Earnings management and the quality of non-financial reporting in a regulated context

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Abstract

This research aims to study the relationship between firms’ accounting earning management practices and the quality of non-financial information disclosed in their annual reports. It is part of the ongoing debate on the reality or symbolism of corporate social responsibility (CSR) practices of companies and their transparency in this area (Buertey, Sun, Lee, & Hwang, 2019; Bozzolan, Fabrizi, Mallin, & Michelon, 2015; Prior, Surroca, & Tribo, 2008; Riahi-Belkaoui, 2003). We apply generalized least squares (GLS) regression on panel data obtained by a content analysis of annual reports of French SBF 120 listed firms, for the 2012 to 2015 period. The study confirms that upward earnings management led to the disclosure of more mandatory environmental information, but no effect is detected on their objectivity. Environmental disclosures contribute to drawing an image of regulatory compliance and divert stakeholders’ attention from the opportunistic discretionary intervention on financial reporting. Findings support the substitution relationship between financial and non-financial reporting (Francis, Nanda, & Olsson, 2008; Yip, Van Staden, & Cahan, 2011). However, we evidenced that firms that are practicing more aggressive earning management are providing less comprehensive mandatory environmental reporting. Our findings differ from previous studies in that we consider information disclosed in response to regulatory requirements. Also, we analyze not only the comprehensiveness of information but also their objectivity, and demonstrate that earnings management practices have different effects on these characteristics.

Keywords: Earnings Management, Environmental Disclosure, Information Quality, Mandatory Reporting, Managerial Opportunism

Authors’ individual contribution: Conceptualization — Z.K.-R.; Methodology — Z.K.-R.; Validation — Z.K.-R.; Formal Analysis — Z.K.-R.; Investigation — Z.K.-R.; Writing — Original Draft — Z.K.-R.; Writing — Review & Editing — M.H.-S.; Supervision — M.H.-S.; Funding Acquisition — M.H.-S.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: M14, M41

Received: 02.09.2021
Accepted: 10.12.2021
Published online: 14.12.2021

How to cite this paper: Khelil-Rhouma, Z., & Hamed-Sidhom, M. (2021). Earnings management and the quality of non-financial reporting in a regulated context. Corporate Governance and Sustainability Review, 5(4), 56–67. https://doi.org/10.22495/cgsrv5i4p5