Camouflaging the damage: the consequences of negative ESG media coverage on earnings management

As media scrutiny of ESG misconduct intensifies, this study examines whether and how firms adjust their earnings management strategies in response to the costs of negative ESG media coverage. We explore this phenomenon through three perspectives: the ethical, managerial opportunism, and trade-off views. Using a panel of listed European firms from 2018 to 2022, we find that firms increase real earnings management and classification shifting following negative ESG media coverage, consistent with the managerial opportunism view. Further analyses reveal that climate risk exposure, reflected in unfavourable climate media coverage, prompts these opportunistic responses, and that earnings management operates as a shielding mechanism mitigating increases in financing costs and declines in institutional ownership. Moreover, firms operating in countries with tighter social norms, stronger regulatory scrutiny, and better control of corruption, as well as firms with more effective boards, are less likely to engage in earnings manipulation. The study contributes to the earnings management literature by extending it to adverse ESG shocks and by identifying institutional and governance conditions that shape managerial responses. The findings provide insights into how managers react to ESG scandals and offer guidance for investors, boards, and regulators seeking to enhance accountability.