ESG and Earnings management nexus in the GCC: Evidence from a quantile-on-quantile regression approach

This study investigates the relationship between environmental, social, and governance (ESG) performance and earnings management (EM) within the Gulf Cooperation Council (GCC) region via a Quantile-on-Quantile Regression (QQR) methodology. Disaggregating ESG into its three pillars uncovers intricate and nonlinear relationships with EM across different quantiles. Although ESG is typically perceived as limiting opportunistic reporting, results of this study indicate that only moderate levels of ESG performance, specifically at the 20th and 50th quantiles, are associated with reduced earnings management, implying the presence of threshold effects. The findings suggest that environmental performance generally diminishes earnings management in high-risk circumstances, but social and governance scores frequently align with heightened earnings management, potentially due to symbolic compliance. The study enhances the literature by providing a nuanced perspective on ESG-EM dynamics in emerging markets, contesting the assumptions of linear causality. It emphasizes the necessity of differentiating between genuine ESG integration and cursory implementation. These findings have significant implications for politicians, investors, and regulators seeking to enhance financial transparency and sustainability in the GCC and analogous environments.