Corporate environmental disclosure and earnings management—The moderating role of corporate governance structures

Ali Meftah Gerged,Khaldoon Albitar,Lara Al‐Haddad

doi:10.1002/ijfe.2564

Abstract

AbstractOur study examines whether internal corporate governance (CG) mechanisms moderate the relationship between a firm's engagement in corporate environmental disclosure (CED) and earnings management (EM) practices in an emerging economy. Using a sample of 100 Jordanian listed firms from 2010 to 2014 (i.e., 500 firm‐year observations), our findings reveal that while the relationship between CED and earnings manipulations is negative, the links between CG arrangements and EM are heterogeneous in that they might have either reduced or increased earnings manipulations in Jordan. Furthermore, some CG structures, such as board size, managerial, and institutional ownership structures have moderating effects on the CED‐EM nexus. Our research highlights the significance of considering internal CG mechanisms to explain the link between CED and EM in the context of emerging economies. Our results help to explain and place into setting the earlier mixed results on the association between CED and earnings manipulations and most importantly add to the debate about whether CG structures detrimental to the CED‐EM nexus. This study allows for a richer understanding of how managers respond to CED initiatives and CG reforms in relation to reducing earnings manipulations, which offers policymakers, board directors and managers, a set of context‐specific recommendations related to the crucial need for more concerted efforts to ensure corporate sustainability in emerging economies.

Highlights

In an era of climate change, constraints of natural resource and other socio-environmental pressures, Corporate Environmental Disclosure (CED) has been increasingly pushed to the forefront of corporate decisionmaking and communication (Albitar, Hussainey, Kolade, & Gerged, 2020; Cho & Patten, 2007; Gerged, 2020; Gerged, Beddewela, & Cowton, 2020; Gerged, Matthews, & Elheddad, 2020; Lu & Abeysekera, 2017)
The findings of model 1 of Table 6 show that corporate environmental disclosure (CED) has a significant negative effect on earnings management (EM) (−0.773***) at the 1% level of significance, which signifies that firms engaged in CED are less likely to engage in unethical behaviors such as EM in Jordan
Despite theoretical arguments that boards and top management often drive the decision to engage in CED practices, though previous evidence on how and why corporate governance (CG) mechanisms might moderate the CED-EM nexus is very rare

Summary

Introduction

In an era of climate change, constraints of natural resource and other socio-environmental pressures, Corporate Environmental Disclosure (CED) has been increasingly pushed to the forefront of corporate decisionmaking and communication (Albitar, Hussainey, Kolade, & Gerged, 2020; Cho & Patten, 2007; Gerged, 2020; Gerged, Beddewela, & Cowton, 2020; Gerged, Matthews, & Elheddad, 2020; Lu & Abeysekera, 2017). CED can involve critical environmental issues and their effects on firms' future financial performance, material items of expense or income, environmental policies, and other uncertainties and risks (Birkey, Michelon, Patten, & Sankara, 2016). Such issues are expected to be of interest to a large group of users involving, investors, lenders, and shareholders that are concerned about environmental sustainability due to its economic, social, and political implications (Gray, Javad, Power, & Sinclair, 2001; Lehman & Kuruppu, 2017). The first theoretical stance suggests a significant and negative relationship between CED and earnings manipulations, the second one hypothesizes the opposite relationship (Kim, Park, & Wier, 2012)

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