Sustainability and reporting quality in emerging markets: ESG performance, growth opportunities, and the moderating role of innovation

Abstract

Despite increasing research on environmental, social, and governance (ESG) performance and financial reporting quality, the moderating role of innovation in ESG–earnings management linkages remains underexplored, particularly in emerging markets like China (Shen et al., 2023; Del Gesso & Lodhi, 2025). This study addresses this gap by exploring the impact of ESG performance, growth opportunities, and the moderating effect of innovation capacity on earnings management among Chinese A-share listed companies. The study employs firm fixed-effects regression models with year fixed effects and clustered standard errors. Using a panel dataset of 3,094 firm-year observations from 2018 to 2022, the study finds that higher ESG performance reduces discretionary accruals, indicating reduced earnings manipulation. Conversely, greater growth opportunities demonstrate increased earnings manipulation. Innovation capacity strengthens the effect of ESG on earnings management and weakens the adverse impact of growth pressures. These findings integrate stakeholder theory, agency theory, and the resource-based view (RBV), offering insights into how internal capabilities and external expectations shape financial reporting behaviour. The study contributes to the evolving discourse on corporate transparency and sustainable governance and provides practical implications for regulators, investors, and managers seeking better financial reporting quality and sustainable corporate development in emerging economies like China.