Sustainability and Earnings Quality: The Moderating Role of Institutional Factors

ABSTRACT The objective of this paper is to examine the impact of firms' sustainability performance on earnings quality, with a particular focus on the moderating role of institutional factors in Latin American countries for the period 2012–2023. A panel data set with 390 companies was structured with information sourced from the London Stock Exchange Group (LSEG) and the Worldwide Governance Indicators. The main findings demonstrate the positive impact that the regulative dimension has on earnings quality. However, they also show lower earnings quality for those firms with better sustainability performance (normative dimension) in Latin American countries with a stronger regulatory environment. The correlation analysis conducted in this study advances the literature frontier by providing new elements on how environmental factors affect earnings quality within the institutional framework. Additionally, this research can be useful for designing policies that stimulate earnings quality in various contexts. This is the first study to connect institutions, firm‐level earnings quality, and sustainability in the most biodiverse region on Earth. Even when components of sustainability—such as governance—are studied separately, it appears that improvements in a country's regulatory quality and a company's overall governance assessment are likely to enhance the company's earnings.