The Double‐Edged Sword of Sustainability Reporting: The Role of Board Independence

ABSTRACT This study examines the relationship between sustainability reporting and earnings quality management (EQM) in Pakistan's listed financial firms, with a focus on the moderating effect of board independence on the Pakistan Stock Exchange (PSX). The data are analyzed using multiple regression analysis alongside robust standard error (RSE) and the panel‐corrected standard error (PCSE) technique to affirm robustness. The data were based on 960 firm‐year observations of PSX's listed financial companies from 2015 to 2024, collected from the annual audited reports available at PSX, Open Doors, and the D‐space repository. The findings reveal significant negative results for sustainability reporting and EQM in the absence of independent directors. Board independence acts as a moderator, yielding significant and positive results regarding sustainability reporting, EQM, and interacting terms. The “RSE” and PCSE affirm the robustness of the results. This study is of concern from the viewpoint of direct, indirect, and connected stakeholders. Prospective investors should be aware of the risks associated with investing in Pakistan's financial sector, particularly when the role of independent directors is limited. Regulatory authorities of Pakistan, like the Securities and Exchange Commission of Pakistan (SECP) and PSX, should devise a governance mechanism where the reporting is not confined to books only, but is also practiced, and sustainability reporting should not be taken as a cushion for EQM. The study sheds light on the importance of independent directors in the Pakistani financial sector in overcoming the issue of EQM. The research has contributed to the existing literature on sustainability reporting and EQM by examining the moderating role of board independence in the financial listed sector of Pakistan. The use of the income smoothing ratio, “discretionary LLC,” is taken as a gap for the study, which is replenished.