Environmental, Social, and Governance Reporting and Financial Reporting Quality in Emerging Markets

Abstract

The study investigates the impact of environmental, social, and governance disclosure on Pakistani listed companies' ability to engage in earnings management. The study uses panel data from Pakistan Stock Exchange-listed 45 companies from 2020 to 2024, which represents a period when Pakistan's corporate sector began to adopt sustainability reporting and governance reforms. The study assesses environmental, social, and governance disclosure through Refinitiv environmental, social, and governance scores, which include aggregate and pillar-level measurements of environmental, social, and governance disclosure dimensions. The data was gathered from financial and governance information by examining the audited annual reports and corporate governance disclosures of the selected firms. The study uses ordinary least squares regression models, which include standard firm-level control variables that already contain profitability, leverage, and firm size, market-to-book ratio, and board size and board independence as standard controls. The study establishes a negative connection between environmental, social, and governance disclosure, both at the total and pillar levels, and accrual-based earnings management through the application of stakeholder theory, legitimacy theory, and agency theory. The findings from the empirical research show that there exists no statistically significant link between total environmental, social, and governance disclosure and its separate disclosure pillars and earnings management across all tested models. The results demonstrate that Pakistani listed companies' sustainability disclosure practices currently lack sufficient strength to operate as effective governance systems, which would restrict managerial freedom in financial reporting. Firm profitability and firm size emerge as the most influential determinants of discretionary accrual behavior, while the market-to-book ratio demonstrates significance within the signed discretionary-accrual models. The result provides one of the first studies that assesses environmental, social, and governance disclosure at both firm and pillar levels, which shows its impact on earnings management in Pakistan while delivering important insights for regulators, investors, and corporate governance policymakers.

Keywords: Environmental, Social, and Governance Disclosure, Earnings Management, Corporate Governance, Pakistan Stock Exchange