The effect of corporate environmental disclosure on earnings management and financial performance: the moderating role of board monitoring

Environmental sustainability and corporate transparency have become critical priorities worldwide, with Malaysia embedding these principles into national strategies such as the Twelfth Malaysia Plan and Bursa Malaysia’s sustainability reporting framework. Despite these developments, there is ongoing debate, particularly in emerging markets, about the relationship between Corporate Environmental Disclosure (CED), earnings management, and financial performance. This study investigates the effects of CED on earnings management and financial performance, as well as the moderating role of board monitoring, within Malaysian public-listed manufacturing companies. Using a sample of 258 firms (1,548 firm-year observations) from 2016 to 2021, this study applies panel data analysis with the Generalised Method of Moments (GMM) to address endogeneity and ensure robust results. CED quality was assessed through content analysis based on the Global Reporting Initiative and Bursa Malaysia guidelines. Financial performance was measured using Tobin’s Q, Return on Assets (ROA), and Return on Equity (ROE), while earnings management was proxied through accrual-based (AEMJ) and real activity measures (abnormal cash flows: ABCFO, and abnormal discretionary expenses: ABDIS). A Board Monitoring Index (BMI), comprising board size, independence, competency, gender, and tenure, was constructed to capture governance strength. The results provide mixed evidence. CED exhibits a significant positive relationship with accrual-based earnings management but a significant negative relationship with real earnings management (ABCFO and ABDIS), suggesting that, while disclosures may at times serve symbolic purposes, they can also constrain opportunistic managerial behaviour. In terms of financial performance, CED shows significant negative associations with Tobin’s Q, ROA, and ROE, indicating potential short-term costs of disclosure practices. Earnings management demonstrates varied effects: accrual- and cash flow–based measures are positively associated with financial performance, while discretionary expenses show a negative effect, reflecting the complex nature of managerial strategies. Furthermore, board monitoring produces both strengthening and weakening effects across the tested relationships, underscoring its multifaceted role in governance. This study contributes by offering sector-specific evidence from Malaysia and by introducing the Board Monitoring Index as a moderator in disclosure–performance dynamics. The findings highlight the need for regulators and policymakers to enhance governance mechanisms to ensure that CED functions as a genuine tool of transparency rather than a symbolic or opportunistic practice. For practitioners, the results underline that while environmental disclosure can strengthen accountability, its immediate financial implications depend on how it is managed and overseen.