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Sustainability Policy and Corporate Financial Integrity: Assessing the Impact of China’s Energy-Use Rights Trading Scheme on Earnings Management

Year: 2025

Type: article

Abstract: As a pivotal market-based instrument for achieving sustainable development and carbon neutrality goals, China's Energy-Use Rights Trading Policy (EURT) was implemented to incentivize corporate energy efficiency and emission reduction. This study empirically examines the impact of China's 2016 pilot policy on energy-use rights trading on corporate earnings management, utilizing micro-level data from China's A-share listed companies. The results demonstrate that the policy significantly intensifies earnings management, finding that are corroborated by a series of robustness checks. Heterogeneity analysis reveals that the policy effects on corporate financial manipulation are more pronounced in: private enterprises, non-Big Four-audited firms, firms within industries characterized by high concentration, and firms located in regions characterized by lower environmental fiscal expenditure, and weaker waste gas treatment capacity. Extended analysis identifies two key moderating factors: heightened environmental governance pressure amplifies the effect, whereas a high proportion of environmental investment significantly mitigates it, suggesting a potential pathway for aligning environmental and financial sustainability. Further investigation reveals that the policy exacerbates earnings management not only by intensifying financing constraints but also by increasing corporate financial risk, thereby revealing the micro-level transmission channels through which the environmental mandate impacts economic decision-making. This study provides empirical evidence for policymakers to refine the design of market-based environmental instruments. Its findings highlight the necessity of integrated governance that harmonizes environmental sustainability with corporate financial integrity.

Source: Sustainability

DOI: 10.3390/su172310759

Authors: Jingjing Zhang, Qingjun Liu, Senping Yang

Institutions: Jinan University, University of Jinan, Renmin University of China

Language: English

Topic: Auditing, Earnings Management, Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDG: Climate action

Open Access status: gold

Estimated APC paid: $2,896