TY - JOUR

T1 - Do corporate sustainability practices mitigate earnings management? The moderating role of firm size

AU - Ur Rahman, Haseeb

AU - Zahid, Muhammad

AU - Khan, Parvez Alam

AU - Al-Faryan, Mamdouh

AU - Hussainey, Khaled

PY - 2024/4/8

Y1 - 2024/4/8

N2 - Most of the previous empirical studies focused on the direct role of Corporate Sustainability Practices (CSP) as a composite construct in mitigating Earnings Management (EM) and produced equivocal outcomes. Therefore, this study not only examines the role of CSP as a combined construct but also as its three separate dimensions – social, economic, and environmental sustainability in restricting EM directly and with the distinct moderation of firm size that has rarely been inquired in the past. Using a sample of 255 Pakistani listed companies from 2018 to 2022, the estimations of ordinary least squares with panel-corrected standard errors revealed that CSP and its separate dimensions significantly control accruals-based earnings management, and all these relationships are further amplified by the moderation of firm size. However, neither CSP nor any of its dimensions, either directly or with the moderation of firm size, have a significant role in reducing real-based earnings management. The additional analysis also validated these findings but only for large firms rather than small firms after dividing the sample based on firm size. The findings endorse the stakeholder theory and ethical perspective but oppose managerial opportunism in Pakistan. Besides enriching the existing body of knowledge, this research also offers several important implications for the theory, methodology, practice, and policy.

AB - Most of the previous empirical studies focused on the direct role of Corporate Sustainability Practices (CSP) as a composite construct in mitigating Earnings Management (EM) and produced equivocal outcomes. Therefore, this study not only examines the role of CSP as a combined construct but also as its three separate dimensions – social, economic, and environmental sustainability in restricting EM directly and with the distinct moderation of firm size that has rarely been inquired in the past. Using a sample of 255 Pakistani listed companies from 2018 to 2022, the estimations of ordinary least squares with panel-corrected standard errors revealed that CSP and its separate dimensions significantly control accruals-based earnings management, and all these relationships are further amplified by the moderation of firm size. However, neither CSP nor any of its dimensions, either directly or with the moderation of firm size, have a significant role in reducing real-based earnings management. The additional analysis also validated these findings but only for large firms rather than small firms after dividing the sample based on firm size. The findings endorse the stakeholder theory and ethical perspective but oppose managerial opportunism in Pakistan. Besides enriching the existing body of knowledge, this research also offers several important implications for the theory, methodology, practice, and policy.

U2 - 10.1002/bse.3754

DO - 10.1002/bse.3754

M3 - Article

JO - Business Strategy and the Environment

JF - Business Strategy and the Environment

SN - 1099-0836

ER -