Real earnings management and capital structure: Does environmental, social and governance (ESG) performance matter?

Figures & data

Table 1. Sample distribution by country

Variable	No. of firms
Malaysia	35
Singapore	32
Indonesia	20
Philippines	15
Thailand	14

Table 2. Variables measurements

Variable name	Proxy	Database sources
Real earnings management (Real_EM)	The aggregate of real EM_CFO, real EM_SGA, and real EM_PROD
Real EM components:
Abnormal cash flows from operating activities (Real EM_CFO)^1	$\frac{\mathit{\text{CF}}{O}_{\mathit{\text{it}}}}{A_{\mathit{\text{it}}-1}}={\alpha }_i\left(\frac{1}{A_{\mathit{\text{it}}-1}}\right)+{\beta }_{1i}\left(\frac{\mathit{\text{Sale}}{s}_{\mathit{\text{it}}}}{A_{\mathit{\text{it}}-1}}\right)+{\beta }_{2i}\left(\frac{\mathrm{\Delta }\mathit{\text{Sale}}{s}_{\mathit{\text{it}}}}{A_{\mathit{\text{it}}-1}}\right)+{\epsilon }_{\mathit{\text{it}}}$	The authors’ computation is based on data collected from DataStream
Abnormal discretionary expenses (Real EM_SGA)	$\frac{\mathit{\text{DiscEx}}{p}_{\mathit{\text{it}}}}{A_{\mathit{\text{it}}-1}}={\alpha }_i\left(\frac{1}{A_{\mathit{\text{it}}-1}}\right)+{\beta }_{1i}\left(\frac{\mathit{\text{Sale}}{s}_{\mathit{\text{it}}}}{A_{\mathit{\text{it}}-1}}\right)+{\epsilon }_{\mathit{\text{it}}}$	The authors’ computation is based on data collected from DataStream
Abnormal production costs (Real EM_PROD)	$\frac{\mathit{\text{Pro}}{d}_{\mathit{\text{it}}}}{A_{\mathit{\text{it}}-1}}={\alpha }_i\left(\frac{1}{A_{\mathit{\text{it}}-1}}\right)+{\beta }_{1i}\left(\frac{\mathit{\text{Sale}}{s}_{\mathit{\text{it}}}}{A_{\mathit{\text{it}}-1}}\right)+{\beta }_{2i}\left(\frac{\mathrm{\Delta }\mathit{\text{Sale}}{s}_{\mathit{\text{it}}}}{A_{\mathit{\text{it}}-1}}\right)+{\beta }_{3i}\left(\frac{\mathrm{\Delta }\mathit{\text{Sale}}{s}_{\mathit{\text{it}}-1}}{A_{\mathit{\text{it}}-1}}\right)+{\epsilon }_{\mathit{\text{it}}}$	The authors’ computation is based on data collected from DataStream
Book leverage (LEV)	Total debt to total book value of asset	Refinitiv Eikon Database
Leverage determinants:
Market-to-book ratio	The ratio of market value to book value	Refinitiv Eikon Database
Profitability	The ratio of earnings before interest and taxes to the total book value of assets	Refinitiv Eikon Database
Tangibility	The proportion of net property, plant, and equipment to the total book value of assets	Refinitiv Eikon Database
Firm size	The logarithm of the total book value of assets	Refinitiv Eikon Database
Non-debt tax shields	The ratio of accumulated depreciation on the total book value of assets	Refinitiv Eikon Database
ESG Performance:
ESG Score	ESG score	Refinitiv Eikon Database
Environmental performance	Environmental pillar score	Refinitiv Eikon Database
Social performance	Social pillar score	Refinitiv Eikon Database
Governance performance	Governance pillar score	Refinitiv Eikon Database

Table 3. Descriptive statistics

Variables	Obs	Mean	Median	Std.	Min.	Max.
ESG score	812	46.4434	48.3585	19.7494	3.0682	88.3957
Environmental pillar score	812	40.8310	41.2145	23.9770	0.0000	93.9838
Social pillar score	812	49.1383	49.4553	23.4654	2.6603	97.3238
Governance pillar score	812	48.4237	49.9686	22.7863	0.9226	95.4817
REM (aggregate)	809	0.6677	0.5035	0.5454	−0.0353	3.7683
REM from CFO	812	0.0000	−0.0049	0.0757	−0.2661	0.4706
REM from SGA	812	0.0000	−0.0069	0.0808	−0.2985	0.4541
REM from PROD	808	0.0000	−0.0002	0.2254	−1.3232	1.0024
Book leverage	812	1.5410	1.1438	2.2950	−17.2401	28.1531
Market-to-book value	806	2.2524	1.6178	1.6411	0.6690	5.9022
Profitability	807	5.5870	4.2800	6.9484	−12.4000	62.1000
Tangibility	812	0.6351	0.5927	0.4536	0.0000	2.4890
Firm size	812	8.5693	8.6370	1.1624	5.2857	11.4828
Non-debt tax shields	797	0.0404	0.0196	0.0470	0.0016	0.1503

Table 4. Correlation matrix

Variables	1	2	3	4	5	6	7	8	9	10	11	12	13	14
1. ESG score	1
2. Environmental pillar score	0.8601	1
3. Social pillar score	0.9197	0.7654	1
4. Governance pillar score	0.7032	0.3817	0.4751	1
5. REM	−0.0180	0.0330	0.0166	−0.1143	1
6. REM from CFO	0.1289	0.0801	0.1228	0.1269	0.1205	1
7. REM from SGA	0.0231	0.0068	0.0285	0.0419	0.1846	0.2602	1
8. REM from PROD	−0.0410	−0.0579	−0.0368	0.0146	0.3855	−0.1316	−0.0084	1
9. Book leverage	0.0132	0.0522	0.0232	−0.0975	0.1241	0.0946	0.1356	0.0181	1
10. Market-to-book value	−0.0104	−0.0530	−0.0151	0.0432	0.5414	0.3828	0.3061	0.0943	0.2407	1
11. Profitability	0.1247	0.0662	0.1136	0.1127	0.4175	0.6477	0.1883	−0.1465	0.1292	0.6289	1
12. Tangibility	0.2618	0.1599	0.2805	0.1585	0.0994	0.0965	0.0055	−0.0128	0.1962	0.1239	0.0688	1
13. Firm size	0.0368	0.1423	0.0245	−0.0614	−0.2657	−0.0614	−0.1283	−0.1839	0.0868	−0.3642	−0.3591	−0.0388	1
14. Non-debt tax shields	−0.0039	0.0078	0.0521	−0.1276	0.2175	0.0053	0.0144	−0.0784	0.1542	0.1995	0.1404	0.2946	−0.0690	1

Table 5. REM and leverage

	(1)	(2)	(3)	(4)
	REMAGG	CFO	SGA	PROD
Real earnings management	0.3355***
	(0.0000)
REM from CFO		−0.6509
		(0.1202)
REM from SGA			0.9096***
			(0.0074)
REM from PROD				0.3177***
				(0.0077)
MTB	0.1038***	0.1619***	0.1316***	0.1470***
	(0.0001)	(0.0000)	(0.0000)	(0.0000)
Profitability	−0.0769*	−0.0328	−0.0414	−0.0398
	(0.0580)	(0.4530)	(0.3141)	(0.3344)
Tangibility	0.0232	0.0514	0.0251	0.0255
	(0.7823)	(0.5529)	(0.7675)	(0.7638)
Firm size	0.1790***	0.1748***	0.1742***	0.1870***
	(0.0000)	(0.0000)	(0.0000)	(0.0000)
NDTS	1.6244***	1.9627***	2.0389***	2.1671***
	(0.0086)	(0.0016)	(0.0010)	(0.0005)
Constant	−1.4606***	−1.5784***	−1.4115***	−1.5783***
	(0.0000)	(0.0000)	(0.0000)	(0.0000)
Observations	745	745	745	744
R-squared	.4453	.4295	.4332	.4332
Adj R^2	.426	.4096	.4135	.4135
F-stat	23.0836	21.6498	21.9839	21.9546
Industry Dummies	Yes	Yes	Yes	Yes
Year Dummies	Yes	Yes	Yes	Yes
Country Dummies	Yes	Yes	Yes	Yes

p-values are in parentheses. *** p < .01, ** p < .05, * p < .1

Table 6. REM and leverage—the role of ESG performance

	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
	ESG performance		Environmental pillar score		Social pillar score		Governance pillar score
	HIGH ESG	LOW ESG	HIGH ENV	LOW ENV	HIGH SOCIAL	LOW SOCIAL	HIGH GOV	LOW GOV
Real EM	0.0760	0.4970***	0.0799	0.4255***	0.1244	0.4109***	0.2108**	0.6105***
	(0.3607)	(0.0000)	(0.3455)	(0.0000)	(0.1779)	(0.0001)	(.0271)	(0.0000)
MTB	0.2744***	−0.0337	0.2777***	0.0315	0.2373***	0.0244	0.1826***	−0.0304
	(0.0000)	(0.4554)	(0.0000)	(0.4228)	(0.0000)	(0.5245)	(0.0000)	(0.4896)
Profitability	−0.2415***	0.0309	−0.2821***	0.0116	−0.2575***	0.0689	−0.1429***	−0.0049
	(0.0000)	(0.6270)	(0.0000)	(0.8326)	(0.0000)	(0.2213)	(0.0025)	(0.9449)
Tangibility	−0.2508***	0.2310	−0.3857***	0.4634***	−0.1466	0.4150***	−0.1262	−0.0222
	(0.0069)	(0.1917)	(0.0004)	(0.0006)	(0.1708)	(0.0021)	(0.1494)	(0.8907)
Firm size	0.1161***	0.1955***	0.1285***	0.2305***	0.0973**	0.2288***	0.2608***	0.1058**
	(0.0026)	(0.0000)	(0.0021)	(0.0000)	(0.0233)	(0.0000)	(0.0000)	(0.0120)
NDTS	0.5069	3.9052***	0.5831	2.9159***	1.0043	3.2057***	0.9849	3.2529***
	(0.4365)	(0.0007)	(0.4230)	(0.0018)	(0.1693)	(0.0013)	(0.1497)	(0.0026)
Constant	−0.4457	−2.1914***	0.0014	−2.5315***	−0.1895	−2.8328***	−2.0720***	−0.1474
	(0.2504)	(0.0000)	(0.9976)	(0.0000)	(0.6480)	(0.0000)	(0.0000)	(0.7777)
Observations	370	375	364	381	359	386	380	365
R-squared	.5798	.4729	.5534	.5536	.5158	.5472	.6029	.4719
Adj R^2	.5506	.4352	.5218	.5222	.481	.5158	.5748	.433
F-stat	19.8383	12.5255	17.506	17.6096	14.8271	17.4038	21.4973	12.1172
Industry Dummies	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year Dummies	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Country Dummies	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes

p-values are in parentheses. *** p < .01, ** p < .05, * p < .1

Table 7. REM (Cash flows from operating activities) and leverage—the role of ESG performance

	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
	ESG performance		Environmental pillar score		Social pillar score		Governance pillar score
	HIGH ESG	LOW ESG	HIGH ENV	LOW ENV	HIGH SOCIAL	LOW SOCIAL	HIGH GOV	LOW GOV
REM from CFO	1.0516**	−4.0766***	0.5658	−2.5578***	1.1679**	−3.2776***	0.0507	−1.5919**
	(0.0263)	(0.0000)	(0.2705)	(0.0000)	(0.0314)	(0.0000)	(0.9215)	(0.0294)
MTB	0.2692***	0.0735*	0.2821***	0.1343***	0.2350***	0.1059***	0.1989***	0.1100***
	(0.0000)	(0.0582)	(0.0000)	(0.0001)	(0.0000)	(0.0013)	(0.0000)	(0.0069)
Profitability	−0.2844***	0.1804***	−0.3027***	0.0927	−0.3053***	0.1846***	−0.1266**	0.0770
	(0.0000)	(0.0054)	(0.0000)	(0.1008)	(0.0000)	(0.0012)	(0.0125)	(0.3021)
Tangibility	−0.2902***	0.2273	−0.4003***	0.5812***	−0.1948*	0.4826***	−0.1147	0.0013
	(0.0021)	(0.1906)	(0.0003)	(0.0000)	(0.0759)	(0.0003)	(0.2039)	(0.9942)
Firm size	0.1055***	0.2260***	0.1257***	0.2521***	0.0803*	0.2472***	0.2511***	0.1255***
	(0.0057)	(0.0000)	(0.0026)	(0.0000)	(0.0591)	(0.0000)	(0.0000)	(0.0046)
NDTS	0.5889	5.2711***	0.5452	3.2076***	1.2106*	4.3094***	1.1527*	3.5695***
	(0.3631)	(0.0000)	(0.4538)	(0.0005)	(0.0972)	(0.0000)	(0.0922)	(0.0015)
Constant	−0.1726	−3.2144***	0.1258	−3.2364***	0.1852	−3.5808***	−1.9586***	−0.8053
	(0.6660)	(0.0000)	(0.7864)	(0.0000)	(0.6697)	(0.0000)	(0.0000)	(0.1500)
Observations	370	375	364	381	359	386	380	365
R-squared	.5848	.4895	.5539	.5534	.5199	.5561	.5974	.423
Adj R^2	.5559	.453	.5223	.5219	.4854	.5253	.5689	.3805
F-stat	20.2481	13.3867	17.5363	17.5947	15.0706	18.0407	21.0087	9.942
Industry Dummies	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year Dummies	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Country Dummies	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes

p-values are in parentheses. *** p < .01, ** p < .05, * p < .1

Table 8. REM (Selling and distribution expenses) and leverage—the role of ESG performance

	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
	ESG performance		Environmental pillar score		Social pillar score		Governance pillar score
	HIGH ESG	LOW ESG	HIGH ENV	LOW ENV	HIGH SOCIAL	LOW SOCIAL	HIGH GOV	LOW GOV
REM from SGA	0.1068	0.9189*	0.0618	1.4909***	0.1645	0.8421*	0.2377	1.7550***
	(0.8140)	(0.0847)	(0.8967)	(0.0013)	(0.7607)	(0.0577)	(0.6006)	(0.0005)
MTB	0.2807***	0.0409	0.2860***	0.0680*	0.2485***	0.0799**	0.1949***	0.0533
	(0.0000)	(0.3299)	(0.0000)	(0.0665)	(0.0000)	(0.0249)	(0.0000)	(0.2033)
Profitability	−0.2338***	0.0949	−0.2742***	0.0803	−0.2495***	0.1297**	−0.1220***	0.0690
	(0.0000)	(0.1446)	(0.0000)	(0.1581)	(0.0000)	(0.0234)	(0.0096)	(0.3424)
Tangibility	−0.2442***	0.1902	−0.3809***	0.4950***	−0.1393	0.4626***	−0.1160	−0.0121
	(0.0083)	(0.2938)	(0.0005)	(0.0003)	(0.1941)	(0.0008)	(0.1882)	(0.9427)
Firm size	0.1134***	0.1977***	0.1262***	0.2159***	0.0910**	0.2281***	0.2526***	0.1162***
	(0.0032)	(0.0000)	(0.0027)	(0.0000)	(0.0336)	(0.0000)	(0.0000)	(0.0076)
NDTS	0.5776	4.0639***	0.6108	2.8576***	1.1302	3.1083***	1.1817*	3.2732***
	(0.3940)	(0.0009)	(0.4295)	(0.0027)	(0.1389)	(0.0029)	(0.0850)	(0.0034)
Constant	−0.4268	−2.4223***	0.0185	−2.4601***	−0.1261	−3.0432***	−1.9705***	−0.3673
	(0.2713)	(0.0000)	(0.9677)	(0.0000)	(0.7603)	(0.0000)	(0.0000)	(0.4947)
Observations	370	375	364	381	359	386	380	365
R-squared	.5789	.4495	.5523	.5455	.5133	.5319	.5977	.4355
Adj R^2	.5496	.4101	.5206	.5135	.4784	.4994	.5693	.3938
F-stat	19.7609	11.401	17.4245	17.0458	14.679	16.3655	21.035	10.4594
Industry Dummies	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year Dummies	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Country Dummies	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes

p-values are in parentheses. *** p < .01, ** p < .05, * p < .1

Table 9. REM (Production Cost) and leverage—the role of ESG performance

	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
	ESG performance		Environmental pillar score		Social pillar score		Governance pillar score
	HIGH ESG	LOW ESG	HIGH ENV	LOW ENV	HIGH SOCIAL	LOW SOCIAL	HIGH GOV	LOW GOV
REM from PROD	-0.0108	1.0502***	-0.0446	0.9955***	-0.0520	0.8885***	0.1740	0.9766***
	(0.9366)	(0.0000)	(0.7493)	(0.0000)	(0.7376)	(0.0000)	(0.2855)	(0.0000)
MTB	0.2827***	0.0164	0.2876***	0.0806**	0.2515***	0.0648*	0.2023***	0.0354
	(0.0000)	(0.6838)	(0.0000)	(0.0179)	(0.0000)	(0.0560)	(0.0000)	(0.3861)
Profitability	-0.2353***	0.0529	-0.2783***	0.0128	-0.2545***	0.0875	-0.1194**	0.0923
	(0.0000)	(0.3982)	(0.0000)	(0.8129)	(0.0000)	(0.1136)	(0.0112)	(0.1971)
Tangibility	-0.2431***	0.2434	-0.3757***	0.5323***	-0.1342	0.4710***	-0.1153	-0.0008
	(0.0089)	(0.1675)	(0.0005)	(0.0001)	(0.2121)	(0.0005)	(0.1908)	(0.9963)
Firm size	0.1120***	0.2529***	0.1229***	0.2865***	0.087**	0.2871***	0.2511***	0.1855***
	(0.0040)	(0.0000)	(0.0039)	(0.0000)	(0.0456)	(0.0000)	(0.0000)	(0.0000)
NDTS	0.5227	5.0398***	0.5276	3.9110***	1.0122	3.9839***	1.2503*	4.548***
	(0.4330)	(0.0000)	(0.4787)	(0.0000)	(0.1755)	(0.0001)	(0.0703)	(0.0000)
Constant	-0.4165	-2.8463***	0.0456	-3.0889***	-0.0955	-3.4558***	-1.9830***	-1.0849**
	(0.2871)	(0.0000)	(0.9212)	(0.0000)	(0.8201)	(0.0000)	(0.0000)	(0.0440)
Observations	370	374	364	380	359	385	379	365
R-squared	.5788	.4794	.5524	.5645	.5134	.5538	.5986	.4576
Adj R^2	.5495	.442	.5207	.5338	.4784	.5227	.5702	.4176
F-stat	19.7561	12.8191	17.4324	18.3568	14.6807	17.8226	21.0596	11.44
Industry Dummies	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year Dummies	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Country Dummies	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes

p-values are in parentheses. *** p < .01, ** p < .05, * p < .1

Table 10. Alternative measures of real earnings management and leverage

	(1)	(2)	(3)
	CFOPROD	SGAPROD	SGACFO
aggCFOPROD	0.2663**
	(0.0261)
aggSGAPROD		0.3981***
		(0.0005)
aggSGACFO			0.2439
			(0.3154)
MTB	0.1457***	0.1345***	0.1465***
	(0.0000)	(0.0000)	(0.0000)
Profitability	−0.0524	−0.0288	−0.0616
	(0.2001)	(0.4863)	(0.1351)
Tangibility	0.0155	0.0246	0.0165
	(0.8555)	(0.7716)	(0.8477)
Firm size	0.1837***	0.1915***	0.1720***
	(0.0000)	(0.0000)	(0.0000)
NDTS	2.1524***	2.2300***	2.0208***
	(0.0006)	(0.0003)	(0.0012)
Constant	−1.5072***	−1.5913***	−1.3962***
	(0.0000)	(0.0000)	(0.0000)
Observations	744	744	745
R-squared	.4316	.4372	.4284
Adj R^2	.4118	.4176	.4085
F-stat	21.8035	22.3066	21.5512
Industry Dummies	Yes	Yes	Yes
Year Dummies	Yes	Yes	Yes
Country Dummies	Yes	Yes	Yes

Table 11. Omitted variable bias (Ramsey test)

Models	F-stats	Prob. (F-stats)
aggCFOPROD	0.650	0.5810
aggSGACFO	0.360	0.7797
aggSGAPROD	0.910	0.4380
aggrREM	1.120	0.3415