The Impact of ESG on Earnings Quality and Real Earnings Management: The Role of Firm Size

Stylianos Efstratios Vatis (), George Drogalas, Antonios Persakis and Evangelos Chytis
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Stylianos Efstratios Vatis: Department of Accounting and Finance, University of Thessaly, 41500 Larissa, Greece
George Drogalas: Department of Business Administration, University of Macedonia, 54636 Thessaloniki, Greece
Antonios Persakis: Department of Accounting and Finance, University of Thessaly, 41500 Larissa, Greece
Evangelos Chytis: Department of Accounting and Finance, University of Ioannina, 48100 Preveza, Greece

Sustainability, 2025, vol. 17, issue 11, 1-26

Abstract: This study examines the impact of ESG on Εarnings Quality (EQ) and Real Earnings Management (REM). Additionally, it investigates the potential role of firm size (FS) in this relationship. Using a fixed-effects multivariate regression analysis on an international sample of 32,050 firm-year observations over the period 2003–2022, we show that ESG enhances EQ and restricts REM. Further analysis confirms our main findings, indicating that the intensity of the positive relationship between ESG and EQ is more pronounced in small firms, while the negative association between ESG and REM is more intense in large firms. To the best of our knowledge, this is the first study to capture the impact of ESG on both EQ and REM using international evidence, while testing the role of FS. Our findings suggest that EQ and earnings management (EM) can be viewed as a double-edged sword of reporting quality, thus, a more flexible and proactive strategy is needed when considering the material effects of ESG.

Keywords: ESG; earnings quality; earnings management; firm size; stakeholder theory; sustainability; business ethics; transparency and credibility (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2025
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