Managerial opportunism during the ESG and non-ESG era: insights from an emerging economy

Purpose The present study analyzes whether the compilation environmental, social and governance (ESG) framework as a complementary mechanism to the prevailing credit rating system has regulated earnings management (EM) practices in India during the ESG and non-ESG eras. Design/methodology/approach We applied the Modified Jones and Roychowdhury models to estimate EM proxies. Fixed-effect panel regression was used to analyze the EM practices of 81 non-financial companies listed in the Nifty ESG 100 Index from 2013–2014 to 2023–2024 (891 firm-year observations). Findings The study found that credit rating is effective in reducing accrual earnings management (AEM), while ESG is effective in mitigating both AEM and total earnings management (TEM), whereas compilation of ESG as a complementary mechanism along with the existing CR mechanism is effective in mitigating AEM, real earnings management and TEM. Findings also reveal that firms used accounting accruals as a tool to signal their performance during the pandemic period. Research limitations/implications Due to the unavailability of data and limited implementation of the ESG framework, the present study is limited to large-cap non-financial companies. Also, the sector-wise impact of sustainable reporting has not been considered. Originality/value To the best of the authors’ knowledge, this is the first study that analyzes the complementary effect of non-financial metrics (ESG) on financial metrics (CR) in regulating managerial discretionary practices in emerging markets like India, which is one of the fastest-growing sustainable investment avenues in the world.