The Impact of ESG Scores and Financial Performance on Earnings Management in Japanese Technology Firms

Abstract

This study intends to examine whether environmental, social and governance (ESG) scores of Japanese electrical machinery sector firms affect their earnings management (EM). The analysis incorporates stakeholder theory and suggests that greater stakeholder orientation and higher profitability lower the incentives for opportunistic reporting. Research in developing nations has already established a mixed relationship between ESG and EM. This can mainly be attributed to institutions, disclosure regimes and consensus on measurement.  Thus, Japan is an important and relevant setting for further research. The study, which employs panel data of Tokyo Stock Exchange (TSE) Electrical Machinery companies from 2020-2024 in order to reflect to Indonesia's context. Next, discretionary accruals are computed using the Modified Jones Model. We utilize ordinary least squares regressions with industry fixed effects and firm-clustered standard errors, controlling for leverage, firm size and return on assets. There is a negative association between ESG scores and EM because of improved monitoring pressure and increased transparency. Data are analyzed using STATA 17, and by examining ESG disclosures and financial performance at the same time, the study offers empirical evidence on how stakeholder-oriented practices may limit earnings manipulation in an emerging market. The results can be useful to regulators, auditors, and investors with regard to the ability of ESG indicators to predict earnings management risks.

This study intends to examine whether environmental, social and governance (ESG) scores of Japanese electrical machinery sector firms affect their earnings management (EM). The analysis incorporates stakeholder theory and suggests that greater stakeholder orientation and higher profitability lower the incentives for opportunistic reporting. Research in developing nations has already established a mixed relationship between ESG and EM. This can mainly be attributed to institutions, disclosure regimes and consensus on measurement.  Thus, Japan is an important and relevant setting for further research. The study, which employs panel data of Tokyo Stock Exchange (TSE) Electrical Machinery companies from 2020-2024 in order to reflect to Indonesia's context. Next, discretionary accruals are computed using the Modified Jones Model. We utilize ordinary least squares regressions with industry fixed effects and firm-clustered standard errors, controlling for leverage, firm size and return on assets. There is a negative association between ESG scores and EM because of improved monitoring pressure and increased transparency. Data are analyzed using STATA 17, and by examining ESG disclosures and financial performance at the same time, the study offers empirical evidence on how stakeholder-oriented practices may limit earnings manipulation in an emerging market. The results can be useful to regulators, auditors, and investors with regard to the ability of ESG indicators to predict earnings management risks.