The Impact of Real Earning Management and Environmental, Social, and Governance Transparency on Financing Costs

Abstract

The aim of this research is to investigate the potential relationship between reduced loan and equity financing costs and stakeholder confidence in sustainable development practices as assessed by ESG information disclosure. We also investigate the potential moderating role of actual earnings management. We use a fixed effects panel data analysis to examine 97 firm-year observations of UK firms from 2014 to 2023. According to the research, investors place a lower value on ESG disclosure and increase the price of shares, whilst lenders view it favourably and reduce the cost of debt. Furthermore, when the moderating effects of real earnings management is taken into account, the effect of ESG disclosure on the cost of debt decreases and the effect on the cost of equity grows. Lenders and investors seem to think that when companies use ESG disclosure to mask their true earnings management, they are using it to defend their practices.

Keywords: Environmental policy, ESG disclosure, Real earnings management, Stakeholder engagement, Sustainable development, COD, COE, FTSE 100