The Impact of Earnings Management on Corporate Sustainability: Evidence From London Stock Exchange Listed Companies

ABSTRACT An increasing number of companies engage in earnings management, including greenwashing, by manipulating sustainability reports. Under the UK Companies Act 2006, corporations are required to report to the Task Force on Climate‐related Financial Disclosures (TCFD), reflecting the nation's commitment to integrating environmental, social, and governance (ESG) factors into corporate reporting. This study examined the impact of earnings management on corporate environmental, social, and economic sustainability. Using purposive sampling based on defined inclusion and exclusion criteria, the study analyzed 23 years of data (2002–2024) from 200 non‐financial companies listed on the London Stock Exchange. Pre‐estimation tests identified cross‐sectional dependence, heterogeneity and endogeneity which were addressed using the augmented mean group (AMG) estimator, fixed effects with Driscoll–Kraay standard errors and two‐step difference general method of movements (GMM). The findings revealed that earnings management, measured by discretionary accruals, had a significant negative effect on corporate sustainability across environmental, social, and economic dimensions. For non‐financial firms listed on the London Stock Exchange, higher discretionary accruals are associated with lower sustainability across environmental, social, and economic dimensions. Strengthening internal audits, enforcing ethical reporting, and ensuring accurate disclosures can enhance stakeholder trust, regulatory compliance, and long‐term corporate sustainability.