Earnings Management of Firms Disclosing Sustainability Performance

• In Event: Earnings Management, Modifying Auditor Exposure, Enhancing Skepticism, and Fraud Tales

Abstract

In the aftermath of the global 2007-2009 financial crisis, financial markets are in need of improved firm performance in business sustainability disclosures, which includes economic, governance, social, ethics and environmental (EGSEE) activities. In this paper, we examine how business sustainability disclosures affect earnings informativeness and quality by investigating accrual quality and earnings-response-coefficients (ERCs) of companies that disclose sustainability information and those that do not disclose such information. We find some evidence that sustainability reporting improves both earnings informativeness and quality and the relationship between business sustainability disclosures and earnings quality is mediated by both accrual-based (AEM) and real earnings (REM) management. We also find some evidence that business sustainability constraints AEM while it promotes REM. We explore the differential effects of the EGSEE dimensions of business sustainability disclosures individually and find that these dimensions have significantly different effects on earnings quality and informativeness. The observed link between sustainability disclosures and earnings quality and informativeness should be of relevant to policy makers and regulators in an attempt to provide guidelines for more standardized sustainability disclosures and possible move toward global acceptance of sustainability reporting.

Authors

• Zabihollah Rezaee, University of Memphis

• Anthony C Ng, Polytecnic University, Hong Kong