Abstract
AbstractThe purpose of this study is to examine the relationship between environmental performance, carbon performance and earnings management. This analysis includes panel regressions as empirical‐quantitative (archival) research methods and looks at the 2014–2018 financial years of companies listed on the STOXX Europe 600 (1,509 firm‐year observations). Environmental (carbon) performance proxies are included as independent variables, and with two earnings quality measures, accrual‐based earnings management (ACC) and real earnings management (REM) as dependent variables. Our findings align with prior research on sustainability performance and indicate that environmental (carbon) performance reduces ACC but increases REM. After including Granger causality tests, we find no indications of a bidirectional relationship. This analysis makes a key contribution to prior studies as this appears to be the first on the relationship between environmental (carbon) performance and earnings management in the European capital market. The study has major implications for business practice, regulators and research. Managers might use environmental and carbon strategies for greenwashing policies as this change in earnings management can be hardly detected by other stakeholders.
Highlights
Environmental and climate change strategies have increasingly become a part of business practice and research (Jung, Herbohn, & Clarkson, 2018; Nuber, Velte, & Hörisch, 2020)
With carbon emissions being key to environmental performance (Bebbington & Larrinaga-González, 2008; Busch, Johnson, & Pioch, 2020), they have been at the forefront of media attention and public discussion (“Fridays for Future”)
According to our empirical quantitative research, using panel regressions, we found a negative impact of environmental performance on accrual-based earnings management (ACC) and a positive impact on real earnings management (REM)
Summary
Environmental and climate change strategies have increasingly become a part of business practice and research (Jung, Herbohn, & Clarkson, 2018; Nuber, Velte, & Hörisch, 2020). Stakeholder theory assumes that top management will provide decision-useful financial and environmental reporting, which will lead to increased environmental performance and earnings quality (Velayutham, 2018; Velte, 2016). Focusing on this negative environmental performance-earnings management connection, sustainable companies prefer to foster a longterm relationship with their shareholders and other stakeholders. While a positive or negative link between environmental (carbon) performance and earnings management is possible according to our theoretical framework, we decided to focus on agency theory for the following reasons: First, the literature states that current climatechange policies and reporting practices that influences environmental
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