Climate Change Exposure and Accruals Management: A Quasi‐Natural Experiment

ABSTRACT Recognizing the critical role of environmental exposure as a factor affecting strategic managerial behaviors, we examine the influence of a relatively forward‐looking firm‐specific climate change exposure on accruals management, a measure of accruals‐based earnings management. By capitalizing on the stochastic variation in global firms' climate change exposure, we provide evidence that higher exposure positively influences the incidence of accruals management. The results are influenced by price and quantity channels that are affected by lenders. We also delineate theoretical mechanisms that amplify this effect. Leveraging the Paris‐2015 Agreement as a policy‐induced shock and using a difference‐in‐differences design, we discern evidence that the impact of increased climate change exposure on accruals management weakened after the announcement of this accord. These outcomes suggest that managers and regulatory bodies should coordinate efforts to ensure transparency in disclosures and compliance with international climate commitments, thereby reducing accrual manipulation.