ESG Uncertainty and Accounting

This PhD thesis comprises two research articles that examine areas that have not adequately addressed ESG uncertainty. The articles aim to enhance the ongoing discourse on the causes and consequences of ESG uncertainty. The research in the first chapter aims to investigate whether firms’ ESG uncertainty increases errors and dispersion in analysts’ earnings forecasts. Based on the stakeholder theory, we conjecture that uncertain ESG ratings can increase the complexity of analysts’ forecasting tasks since the extent of ESG uncertainty implies the complexity of trade-offs and efforts applied in ESG activities and an unclear information environment. Our empirical results provide strong evidence that increased ESG uncertainty is related to less accurate and more dispersed analysts’ earnings forecasting. The results empirically support the positive association between ESG ratings and analysts’ earnings forecasting accuracy proposed in prior studies. Results also show that the association between ESG uncertainty and analysts’ forecasting tasks is more pronounced for high-ESG firms. It reveals the potential risks that the ESG performance backed by great ESG rating performance will make it more challenging instead of weakening the difficulties for analysts’ earning forecast. We further investigate the effect of each pillar’s information uncertainty (environment, social, and governance) separately, where the social pillar contributes to the overall impact of ESG uncertainty. The second chapter of this thesis examines the potential effect of firms’ earnings management (EM) behaviors, including accrual-based (AEM) and real earnings management (REM), on ESG uncertainty. Specifically, stakeholder theory says ESG-oriented firms are more transparent and accountable, minimizing earning manipulation to retain stakeholder confidence and long-term sustainability. When the firms ' EM behaviors are detected, ESG raters will distrust the firms’ information, including their ESG disclosures. The credibility loss of ESG raters in firms' ESG matters will be reflected in their increased ESG disagreement. In the context of opportunism, prior studies find a positive association between EM and firms’ social responsibility performance, indicating that managers are employed to cover up their EM behaviors and in response to stakeholders’ pressure by highlighting their ESG practices. Firms will generate information asymmetry to mask their earnings management by selecting excessive ESG practices, which leads to disagreement among ESG raters. The findings show that AEM is positively associated with ESG uncertainty, while REM exhibits a limited impact under different contexts. We highlight the risks of the high ESG ratings, as the positive relationship between ESG uncertainty and EM will be pronounced for those top ESG firms. Additionally, we find that the association between EM and ESG uncertainty is moderated by firms’ financial health and global economic contexts, such as the global financial crisis (2007–2010). The study provides empirical evidence revealing the mechanism to illustrate firms’ earnings management behaviors as internal factors causing ESG uncertainty mediated by information disclosures.