ESG Disclosure Quality, Audit Committees, and Real Earnings Management: Evidence from the Tehran Stock Exchange

Abstract

This study empirically investigates the impact of Environmental, Social, and Governance (ESG) disclosure quality on real earnings management (REM) and examines the moderating role of audit committee characteristics. Drawing upon agency theory and stakeholder theory, the research addresses a critical gap in emerging market literature where economic volatility and evolving governance mandates intersect. Utilizing a comprehensive panel dataset of non-financial firms listed on the Tehran Stock Exchange (TSE) from 2019 to 2024, advanced econometric frameworks, including firm-fixed effects and the dynamic generalized method of moments (GMM), are deployed to rigorously control for endogeneity and unobserved firm-specific heterogeneity. The empirical findings reveal a robust, statistically significant negative relationship between the quality of ESG disclosures—measured through a comprehensive index of sustainability reporting—and the magnitude of REM. This indicates that superior sustainability reporting effectively reduces information asymmetry, constraining managerial opportunism regarding real economic activities such as abnormal discretionary expenditures and production costs. Furthermore, the analysis demonstrates that this mitigating effect is significantly amplified by the presence of a strong audit committee. Specifically, audit committee independence and the inclusion of members with financial expertise provide the critical oversight necessary to prevent managers from utilizing ESG disclosures as a greenwashing tool to mask underlying financial manipulations. The results offer vital insights for regulators, investors, and policymakers in emerging economies, highlighting that the true efficacy of non-financial reporting in safeguarding fundamental earnings quality is profoundly dependent on the concurrent strength of internal corporate governance mechanisms.