The Effect of Financial Performance on ESG Performance in European listed companies: Earnings Management as a Mediator
Omar Al-Habashneh ;
Ahmed Abdul Latiff ;
Chew Loke
Published: 2026/05/02
Abstract
This study examines the relationship between financial performance and ESG performance in European listed firms, emphasizing the mediating role of earnings management. Using panel data from 2010–2023, the analysis applies firm fixed-effects models with clustered robust standard errors to control for unobserved heterogeneity. Financial performance is measured through Return on Assets (ROA), Tobin’s Q, and Net Profit Margin, while earnings management is captured using discretionary accruals. The results show that financial performance does not directly enhance ESG performance. ROA exhibits a significant negative association with ESG scores, whereas Tobin’s Q and Net Profit Margin are statistically insignificant. Further analysis indicates that profitability increases earnings management practices, which in turn negatively affect ESG performance. Bootstrapping confirms a significant indirect effect, supporting partial mediation. The findings suggest that the financial performance–ESG nexus operates primarily through managerial reporting behavior rather than direct resource allocation, highlighting the importance of governance quality and reporting integrity in regulated European markets.
Keywords
The Effect of Financial Performance on ESG Performance in European listed companies: Earnings Management as a Mediator is licensed under CC BY 4.0
References
- Alduais, F. (2023). Unravelling the intertwined nexus of firm performance, ESG practices, and capital cost in the Chinese business landscape. Cogent Economics & Finance, 11(2), 2254589. Al-Gamrh, B., Ku Ismail, K. N. I., Ahsan, T., & Alquhaif, A. (2020). Investment opportunities, corporate governance quality, and firm performance in emerging markets. Journal of Accounting in Emerging Economies, 10(2), 261-276. Arvidsson, S., & Dumay, J. (2022). Corporate ESG reporting quantity, quality and performance: Where to now for environmental policy and practice?. Business Strategy and the Environment, 31(3), 1091-1110. Astuti, W. (2021). A literature review of net profit margin. Social Science Studies, 1(2), 115-128. Barauskaite, G., & Streimikiene, D. (2021). Corporate social responsibility and financial performance of companies: The puzzle of concepts, definitions and assessment methods. Corporate Social Responsibility and Environmental Management, 28(1), 278-287. Baskaran, S., Nedunselian, N., Ng, C. H., Mahadi, N., & Abdul Rasid, S. Z. (2020). Earnings management: a strategic adaptation or deliberate manipulation?. Journal of Financial Crime, 27(2), 369-386. Bătae, O. M., Dragomir, V. D., & Feleagă, L. (2021). Environmental, social, governance (ESG), and financial performance of European banks. Journal of Accounting and Management Information Systems, 20(1), 1-24. Budianto, E. W. H., & Dewi, N. D. T. (2023). Net Profit Margin (NPM) Ratio in Islamic and Conventional Banking: Mapping research topics using VOSviewer bibliometric study and library research. Butt, M. N., Baig, A. S., & Seyyed, F. J. (2023). Tobin’s Q approximation as a metric of firm performance: An empirical evaluation. Journal of Strategic Marketing, 31(3), 532-548. Chatzistamoulou, N. (2023). Is digital transformation the Deus ex Machina towards sustainability transition of the European SMEs?. Ecological Economics, 206, 107739. Chen, S., Song, Y., & Gao, P. (2023). Environmental, social, and governance (ESG) performance and financial outcomes: Analyzing the impact of ESG on financial performance. Journal of Environmental Management, 345, 118829. Dakhlallh, M. M., Rashid, N., Abdullah, W. A. W., & Al Shehab, H. J. (2020). Audit committee and Tobin's Q as a measure of firm performance among Jordanian companies. Journal of Advanced Research in Dynamical & Control Systems, 12(1), 28-41. Ferrell, O. C., Liang, H., & Renneboog, L. (2016). Socially responsible firms. Journal of Financial Economics, 122(3), 585-606. Gonçalves, T., Gaio, C., & Ferro, A. (2021). Corporate social responsibility and earnings management: Moderating impact of economic cycles and financial performance. Sustainability, 13(17), 9969. Guo, B., Feng, W., Cai, H., & Lin, J. (2023). Influence of public hospital reform on public health: Evidence from a quasi-natural experiment in China. Frontiers in Public Health, 11, 1104328. Habib, A., Ranasinghe, D., Wu, J. Y., Biswas, P. K., & Ahmad, F. (2022). Real earnings management: A review of the international literature. Accounting & Finance, 62(4), 4279-4344. He, F., & Ding, C. (2023). ESG performance and corporate risk-taking: Evidence from China. International Review of Financial Analysis, 87, 102550. Heubeck, T. (2024). Walking on the gender tightrope: Unlocking ESG potential through CEOs' dynamic capabilities and strategic board composition. Business Strategy and the Environment, 33(3), 2020-2039. Ibrahim, B., & Aljarah, A. (2021). The era of Instagram expansion: matching social media marketing activities and brand loyalty through customer relationship quality. Journal of Marketing Communications. Kieti, W. M., & Aluoch, M. O. (2024). Corporate board of directors’ activities and profitability of agricultural firms listed on the Nairobi Securities Exchange, Kenya. International Academic Journal of Economics and Finance, 4(2), 59-89. Krishnamoorthy, R. (2021). Environmental, social, and governance (ESG) investing: Doing good to do well. Open Journal of Social Sciences, 9(7), 189–197. Lee, M. T., & Raschke, R. L. (2023). Stakeholder legitimacy in firm greening and financial performance: What about greenwashing temptations?. Journal of Business Research, 155, 113393. Lestari, R., & Muthmainnah, D. R. (2025). The impact of earnings management on perceived quality of earnings: the moderating role of ESG. Asian Journal of Accounting Research. Liao, F., Sun, Y., & Xu, S. (2023). Financial report comment letters and greenwashing in environmental, social and governance disclosures: Evidence from China. Energy Economics, 127, 107122. Liu, J., Luo, X., & Lu, L. (2023). ESG performance and firm value: Evidence from China. Corporate Social Responsibility and Environmental Management. Nagy, M., Valaskova, K., & Durana, P. (2022). The effect of CSR policy on earnings management behavior: Evidence from Visegrad Publicly listed enterprises. Risks, 10(11), 203. Nsibande, S., & Sebastian, R. (2023). ESG performance and firm value: Evidence from emerging markets. Sustainability. Osazefua, I. J. (2019). Operational efficiency and financial sustainability of listed manufacturing companies in Nigeria. Journal of Accounting and Taxation, 11(1), 17-31. Pucheta-Martínez, M. C., & Gallego-Álvarez, I. (2020). Do board characteristics drive firm performance? An international perspective. Review of Managerial Science. Sandberg, H., Alnoor, A., & Tiberius, V. (2023). Environmental, social, and governance ratings and financial performance: Evidence from the European food industry. Business Strategy and the Environment. Wu, M., & Abeysekera, I. (2023). Financial reporting quality of ESG firms listed in China. PLoS One, 18(6), e0284684. Zhang, D., Pan, L., Liu, L., & Zeng, H. (2023). Impact of executive pay gap on environmental, social, and governance disclosure in China: Is there a strategic choice?. Corporate Social Responsibility and Environmental Management.