Sustainability Policy and Corporate Financial Integrity: Assessing the Impact of China’s Energy-Use Rights Trading Scheme on Earnings Management

As a pivotal market-based instrument for achieving sustainable development and carbon neutrality goals, China’s Energy-Use Rights Trading Policy (EURT) was implemented to incentivize corporate energy efficiency and emission reduction. Using the difference-in-differences (DID) method, this study empirically examines the impact of China’s 2016 pilot policy on energy-use rights trading on corporate earnings management, investigating micro-level data from China’s A-share listed companies between 2010 and 2022. The main results show that EURT significantly intensifies earnings management. The effect is more pronounced in private enterprises, non-Big-Four-audited firms, firms within industries characterized by high concentration, and firms located in regions characterized by lower environmental fiscal expenditure and weaker waste gas treatment capacity. Mechanism analyses reveal that the policy operates through tightened financing constraints and elevated financial risk. Importantly, environmental investment mitigates this effect, while regulatory pressure amplifies it. These findings highlight trade-offs in sustainable policy design, demonstrating how environmental instruments may compromise financial integrity, and underscore the need for integrated governance approaches.