Does Firms' Environmental, Social and Governance (
ESG
) Performance Buffer the Crash‐Risk Consequences of Earnings Management? Evidence From Emerging Markets
Vaibhav Pandey, Himanshu, Subhash Abhayawansa ABSTRACT
When firms manipulate earnings, investors can be blindsided by sudden and severe share price falls. This paper examines whether stronger Environmental, Social, and Governance (ESG) performance helps reduce that risk. Using 4048 firm‐year observations from emerging economies, we test whether ESG performance weakens the harmful link between earnings management and stock price crash risk. We consider both major forms of earnings management: accrual‐based manipulation and real activity manipulation. Using a two‐step system Generalised Method of Moments (GMM) approach, we find that stronger ESG performance reduces the positive association between accrual‐based earnings management and future stock price crash risk. This result is observed for both discretionary accruals and performance‐adjusted discretionary accruals. However, the evidence does not support a consistent ESG moderating effect for real earnings management, suggesting that ESG performance is more effective in constraining reporting‐based opacity than operational manipulation embedded in real business decisions. Further analysis shows that this risk‐reducing role of ESG performance is stronger in non‐state‐owned enterprises, in countries with weaker institutional safeguards, and in economies where ESG frameworks are improving rather than remaining at an early stage of development.