ESG Performance and Earnings Management: Does Board Diversity Matter?

Abstract

Environmental, Social, and Governance (ESG) performance has become an important indicator of corporate sustainability and accountability, yet its relationship with earnings management remains inconclusive. While firms with strong ESG performance are generally expected to exhibit higher financial reporting quality, previous studies have produced mixed findings regarding whether ESG initiatives effectively reduce managerial opportunism. This study aims to examine the effect of ESG performance on earnings management and to investigate whether board diversity strengthens this relationship. The study employs a quantitative research design using panel data from publicly listed non-financial companies observed during the 2021–2025 period. Secondary data are obtained from annual reports, sustainability reports, and the Refinitiv ESG database. The hypotheses are tested using panel data regression, with robustness analysis conducted through alternative estimation techniques. The findings indicate that ESG performance is negatively associated with earnings management, suggesting that firms with stronger sustainability practices are less likely to engage in opportunistic financial reporting. Furthermore, board diversity strengthens the negative relationship between ESG performance and earnings management by improving monitoring effectiveness and corporate governance quality. These findings contribute to the literature by integrating ESG performance, earnings management, and board diversity into a unified analytical framework. The study also provides practical implications for regulators, investors, and corporate managers in promoting transparent financial reporting, effective corporate governance, and sustainable business practices.