Sustainability disclosure and earnings management

Abstract

This chapter reviews the relationship between sustainability disclosure and earnings management. Sustainability disclosures included in this chapter are environmental, social and governmental (ESG) qualities of firms. There are two competing views of arguments that are discussed in this chapter about the relationships between sustainability disclosures and earnings management, namely, ethical orientation and opportunistic orientation. Ethical orientation predicts that ethical managers believe that socially responsible firms prefer to have long-term relationships with their stakeholders. As a result theses managers provide more value relevant information to the stakeholders to make their decisions correctly. On the other hand, managers disclose a substantial amount of sustainability information as a tool to get support from major stakeholders of firms when they engage in earnings management. Agency, stakeholder, legitimacy and signaling theories are discussed to explain the above relationships. This chapter also presents measures and methods of sustainability disclosure and earnings management. Finally, this chapter ends with addressing potential endogeneity issue, the main conclusion, and direction for further research.