Environmental, social, and governance (ESG) performance and earnings management: evidence from the brazilian stock market

Purpose: The objective of this study is to analyze the influence of Environmental, Social, and Governance (ESG) performance on earnings management in the Brazilian stock market. Methodology: Using a sample of 717 observations from 96 companies listed on Bolsa, Brasil, Balcão (B3) from 2010 and 2022, earnings management was estimated through two methods: accrual-based (EM-A) and real activities-based earning management (EM-R). ESG performance was measured using the LSEG Data & Analytics platform score, which applies a proprietary methodology to rate companies on a scale from 0 to 100. The econometric analysis was conducted using Ordinary Least Squares (OLS) with robust standard error corrections and fixed effects for year and sector. Results: The findings indicate ESG performance does not influence earnings management overall. However, when breaking down the ESG components, corporate governance shows a significant negative effect on EM-A, indicating that stronger corporate governance reduces incentives to manipulate accounting earnings. Additionally, social performance has a significant negative impact on EM-R, suggesting that higher corporate social responsibility reduces earnings manipulation through real activities. Contributions of the Study: Thus, the study seeks to provide support for governments to develop public policies and regulatory mechanisms aimed at transparency and sustainability; for companies to improve their governance and compliance systems; and for investors to incorporate ESG criteria into their decisions, contributing to the mitigation of conflicts of interest in the market.