Research Handbook of Finance and Sustainability
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Research Handbook of Finance and Sustainability

Edited by Sabri Boubaker, Douglas Cumming and Duc K. Nguyen

The severe consequences of the global financial crisis 2008-2009 and numerous accounting frauds and financial scandals over the last fifteen years have let to calls for more ethical and responsible actions in all economic activities including consumption, investing, governance and regulation. Despite the fact that ethics in business and corporate social responsibility rules have been adopted in various countries, more efforts have to be devoted to motivate and empower more actors to integrate ethical behavior and rules in making business and managerial decisions. The Research Handbook of Finance and Sustainability will provide the readers but particularly investors, managers, and policymakers with comprehensive coverage of the issues at the crossroads of finance, ethics and sustainable development as well as proposed solutions, while focusing on three different levels: corporations, investment funds, and financial markets.
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Chapter 27: Sustainability disclosure and earnings management

Eswaran Velayutham

Abstract

This chapter reviews the relationship between sustainability disclosure and earnings management. Sustainability disclosures included in this chapter are environmental, social and governmental (ESG) qualities of firms. Two competing views of arguments are discussed in this chapter about the relationships between sustainability disclosures and earnings management, namely, ethical orientation and opportunistic orientation. Ethical orientation predicts that ethical managers believe that socially responsible firms prefer to have long-term relationships with their stakeholders. As a result, these managers provide more value-relevant information to the stakeholders to make their decisions correctly. On the other hand, managers disclose a substantial amount of sustainability information as a tool to obtain support from major stakeholders of firms when they engage in earnings management. Agency, stakeholder, legitimacy and signaling theories are discussed to explain the above relationships. This chapter also presents measures and methods of sustainability disclosure and earnings management. Finally, this chapter ends by addressing potential endogeneity issues, the main conclusion, and direction for further research.

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