Beyond the Bin: The Effect of Waste Reduction on Real Earnings Management

Abstract

We investigate the effect of waste management strategies on real earnings management. Using a sample of 6515 firm-year observations from 22 countries spanning the 2011–2022 period, we show that companies that reduce their waste generation are less likely to engage in real earnings management, supporting the ethical theoretical perspective. However, waste-recycling activities positively influence real earnings management due to the high costs of recycling processes. Additionally, we show that the negative effect of waste reduction on real earnings management is only prevalent in companies with low agency costs, those with high corporate governance quality, and those operating in non-competitive markets. These findings highlight the broader implications of corporate waste management for financial reporting quality. By focusing solely on real earnings management, this study opens new avenues via which future research can explore other dimensions of financial reporting quality and examine evolving regulatory frameworks.