Impact of environmental, social, and governance rating disagreement on real earnings management in Chinese listed companies

Ge Li and Yuxiang Cheng

Global Finance Journal, 2024, vol. 62, issue C

Abstract: This study examines the impact of environmental, social, and governance (ESG) rating disagreement on real earnings management in Chinese companies. Using ESG ratings from Huazheng, Wind, SynTao Green Finance, and Bloomberg, we find that increased disagreements in ESG rating lead to higher real earnings management in the current period and over the next 1 to 2 years. This effect is driven by external attention, compensation incentives, and reputational pressure. Furthermore, companies with a financial management background and younger management show a stronger correlation. Specifically, ESG rating disagreement has a significant impact on the manipulation of discretionary expenses and production costs but not on operating cash flows. Additionally, high ESG-rated companies tend to manage their earnings through discretionary expenses when rating disagreements arise. Overall, this study reveals the potential incentive mechanisms for such companies, providing theoretical support for understanding the factors influencing real earnings management. It also suggests that regulators and investors should fully consider the impact of ESG rating disagreement when assessing company performance.

Keywords: Environmental Social and Governance rating disagreement; Real earnings management; Compensation incentives; External attention; Corporate reputation (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:62:y:2024:i:c:s1044028324000875

DOI: 10.1016/j.gfj.2024.101015

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