Do the Sustainability Metrics Curtail Managerial Opportunism? Evidence from an Emerging Market

The present study examines the bidirectional relationship between earnings management (EM) and the three dimensions of the ESG (environmental, social and governance) framework. The modified Jones model and Roychowdhury model were used for estimating the EM proxies. The study covers 82 companies (492 firm-year observations) during the period FY 2018–2019 to FY 2023–2024. The study reveals that among the three pillars of ESG, the governance (G) pillar is more effective than the environmental (E) and social (S) pillars in regulating managerial discretion. Even though the total EM was lower during the pandemic period, firms used current accruals as a tool to signal their performance. Findings of the study can aid policymakers and managers in enhancing the disclosure of environmental and social initiatives in India. Also, SEBI should consider the compilation of an integrated ESG rating mechanism to ensure standardization and consistency in reporting E, S and G engagements of the entity, as it can promote long-term prospects of the investors.