The Bidirectional Relationship Between ESG and Earnings Management in Norway

Abstract

This study examines the relationship between sustainability and earnings management (EM). The literature on this relationship is extensive and has primarily been focused on assessing how corporate social responsibility affects managers discretionary decisions, captured through EM. The current literature presents mixed results to the direction of this relationship, with most studies pointing at a negative effect of sustainability on EM. This thesis examines whether there exists a bidirectional relationship between Environmental, Social and Governance (ESG) and EM in Norway. The study finds that there exists a positive relationship between ESG and EM. These findings are consistent with arguments claiming that sustainability reporting can be used to conceal opportunistic behavior by managers, in accordance with agency theory and stakeholder theory. In addition, it finds that there exists a bidirectional relationship of EM on ESG.