Is earnings management associated with corporate environmental disclosure?

Abstract

PurposeThis study aims to investigate the association between corporate environmental disclosure (CED) and earnings management (EM) in a Gulf Cooperation Council (GCC) emerging market, namely, Kuwait.Design/methodology/approachUsing panel data from firms listed on the Kuwaiti stock exchange from 2010 to 2014, this paper applies a fixed-effects model to examine the CED-EM nexus. This analysis was supplemented with estimating a two-stage least-squares (2SLS) model and a generalised method of moment model to address any concerns regarding endogeneity problems.FindingsThe results are suggestive of a significant and negative relationship between CED and EM in Kuwait. This implies that the environmentally responsible managers are less likely to be engaged in EM practices in Kuwait.Research limitations/implicationsThe theoretical implication of the results of this study is that managers in Kuwait seem to use CED as a method to decrease the possibility of any formal or informal actions that could be imposed upon their activities.Originality/valueSo far, a limited number of studies focused on examining the CED-EM nexus internationally. Furthermore, studies carried out to examine the CED-EM link within a GCC market is virtually non-existent. This study, therefore, presents the first empirical analysis of this relationship in Kuwait. Also, this study is of a significant value stemming from the environmental challenges that are facing Kuwait as an oil-reliant economy coupled together with the crucial economic development in Kuwait and its critical contribution to the GCC economy.