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Environmental science and pollution research international
Feb, 2023;30 (8): 20386-20401.

Does environmental, social, and governance performance mitigate earnings management practices? Evidence from US commercial banks.

Mohamed Chakib Kolsi, Ahmad Al-Hiyari, Khaled Hussainey
Author Information
  1. Mohamed Chakib Kolsi: Faculty of Business, Liwa College of Technology, Abu Dhabi, UAE. Mohamed.Kolsi@ect.ac.ae. ORCID
  2. Ahmad Al-Hiyari: Faculty of Business, Liwa College of Technology, Abu Dhabi, UAE.
  3. Khaled Hussainey: Accounting and Financial Management Subject Group, Faculty of Business and Law, University of Portsmouth, Portsmouth, PO1 3DE, UK.
PMID: 36255584 DOI: 10.1007/s11356-022-23616-2

Abstract

Environmental, social, and governance (ESG) performance has attracted debates of regulatory bodies and the academic community. Previous studies highlighted the relationship between corporate social responsibility (CSR) disclosure index and earnings management (EM) for non-financial firms. In this paper, we examine the relationship between the ESG performance and EM practices for a sample of US commercial banks over the period 2010-2019. We use two proxies for earnings management: abnormal loan loss provisions (ALLP) and EM to meet the threshold of reporting small positive profit or avoiding losses (SPOS). Consistent with the transparent financial reporting hypothesis, we find that banks reporting higher ESG performance are less likely engaged in income-increasing practice through ALLP. However, no evidence supports that ESG score mitigates EM through loss avoidance. Furthermore, we disaggregate the ESG score into its main three components: environmental, social, and governance. Our findings show that the governance pillar effectively mitigates EM practice under its two proxies. Specifically, the social pillar also seems to be an efficient constraint of banks' EM through income-increasing abnormal loan loss provisions and loss avoidance activity. However, no supporting evidence of a mitigating role for the environmental pillar is provided. Taken together, our results show that, except the environmental pillar, ESG performance score acts as an efficient mitigating tool for EM practices for US banks. Our findings provide a better understanding of banks' earnings management practices. Our findings are helpful for managers when undertaking long-term investment strategies in ESG reporting practices, regulators when issuing new standards, and banks' stakeholders when assessing both the financial and non-financial performance of such entities.

Keywords

ESG performance score Earnings management Environmental reporting Loan loss provisions US banks

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MeSH Term

Disclosure
Income
Investments
Social Responsibility
Banking, Personal
Environment
Policy
Journal Article

Word Cloud

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