Published Online:December 2025
Product Name:The IUP Journal of Financial Risk Management
Product Type:Article
Product Code:IJFRM021225
DOI:10.71329/IUPJFRM/2025.22.4.29-56
Author Name:Ananya Paul and Debdas Rakshit
Availability:YES
Subject/Domain:Finance
Download Format:PDF
Pages:29-56
This study investigates the effect of environmental, social and governance (ESG) performance on real earnings management (REM) practices in financially distressed companies, including the moderating impact of ESG on the linkage between REM and financial distress. REM is detected using Roychowdhury model, and financial distress is gauged using Altman’s Z-score and Emerging Market Scoring models. ESG scores are retrieved from the Bloomberg database. Using the two-step system GMM model, the findings convey that firms’ governance performance and overall ESG performance limit production activity based on REM, while environmental performance lowers discretionary expenses based on REM in distressed companies. Moreover, the firms’ overall ESG performance and individual environmental, social, and governance performance significantly weaken the effect of financial distress on REM practices. The findings have important implications for corporate stakeholders.
The rise in environmental and social challenges in recent years has turned the focus of corporate stakeholders towards the nonfinancial performance of companies, in addition to their financial performance. Therefore, stakeholders are now paying greater attention to firms’ environmental, social, and governance (ESG) performance and thus considering ESG factors as a criterion for financing and investment decision-making (Chouaibi & Zouari, 2021; Rakshit & Paul, 2022).