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Environment, social, governance and earning quality: The moderating effect of digital transformation

Year: 2025

Type: article

Abstract: This study empirically examines the relationship between Environmental, Social, and Governance (ESG) performance and the Earnings Response Coefficient (ERC), as well as the moderating effect of Digital Transformation (DT) on this relationship. The findings reveal a significant negative correlation between ESG performance and ERC, suggesting that investors' focus on ESG metrics may conflict with their assessment of earnings quality. Specifically, higher ESG scores are indicative of skepticism among investors concerning firms' financial performance. Further analysis demonstrates that DT significantly mitigates the negative relationship between ESG performance and ERC. By enhancing information transparency and improving market expectations regarding firms' future potential, DT alleviates the adverse impact of ESG performance on earnings quality. This moderating effect is notably pronounced in manufacturing firms and companies listed on the Science and Technology Innovation Board. This study contributes new evidence to the interplay among DT, ESG performance, and earnings quality, providing valuable insights for policymakers, investors, and academia. The findings underscore the importance of balancing profitability and sustainability goals when implementing digital strategies, thus offering a robust foundation for formulating future policies.

Source: Finance Research Open

DOI: 10.1016/j.finr.2025.100027

Authors: Shizong Wu, Zhiqiang Liu

Institution: Universiti Putra Malaysia

Language: English

Topic: Auditing, Earnings Management, Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDGs: Industry, innovation and infrastructure, Decent work and economic growth

Open Access status: gold

Estimated APC paid: $1,000