Does ESG-linked compensation moderate the executive opportunism driven by mandatory ESG disclosure regulation? Interceding role of audit efficacy and media attention

Purpose This research aims to analyze how mandatory ESG reporting legislation affects executive opportunism through the quality of financial reporting. The study also examines audit efficacy and media attention as mechanisms and explains the moderating effect of ESG-linked pay on the nexus between ESG regulation and managerial opportunistic behavior. Design/methodology/approach This study adopts the difference-in-differences (DID) approach to examine a sample of 1,105 listed Indian firms classified as ESG-regulated (n = 463) and control firms (n = 642) from 2011 to 2020, considering 2016 as the implementation year. Moreover, the robustness of the findings is validated using several tests, including alternative proxies for measurement bias, propensity score matching for selection bias and a placebo test for causal validation. Findings The empirical findings conclude that the enforcement of mandatory ESG regulation impedes executive opportunism and enhances the quality of financial disclosures. The study further determines that audit efficacy, by strengthening internal oversight, and media attention, by increasing public scrutiny, act as mediating channels. Moreover, the affirmative effects of ESG regulation are more pronounced for companies with ESG-linked executive compensation. Practical implications This study provides critical implications for policymakers to leverage statutory ESG disclosures for improving corporate transparency and accountability. For managers, the study recommends using ESG-linked compensation to align managerial goals with stakeholder interests and augment the positive effects of sustainability regulations. Originality/value To the best of the authors’ knowledge, this is the first study to analyze the moderating effect of ESG-linked pay on the nexus between ESG regulation and executive opportunism. Furthermore, this study pioneers the empirical examination and explanation of the mechanisms that transmit the effects of ESG legislation.