ESG Disclosure and Real Earnings Management in High-Polluting Industries: The Moderating Role of Audit Quality

The current research looks at how Environmental, Social and Governance (ESG) disclosure affects real earnings management (REM) and how audit quality (AQ) moderates this relationship. The study sample consists of 292 firm-year observations for the period 2022–2025 from 73 non-financial firms in highly polluting industries listed on the Saudi Stock Exchange (Tadawul). Panel regression analyses and an alternative estimator (pooled OLS with robust standard errors) are used to assess the robustness of the results. The findings show that REM is negatively associated with ESG disclosure, suggesting that firms with higher ESG disclosure have lower REM. However, the moderating hypothesis (H2) is not supported by the present evidence since the interaction between ESG disclosure and AQ is not statistically significant in any of the specifications estimated. The absence of a significant interaction is viewed as a lack of statistically measurable moderation as specified here. Based on an integrated Agency and Stakeholder Theory framework, the study considers ESG disclosure and AQ as mechanisms that increase the expected penalty for managerial opportunism and the expected probability of detection, respectively, and therefore suggests a positive relationship between the two; hence, the two mechanisms were expected to act as complements, not substitutes. The evidence confirms the first mechanism, but there is no evidence for the conjunction, indicating that the complementarity is conditional and is not yet available in the Saudi environment because of the lack of an assurance mandate for non-financial information. The study provides new insights from an emerging market and establishes the limitations of ESG disclosure and audit quality in limiting REM together.