Sustainability reporting, board diversity, earnings management and financial statements readability: evidence from an emerging economy

Abstract

PurposeThis paper aims to investigate the moderating effect of sustainability reporting on the relationship between the independent variables of board diversity, and earnings management and the dependent variable of readability of financial statements.Design/methodology/approachThe study panel data regression analysis involved 36 Kenyan-listed companies from 2016 to 2020.FindingsKey findings were that increased board diversity was found to significantly improve the readability of financial statements. Discretionary earnings management was found to significantly reduce the readability of financial statements. Sustainability reporting was found to significantly increase the readability of financial statements, and it moderated the relationship between board diversity, earnings management and financial statements readability in Kenya.Research limitations/implicationsThe study sample of 36 non-financial listed in the Nairobi Securities Exchange was very small and was affected by the problem of thin trading; hence, caution should be adopted when interpreting the findings.Practical implicationsThe Capital Markets Authorities (CMA) as a policymaker should enforce sustainability reporting by Kenyan listed firms as there is evidence that the reporting enhances the readability of financial statements. The Institute of Certified Public Accountants as a policymaker should closely monitor the published financial statements of firms for earnings management and punish the perpetrators, as there is empirical evidence that the practice reduces the readability of financial statements.Social implicationsSustainability reporting is successful as a moderating variable between readability of financial statements and determinants of readability of financial statements.Originality/valueThis study contributes to knowledge by studying sustainability reporting as a moderating variable between the independent variables of board diversity and earnings management and the dependent variable of readability of financial statements and measured sustainability reporting using a dummy variable for the period before and after the enactment and release of CMA code of 2016 on corporate governance that required sustainability reporting by Kenyan listed companies.