ESG initiative and meeting earnings benchmarks: evidence from Malaysia

Abstract

The objective of this study is to examine the real earnings management (REM) activities of firms that are more likely to manage the profits upward to achieve earnings benchmarks by using last year’s earnings and zero earnings. The study also investigates how environmental, social, and governance (ESG) participation influences firms’ earnings management to meet earnings benchmarks. Employing the fixed-effects model regression and the GMM model using data from Malaysia-listed companies for 2006–2022, this study shows that Malaysian managers opportunistically manipulate earnings upward and utilise more REM practices to achieve profit benchmarks. Also, this study indicates that ESG initiatives substantially reduce opportunistic companies’ REM behaviour. The study’s empirical findings provide valuable insights for investors, shareholders, and regulators on the reliability of earnings figures and the need to consider REM and ESG initiatives in investment decisions and financial reporting standards.