Does the moderating effect of ESG on earnings management increase value relevance in Latin American countries?

Abstract

The objective of this study is to analyze the moderating effect of ESG on earnings management in explaining the stock prices (value relevance) of companies from Latin American countries. The study yet compares this moderation before, during, and after the pandemic. The panel data was analyzed using the Generalized Least Squares (GLS) and Panel Corrected Standard Errors (PCSE) model. The final sample consisted of 2,078 observations from 291 companies from 2010 to 2023. The Ohlson (1995) model was employed to measure the value relevance, while the Kothari et al. (2005) model measured discretionary accruals. The findings of the study indicate: i) ESG and share price were positively and significantly related before the pandemic, and negatively and significantly after the pandemic; ii) discretionary accruals and share price were positively and significantly related, except after the pandemic, and iii) interaction between ESG and earnings management reveals a positive moderating relationship with value relevance in the post-pandemic period. This study contributes to investors by providing insights into how ESG moderates earnings management in stock price pricing, helping to identify more transparent and sustainable companies. It provides managers promote viewpoint on how ESG affects the production of financial value and promotes actions consistent with responsible governance. For society, it highlights the role of ESG in building more trustworthy and resilient markets. Understanding how crises impact the applicability of these techniques is made easier by the comparative analysis conducted before, during, and following the pandemic. Thus, the study reinforces the importance of ESG in promoting trust and economic stability.