The Effect of ESG Disclosure on Firm Performance: Does Earnings Management Matter?

ABSTRACT This study investigates the relationship between environmental, social, and governance disclosure (ESGD) and firm performance, focusing on its impact on firm profitability (return on assets; ROA) and firm value (Tobin's Q), while considering the moderating roles of accrual earnings management (AEM) and real earnings management (REM) within the Egyptian context. The study uses panel data from 71 nonfinancial firms listed in the EGX 100 index over the period 2016–2022 (497 firm‐year observations) and analyzes the data using fixed‐effects regression with Driscoll and Kraay standard errors. Based on a self‐constructed ESGD index including 85 indicators, ESG data were collected from multiple sources. The findings indicate that although ESGD is positively associated with firm profitability (ROA), consistent with stakeholder and legitimacy theories, it is negatively associated with firm value (Tobin's Q), suggesting that ESG efforts are valued differently by internal and external stakeholders. Moreover, AEM negatively moderates both the ESGD–ROA and ESGD–Tobin's Q relationships, indicating that managerial opportunism, as emphasized by agency theory, may distort the performance relevance of ESGD across both operational and market dimensions. However, REM negatively moderates only the ESGD–Tobin's Q relationship, suggesting that agency‐driven real activity manipulation primarily weakens the market's perception of ESGD credibility. This study offers novel evidence from the underresearched Egyptian context, being the first to examine how both AEM and REM moderate the ESGD–firm performance relationship in an emerging market. It contributes to the research debate on ESGD and firm performance by highlighting how credible ESG reporting and financial reporting integrity shape both profitability and market valuation under managerial discretion. The findings offer insights for policymakers seeking to strengthen ESGD regulations, for managers aiming to align ESG initiatives with operational outcomes, and for investors evaluating the credibility of ESG information in the presence of earnings management concerns.