Earnings Management and IFRS Adoption Influence on Corporate Sustainability Performance: The Moderating Roles of Institutional Ownership and Board Independence

Abstract

Many companies engage in earnings manipulation that obscures their actual financial condition and sustainability efforts, undermining the credibility of financial reports and eroding stakeholder trust. To address these concerns, the United Kingdom has strictly adhered to International Financial Reporting Standards (IFRS), enhancing financial transparency and reducing the risk of manipulation. This study applies agency theory to examine the effects of earnings management and IFRS adoption on corporate sustainability performance, while also assessing the moderating roles of institutional ownership and board independence. Data were drawn from 248 companies listed on the London Stock Exchange between 2002 and 2024, using purposive sampling and sourced from Thomson Reuters Eikon DataStream. Advanced estimation techniques, specifically the Augmented Mean Group (AMG) and fixed effects models with Driscoll-Kraay standard errors, were employed to address cross-sectional dependence and slope heterogeneity. The results indicate that earnings management, as measured by discretionary accruals, has a significant negative impact on sustainability performance. In contrast, the adoption of IFRS has a positive and significant influence on sustainability outcomes. Additionally, institutional ownership and board independence significantly moderate the adverse effects of earnings management, leading to improved sustainability performance. The findings suggest that managers should enhance the clarity and accountability of financial reporting by implementing robust internal systems aligned with IFRS, conducting regular compliance audits, and training finance staff on current disclosure standards.

1. Introduction

Corporate sustainability performance has received growing attention as companies face increasing pressure to enhance accountability and operate responsibly [1]. Stakeholders no longer rely solely on financial statements to assess performance; instead, they consider how firms address environmental, social, and governance (ESG) issues. A company can achieve long-term success by creating enduring value while minimizing negative impacts on society and the environment [2]. The evolving expectations of investors, regulators, employees, and customers highlight the need to integrate sustainability into corporate strategies, as doing so fosters trust and maintains competitive advantage [3].

Earnings management—the intentional manipulation of financial reports—undermines transparency and the credibility of financial information [4]. Executives may use both legal accounting methods and more aggressive strategies to meet market expectations, secure bonuses, or inflate stock prices [5]. These practices compromise the integrity of financial reports and reduce stakeholder trust. Transparent reporting is fundamental to the proper functioning of capital markets. Understanding the drivers and consequences of earnings management is crucial for enhancing corporate governance and protecting investor interests [6].

The global adoption of International Financial Reporting Standards (IFRS) has significantly reshaped financial reporting practices [7]. IFRS promotes comparability, consistency, and clarity, thereby enhancing investor confidence and facilitating cross-border operations [8,9]. Many countries have transitioned from local standards to IFRS to improve the quality of financial information. However, adoption also poses challenges such as regulatory changes, training requirements, and increased compliance costs, necessitating well-planned implementation strategies.

The interplay between earnings management and IFRS is central to financial reporting reliability and corporate sustainability [10,11]. While IFRS supports standardized and transparent disclosures, earnings manipulation can diminish these benefits by concealing a company’s true performance. Accurate financial data that reflect both fiscal health and ESG performance are essential for assessing long-term value creation [12]. As such, understanding the combined effects of earnings management and IFRS adoption is crucial for evaluating the integrity of financial statements and guiding informed stakeholder decisions.

Despite IFRS adoption, some firms continue to manipulate earnings, obscuring their actual financial position and sustainability initiatives [13]. This lack of transparency hinders meaningful sustainability assessments and weakens investor confidence. As ESG expectations rise, ensuring that financial reports accurately represent corporate sustainability efforts becomes increasingly important [14]. Addressing these challenges is vital for long-term value creation and maintaining stakeholder trust.

While previous studies have explored earnings management’s effect on sustainability, most focus on real earnings manipulation, with limited attention to accrual-based strategies [15,16,17]. Moreover, there is scant evidence on how IFRS adoption influences sustainability outcomes, despite its growing relevance.

Institutional ownership and board independence are key governance mechanisms that enhance transparency and accountability [17]. Their influence ensures ethical practices and improves the reliability of financial information. However, few studies have examined their moderating roles in the relationships among earnings management, IFRS adoption, and corporate sustainability performance. Addressing these gaps will deepen our understanding of how governance affects the effectiveness of financial reporting and corporate sustainability efforts.

This study responds to these gaps by addressing the following research questions:

• What is the impact of earnings management and IFRS adoption on corporate sustainability performance?
• How does institutional ownership moderate the relationship between earnings management, IFRS adoption, and corporate sustainability performance?
• How does board independence moderate the relationship between earnings management, IFRS adoption, and corporate sustainability performance?

The study makes three key contributions to the literature. First, it examines how IFRS adoption affects corporate sustainability performance, providing insight into transparent and responsible reporting amid growing ESG pressures [18]. The findings offer guidance to policymakers and businesses on integrating financial reporting with sustainability goals.

Second, the study investigates how institutional ownership and board independence moderate the relationship between earnings management and sustainability. Institutional investors help mitigate opportunistic behavior and promote ethical financial practices [19], while independent boards enhance oversight and limit managerial discretion [20], aligning reported performance with actual sustainability efforts.

Third, it evaluates how these governance mechanisms also moderate the combined effects of earnings management and IFRS adoption on sustainability. Institutional investors’ demand for transparency and accountability can strengthen IFRS’s impact on long-term performance [21]. Similarly, independent boards can reinforce IFRS benefits by ensuring fair and consistent financial reporting, thereby promoting trust and sustainable growth.

This study was motivated by the global push for corporate responsibility and the urgent need to align financial practices with Environmental, Social, and Governance (ESG) objectives. Growing concerns about accountability, transparency, and sustainable value creation have intensified the demand for research that explores how financial reporting and governance frameworks influence sustainability performance. By addressing this gap, the study provides meaningful insights for business leaders, regulators, and investors who aim to foster long-term value, strengthen accountability mechanisms, and advance sustainable development in line with global ESG priorities.

2. Literature Review

2.1. Theoretical Background

This study is grounded in agency theory as formulated by Jensen and Meckling [22], which provides a robust lens for understanding the interactions and conflicts between principals (e.g., shareholders) and agents (e.g., company executives). Agency theory contends that due to divergent interests and the existence of information asymmetry—where managers typically possess superior knowledge of the firm’s internal operations—agents may engage in behaviors that do not align with shareholders’ goals [23]. A central manifestation of this agency conflict is earnings management, whereby managers manipulate reported earnings to serve personal or organizational interests, potentially misleading investors and other stakeholders [24].

In the context of this study, earnings management is conceptualized as a typical agency problem that undermines the reliability and transparency of financial reporting. From an agency theory perspective, mitigating such opportunistic behavior is crucial for protecting shareholders’ interests and promoting long-term corporate value. The adoption of International Financial Reporting Standards (IFRS) functions as a mechanism to reduce agency conflicts by enhancing the clarity, comparability, and consistency of financial reports, thus addressing information asymmetry [25]. By standardizing accounting practices and limiting managerial discretion in financial reporting, IFRS fosters accountability and strengthens stakeholder trust.

Agency theory also provides insight into how unchecked managerial actions can negatively affect corporate sustainability performance, which encompasses a firm’s commitment to long-term value creation and environmental, social, and governance (ESG) objectives [26]. Managers, driven by short-term incentives, may underinvest in sustainability initiatives that do not yield immediate financial returns, thereby compromising the firm’s broader strategic goals. To counteract such tendencies, institutional ownership emerges as a key governance mechanism. Large and informed investors have the capacity to monitor managerial behavior effectively and advocate for decisions that enhance long-term value [27]. Similarly, board independence serves as a critical safeguard, ensuring that managerial decisions align with shareholder interests rather than self-serving motives [28]. Independent directors are especially instrumental in enforcing compliance with IFRS and curbing earnings management practices, thereby fostering genuine and sustained corporate performance.

The agency theory underpins this study by elucidating the mechanisms through which earnings management and IFRS adoption interact to influence corporate sustainability performance. The theory supports the proposition that effective corporate governance—through financial reporting standards, institutional ownership, and board independence—can mitigate agency problems and promote long-term corporate sustainability among firms listed on the London Stock Exchange.

2.2. Hypothesis Development

2.2.1. The Influence of Earnings Management on Corporate Sustainability Performance

Earnings management has a significant impact on a company’s sustainability performance by distorting its true financial condition and outcomes, thereby hindering its ability to make environmentally responsible decisions over time [29]. Managers who manipulate accruals or engage in real activity-based earnings management often divert resources away from ESG initiatives to meet short-term financial targets. These actions can undermine sustainability investments, erode stakeholder confidence, and obstruct long-term value creation strategies [30]. Shi et al. [31] found that firms engaging heavily in earnings management are less likely to show a genuine commitment to corporate social responsibility (CSR), a key driver of long-term profitability.

By obscuring the clarity and reliability of financial reports, earnings management also impedes external stakeholders—such as investors, regulators, and analysts—from accurately evaluating a firm’s sustainability performance [32]. This lack of transparency diminishes trust, which is essential for fostering long-term stakeholder relationships. Velte [33] demonstrated that profit-reducing manipulations are associated with weaker sustainability reporting and lower corporate reputation. Companies that publish misleading financial information risk damaging their credibility and losing support for their ESG initiatives [34]. This can result in a trust gap between perceived and actual sustainability outcomes, potentially leading to reputational harm and legal consequences.

Internally, earnings management promotes a culture of short-termism. Managers may prioritize immediate financial outcomes such as earnings targets or compensation over long-term investments in areas like renewable energy, employee well-being, or ethical supply chains [35]. Carroll and Shabana [36] observed that firms manipulating profits to boost short-term performance often neglect CSR efforts. Such practices impede authentic progress and sustainability development, ultimately weakening a firm’s competitive advantage, investor loyalty, and future growth prospects [29,37]. Based on these in-sights, this study proposes the following hypothesis:

H1: 

Earnings management negatively and significantly influences corporate sustainability performance.

2.2.2. The Influence of IFRS Adoption on Corporate Sustainability Performance

International Financial Reporting Standards (IFRS) play a critical role in improving the clarity, accuracy, and comparability of financial information [38], which supports long-term organizational performance. Accurate financial reporting is essential for assessing a firm’s capacity to implement and sustain ESG initiatives. IFRS establishes a unified reporting framework that fosters trust, accountability, and effective communication between management and stakeholders [38]. Mensah [39] found that IFRS adoption enhances financial reporting quality, enabling informed investment decisions aligned with sustainability corporate practices.

Additionally, IFRS adoption increases the likelihood of consistent disclosure of non-financial risks and performance indicators [40]. While IFRS primarily addresses financial information, its emphasis on fair presentation and disclosure also supports transparency in sustainability reporting. Evans et al. [41] found that IFRS adoption is associated with reduced earnings management and improved reporting accuracy, aiding stakeholders in evaluating a company’s long-term viability. Stricter disclosure requirements under IFRS encourage firms to align internal performance metrics with ESG goals, facilitating the integration of sustainability into business strategies [42].

Firms transitioning to IFRS may also feel compelled to improve the environmental sustainability of their operations [43]. In competitive global markets, companies are often assessed on ESG performance, and IFRS adherence increases pressure on managers to enhance environmental responsibility. Moreover, consistent and transparent financial reporting can attract long-term investors who value sustainability, ethical conduct, and accountability [44]. As sustainability finance gains importance, the quality and comparability of financial information provided under IFRS become critical for long-term corporate success. Implementing IFRS improves the reliability of financial statements and supports the integration of sustainability into governance and operations [45]. Based on these discussions, this study proposes the following hypothesis:

H2: 

IFRS adoption has a positive and significant impact on corporate sustainability performance.

2.2.3. The Moderating Effect of Institutional Ownership on the Relationship Between Earnings Management and Corporate Sustainability Performance

Institutional ownership significantly moderates the relationship between earnings management and corporate sustainability performance [46]. Institutional investors such as pension funds, mutual funds, and insurance companies typically possess the capital, expertise, and influence to closely monitor managerial actions. Their involvement can deter opportunistic behaviors, including aggressive earnings manipulation. By demanding greater transparency and accountability, institutional investors help reduce the risk that earnings management will undermine long-term sustainability goals [47]. Ramalingegowda et al. [48] found that higher levels of institutional ownership enhance oversight and decrease the likelihood of earnings manipulation, thereby promoting more reliable and sustainability performance outcomes.

Institutional ownership aligns managerial decisions with long-term investor interests, discouraging short-term profit manipulation in favor of sustainability value creation [49]. When institutional investors hold significant equity stakes, they are well-positioned and incentivized to ensure that firms prioritize genuine, long-term performance. As a result, companies may avoid earnings management practices that could compromise their ESG commitments or damage their reputations [50]. García-Sánchez et al. [51] argue that institutional investors promote socially responsible behavior, strengthening the link between financial transparency and sustainability corporate practices.

ESG considerations increasingly shape institutional investment decisions [52]. Firms under close institutional scrutiny are more likely to be held accountable for both financial integrity and environmental performance. This dual accountability discourages profit manipulation and fosters a commitment to sustainability. Institutional ownership not only limits unethical reporting practices but also cultivates a culture of accountability that supports tangible ESG achievements [53]. Moreover, institutional investors often engage with shareholders to voice concerns and influence strategic direction, mitigating the negative effects of earnings management on long-term viability [54]. Based on these discussions, this study proposes the following hypothesis:

H3: 

Institutional ownership positively and significantly moderates the relationship between earnings management and corporate sustainability performance.

2.2.4. The Moderating Effect of Institutional Ownership on the Relationship Between IFRS Adoption and Corporate Sustainability Performance

Institutional ownership plays a significant moderating role in the relationship between IFRS adoption and corporate sustainability performance by promoting accountability and strengthening governance. Institutional investors generally prioritize transparent, high-quality financial reporting and are well-positioned to ensure corporate compliance with IFRS standards [55]. Their involvement increases the likelihood that firms will adhere to IFRS, thereby improving the accuracy, consistency, and comparability of financial reports. This, in turn, enhances the credibility of sustainability evaluations. Fang et al. [56] found that institutional ownership improves the clarity and quality of financial reporting under IFRS.

Because institutional investors typically focus on long-term value creation and ESG considerations, their influence encourages firms to view IFRS adoption not merely as a compliance requirement but as a strategic tool for demonstrating their commitment to sustainability [57]. This alignment motivates companies to integrate sustainability into both their strategic planning and financial disclosures. Nulla [58] observed that firms with significant institutional ownership are more likely to follow best practices in financial and sustainability reporting, thereby maximizing the impact of IFRS on corporate sustainability.

Additionally, proactive institutional investors and engaged shareholders enhance the benefits of IFRS adoption by holding management accountable for transparent and accurate reporting [59]. Their oversight ensures reliable financial disclosures and clear communication about sustainability initiatives. Institutional ownership fosters stakeholder trust and reinforces the need for sustainability performance by demanding strict adherence to IFRS and ESG standards [60]. This strengthens the connection between standardized financial reporting and genuine corporate accountability. Based on these insights, this study proposes the following hypothesis:

H4: 

Institutional ownership positively and significantly moderates the relationship between IFRS adoption and corporate sustainability performance.

2.2.5. The Moderating Effect of Board Independence on the Relationship Between Earnings Management and Corporate Sustainability Performance

Board independence significantly moderates the relationship between earnings management and corporate sustainability performance by reducing the likelihood of managerial opportunism. Independent directors provide objective oversight, helping to detect and prevent earnings manipulation and ensuring decisions are free from undue managerial influence [61]. Their role supports transparent reporting and helps safeguard long-term sustainability goals. Naciti [62] noted that firms with more independent boards tend to manage profitability more responsibly, resulting in more credible sustainability disclosures.

Independent boards foster a culture of accountability by ensuring that management’s decisions align with the organization’s long-term strategic goals, including ESG targets [63]. They play a crucial role in balancing short-term financial performance with sustainability value creation. Karim et al. [64] found a positive correlation between board independence and improved corporate social responsibility (CSR) performance, indicating that independent directors help mitigate the negative impacts of profit-driven decision-making on environmental and social initiatives.

Furthermore, independent directors bring diverse expertise and perspectives that enhance the board’s ability to interpret complex financial reports and evaluate sustainability standards [65]. Their scrutiny ensures that financial disclosures accurately reflect a firm’s true performance. By promoting ethical conduct and strengthening governance, board independence protects stakeholder interests and enhances corporate reputation [66]. This contributes to genuine long-term success and reinforces the integrity of financial reporting. Based on these insights, this study proposes the following hypothesis:

H5: 

Board independence positively and significantly moderates the relationship between earnings management and corporate sustainability performance.

2.2.6. The Moderating Effect of Board Independence on the Relationship Between IFRS Adoption and Corporate Sustainability Performance

Board independence significantly enhances the relationship between IFRS adoption and corporate sustainability performance by ensuring that financial reporting is rigorously monitored and objectively evaluated. Independent directors, free from managerial influence, are essential for enforcing compliance with IFRS standards and ensuring the clarity and consistency of financial statements [66]. Porter and Sherwood [67] found that boards with greater independence are associated with higher reporting quality, enabling stakeholders to make well-informed decisions regarding a company’s sustainability initiatives.

Independent boards help align IFRS adoption with broader corporate governance and sustainability objectives by providing impartial oversight that integrates financial reporting with ESG commitments [68]. Their presence ensures that disclosures reflect genuine sustainability performance rather than mere regulatory compliance. Agyemang and Appiah [69] demonstrated that independent directors reduce agency conflicts, compelling management to prioritize long-term value creation and uphold environmental commitments.

Moreover, independent board members contribute diverse expertise and perspectives that strengthen the evaluation of both financial reports and sustainability data [70]. This enhances the credibility of disclosed information and builds stakeholder confidence in the company’s commitment to sustainability practices. Board independence plays a pivotal role in reinforcing the positive impact of IFRS adoption on long-term performance by promoting transparency, ethical governance, and accountability [71]. Based on these insights, this study proposes the following hypothesis:

H6: 

Board independence positively and significantly moderates the relationship between IFRS adoption and corporate sustainability performance.

3. Methodology

3.1. Sample and Data

The United Kingdom was selected for this study due to its strong regulatory framework aimed at curbing earnings management and promoting sustainability corporate growth [72]. The UK’s strict adherence to IFRS enhances the transparency and reliability of financial reports, reducing the likelihood of earnings manipulation. Recent regulatory measures, such as the Companies Act mandate for non-financial disclosures and the endorsement of ESG reporting by the Task Force on Climate-related Financial Disclosures (TCFD), require firms to embed sustainability into their core strategies and ensure transparency in their reporting [73,74]. These conditions make the UK a suitable and exemplary context for this study.

The focus on non-financial companies listed on the London Stock Exchange (LSE) is strategic, given their significant economic influence and obligation to comply with strict public disclosure requirements [75]. These firms are subject to comprehensive IFRS regulations and increasing expectations for detailed ESG and sustainability reporting. The LSE’s emphasis on strong corporate governance, especially through mechanisms such as board independence and institutional ownership, supports effective monitoring of earnings management [76]. This setting provides an ideal environment for examining the interrelationships among transparency, governance, and sustainability performance.

The study sample includes companies that consistently apply IFRS and disclose sustainability-related information. Selected firms operate in sectors with high environmental and social impact, such as manufacturing, utilities, consumer goods, and industrials. These companies also exhibit active, independent boards and significant institutional ownership. Excluded from the analysis were financial institutions, firms with incomplete disclosures, newly listed companies outside the study period, and holding companies. This ensures a focus on operational firms directly involved in activities relevant to sustainability and governance.

Data were obtained from Thomson Reuters Eikon DataStream for the period 2002 to 2024, covering 248 firms selected using purposive sampling based on specific inclusion and exclusion criteria. This timeframe captures several key events relevant to the study: the UK’s adoption of IFRS in 2005, the 2008 global financial crisis—which intensified scrutiny of earnings management and financial transparency—the Companies Act’s 2013 mandate for non-financial disclosures, and the emergence of ESG reporting frameworks like the TCFD from 2017 onward. This period is particularly significant for analyzing the evolution of corporate sustainability practices and governance in the UK.

3.2. Dependent, Independent, Moderating, and Control Variables

Table 1. Summary of the study’s variables.

Index	Variable	Acronym	Source of Data	Formulae
	Dependent variables:
1	Corporate sustainability performance	CPSUPM	Thomson Reuters Eikon DataStream	ESG score
	Independent variable:
1	Discretionary accruals	DISCC	Thomson Reuters Eikon DataStream (The computation was done by the researchers)	Modified Jones Model
2	IFRS adoption		Compute by the researchers	Dummy variable was applied where a value of 1 was assigned to firms that had consistently adopted and applied IFRS during the study period (from 2006 to 2024) and 0 otherwise (from 2002 to 2005).
	Control variables
1	Audit quality	AUDITQ	Compute by the researchers	Dummy variable was applied where companies audited by a Big Four firm (PwC, EY, KPMG, or Deloitte) received a score of 1, and otherwise, they received a score of 0
2	Firm size	FIMSE	Thomson Reuters Eikon DataStream	Log (total assets)
3	Firm age	FIMGE	Thomson Reuters Eikon DataStream	It was determined by subtracting the year of incorporation by the companies from the observation year.
4	Capital intensity	CAPTTY	Thomson Reuters Eikon DataStream	${\displaystyle \frac{Total assets}{Total sales}}$
	Moderating variables:
1	Institutional ownership	INSOWN	Thomson Reuters Eikon DataStream	$\left({\displaystyle \frac{Shares owned by Institutional Investors}{Total outstanding share }}\right)\ast 100$
2	Board independence	BADPEN	Thomson Reuters Eikon DataStream	$\left({\displaystyle \frac{Total number \mathit{of} independence directors}{Total number \mathit{of} directors }}\right)\ast 100$

presents the dependent, independent, control, and moderating variables used in this study, along with their abbreviations and corresponding formulas as applied in the regression model.

3.2.1. Dependent Variable

The dependent variable in this study was sustainability performance, defined as a company’s ability to generate long-term value by effectively integrating environmental, social, and governance (ESG) considerations into its operations and decision-making [77,78]. It reflects how well firms align their strategies and practices with principles of accountability, transparency, and responsible resource use to ensure both financial viability and broader contributions to sustainable development [79].

The environmental aspect focuses on how a company manages its impact on the natural environment through practices such as energy efficiency, waste reduction, carbon emission control, and responsible resource use [80]. The social aspect reflects the company’s relationship with its stakeholders, including employees, communities, and customers, emphasizing fair labor practices, diversity, human rights, and community development [81]. The governance aspect highlights the systems and processes that ensure accountability and transparency [82], covering issues such as board structure, ethical conduct, compliance, and effective risk management.

ESG scores were used to measure sustainability performance, as they offered a comprehensive and objective assessment of a company’s commitment to environmental protection, social responsibility, and sound governance [83]. These scores served as a robust indicator of sustainability performance by capturing key dimensions such as environmental stewardship, social accountability, and governance effectiveness [77]. In this study, ESG scores were essential as they reflected the extent to which firms complied with regulations and embedded sustainability into their strategic decision-making.

3.2.2. Independent Variables

The independent variables in this study were earnings management and IFRS adoption. Earnings management referred to the deliberate manipulation of financial statements by managers to achieve specific reporting objectives such as meeting corporate targets, influencing investor perceptions, or satisfying regulatory expectations [84]. This practice compromised the reliability of financial reporting and could obscure a firm’s actual operational performance [85]. In this study, earnings management was measured using discretionary accruals, which represented the portion of total accruals subject to managerial discretion through judgment or accounting choices.

To estimate discretionary accruals, the study employed the Modified Jones Model—a widely accepted and reliable approach for detecting earnings management. This model adjusted total accruals for changes in revenue and property, plant, and equipment to isolate the discretionary component [86]. By identifying accruals unrelated to normal business activities, the model revealed potential manipulative behavior. The Modified Jones Model minimized measurement error and was effective in detecting subtle forms of earnings management across various empirical contexts.

Modified Jones Model

$${\displaystyle \frac{{\mathrm{T}\mathrm{A}\mathrm{C}}_{\mathrm{i},\mathrm{t}}}{{\mathrm{T}\mathrm{A}}_{\mathrm{i},\mathrm{t}}-1}}=\mathsf{\beta }0+\mathsf{\beta }1{\displaystyle \frac{1}{{\mathrm{T}\mathrm{A}}_{\mathrm{i},\mathrm{t}}-1}}+\mathsf{\beta }2{\displaystyle \frac{({\mathsf{\Delta }\mathrm{R}\mathrm{E}\mathrm{V}}_{\mathrm{i},\mathrm{t}}+{\mathsf{\Delta }\mathrm{R}\mathrm{E}\mathrm{C}}_{\mathrm{i},\mathrm{t}})}{{\mathrm{T}\mathrm{A}}_{\mathrm{i},\mathrm{t}}-1}}+\mathsf{\beta }3{\displaystyle \frac{{\mathrm{P}\mathrm{P}\mathrm{E}}_{\mathrm{i},\mathrm{t}}}{{\mathrm{T}\mathrm{A}}_{\mathrm{i},\mathrm{t}}-1}}+{\mathrm{ℇ}}_{\mathrm{i},\mathrm{t}}$$

where:

$$\begin{array}{c}{TA}_{(i,t)}=is total accruals \mathit{for} the current year\\ {TAC}_t={Net Income}_t-{Cash Flows \mathit{from} Operations}_t\\ {TAC}_t represents the total accruals \mathit{for} the current year \left(T\right).\\ {Net Income}_t is the net income \mathit{for} the current year \left(T\right).\\ {Cash Flows \mathit{from} Operations}_t \mathit{refers} to the cash \mathit{flows} \mathit{from} operations \mathit{for} the current year \left(T\right).\\ {TA}_{i,t}-1=are total assets \mathit{of} \mathit{firm} i at the end \mathit{of} the year t-1,\\ {\mathsf{\Delta }REV}_{i,t}/{TA}_{it}-1\hfill \\ =is sales revenue \mathit{of} \mathit{firm} i in year t less revenue in year t\hfill \\ -1 scaled by{TA}_{i,t}-1,\hfill \\ {\mathsf{\Delta }REC}_{i,t}=is the change in accounts receivable, (current year receivable\hfill \\ -previous year receivable)\hfill \\ {PPE}_{i,t}/{TA}_{i,t}-1\hfill \\ =is gross property, plant and equipment \mathit{of} \mathit{firm} i at the end \mathit{of} year t scaled by {TA}_{i,t}-1,\hfill \\ \hfill \beta 0, \beta 1, \beta 2, and \beta 3 are estimated parameters\hfill \\ \hfill {\mathrm{ℇ}}_{i,t} is error term \mathit{for} \mathit{firm} I and year t\hfill \end{array}$$

IFRS is a globally recognized framework aimed at improving the clarity, comparability, and reliability of financial statements [8]. In this study, IFRS adoption is measured using a dummy variable: firms that consistently applied IFRS from 2006 to 2024 were assigned a value of 1, while those operating under other standards between 2002 and 2005 were assigned a value of 0. This binary classification is commonly used in empirical accounting research to differentiate between IFRS-adopting and non-adopting firms, enabling clear comparisons when evaluating the impact of IFRS on corporate practices and performance outcomes.

3.2.3. Control Variables

Audit quality reflects the ability of external auditors to detect material misstatements, thereby enhancing the reliability of financial reports [87]. In this study, audit quality is measured using a dummy variable: firms audited by a Big Four accounting firm (PwC, EY, KPMG, or Deloitte) are assigned a value of 1, and all others a value of 0. Including audit quality as a control variable helps account for its role in curbing earnings management and improving the credibility of sustainability disclosures [88].

Firm size represents the scale of operations and the accessibility of resources [89]. It is measured using the natural logarithm of total assets. Firm size is an important control variable, as larger firms typically have more resources to invest in sustainability initiatives and face greater scrutiny from regulators and the public [90].

Firm age refers to the number of years a company has been incorporated and listed on the stock exchange [91]. It is calculated by subtracting the incorporation year from the year of observation. Older firms often exhibit more stable operations, established systems, and deeper stakeholder relationships [92]. Controlling for firm age captures the influence of organizational experience on sustainability practices and earnings management.

Capital intensity measures the extent to which firms rely on tangible assets to generate revenue [93]. It is calculated as the ratio of total assets to total sales. Capital-intensive firms may face greater environmental scrutiny and, in response to stakeholder expectations, are more likely to adopt sustainability practices [94]. Including capital intensity as a control variable accounts for industry-related differences in financial reporting and sustainability behavior.

3.2.4. Moderating Variables

Institutional ownership refers to the percentage of a company’s shares held by institutional investors, including pension funds, mutual funds, and insurance companies [95]. It is measured as the proportion of total shares owned by such institutions. Institutional investors typically possess greater expertise and demand higher levels of transparency and accountability, making them effective monitors of managerial behavior [19]. In this study, institutional ownership was used as a moderating variable to examine how external oversight influences the relationship between financial reporting practices and sustainability performance.

Board independence denotes the presence of non-executive, independent directors on a company’s board [96]. It is measured as the ratio of independent directors to the total number of board members. Independent directors enhance board objectivity and strengthen management oversight, particularly in areas related to long-term strategy and financial reporting [97]. As a moderating variable, board independence allowed for the investigation of how governance quality affects the relationship between earnings management, IFRS adoption, and corporate sustainability performance.

3.3. Pre-Estimation Tests

Selecting appropriate estimation models is essential for producing accurate and unbiased empirical results. This study followed a systematic approach to identify the most suitable models for analyzing panel data. The first step involved testing for cross-sectional dependence to determine whether correlations exist among the observational units, as such dependence can bias the estimates. To assess this, the study employed the Pesaran, Friedman, and Frees tests, each with a null hypothesis of no cross-sectional dependence and an alternative hypothesis indicating dependence. The results, presented in

Table 2. Cross-sectional and heterogeneity tests.

Types of CD Tests	Corporate Sustainability Performance
Pesaran’s test	12.943 ***
Friedman’s test	8.932 ***
Frees’ test	1345.832 ***
Heterogeneity test (Peseran-Yamagata test)
Δ-tilde stat.	8.242 ***
Δadj-tilde stat.	14.473 ***

*** p < 0.01.

, confirmed the presence of cross-sectional dependence, thus supporting the alternative hypothesis.

Following this, the Pesaran-Yamagata test was conducted to assess slope homogeneity across the panel. The null hypothesis assumed homogeneous slope coefficients, while the alternative suggested heterogeneity. The test results indicated that the slope coefficients vary across units, supporting the alternative hypothesis. This finding suggests that the relationships among the study variables differ across firms, justifying the use of models that account for slope heterogeneity.

Given the presence of cross-sectional dependence, this study employed the Cross-sectional Augmented Dickey-Fuller (CADF) and Cross-sectional Augmented IPS (CIPS) tests to assess unit root properties. The CADF test extends the conventional Augmented Dickey-Fuller (ADF) approach by incorporating cross-sectional averages, thereby improving its accuracy in panel data settings [98]. Similarly, the CIPS test enhances the Im-Pesaran-Shin (IPS) procedure by accounting for cross-sectional dependence using a comparable augmentation method [98].

For both tests, the null hypothesis indicates the presence of a unit root (non-stationarity), while the alternative hypothesis suggests stationarity in. The tests were conducted at both level and first-difference forms. As presented in

Table 3. Unit root tests.

Variable	Cross-Sectional Augmented Dickey-Fuller (CADF) Test		Cross-Sectional Augmented IPS (CIPS)
	Levels	1st Difference	Levels	1st Difference
Sustainability performance	−6.042 ***	−13.094 ***	−6.083 ***	−15.942 ***
Discretionary accruals	−4.987 ***	−12.371 ***	−5.823 ***	−13.763 ***
IFRS	−5.614 ***	−11.942 ***	−5.774 ***	−14.209 ***
Audit quality	−6.321 ***	−13.781 ***	−6.445 ***	−16.022 ***
Firm size	−4.756 ***	−10.882 ***	−5.063 ***	−12.918 ***
Firm age	−6.187 ***	−13.442 ***	−6.123 ***	−15.556 ***
Capital intensity	−5.423 ***	−12.364 ***	−5.968 ***	−14.231 ***
Institutional ownership	−6.674 ***	−13.969 ***	−6.503 ***	−16.347 ***
Board independence	−5.129 ***	−11.783 ***	−5.645 ***	−13.574 ***

*** p < 0.01.

the results confirm that the variables are stationary, satisfying the conditions for subsequent panel regression analysis.

Given the presence of cross-sectional dependence, this study employed the Westerlund panel cointegration test to assess the existence of long-term relationships among the study variables. The Westerlund test is well-suited for panel data characterized by cross-sectional dependence and heterogeneity, as it allows for the analysis of short-run dynamics and individual error correction while aggregating information across all cross-sections [99]. It estimates error correction models for each cross-sectional unit and tests whether at least one unit exhibits a long-run equilibrium relationship in

Table 4. Westerlund panel cointegration test.

Test	Corporate Sustainability Performance
Cointegration tests
Westerlund test	−9.934 ***

*** p < 0.01.

.

The null hypothesis of the Westerlund test states that there is no cointegration, while the alternative hypothesis asserts that cointegration exists in at least some cross-sections. The results, presented in Table 5, support the alternative hypothesis, confirming the presence of long-term equilibrium relationships among the variables. These findings justify the use of long-run estimation techniques and underscore the connection between financial reporting quality, governance mechanisms, and corporate sustainability performance.

3.4. Choice of Regression Estimation

This study employed the Augmented Mean Group (AMG) estimator as the primary estimation model due to the presence of long-term relationships, slope heterogeneity, and cross-sectional dependence among the variables. The AMG estimator incorporates a common dynamic process to account for cross-sectional dependence, capturing the influence of global shocks while allowing for heterogeneous slope coefficients and firm-specific dynamics [100]. This approach effectively addresses correlated errors across panel units, yielding more reliable and consistent coefficient estimates in complex panel data settings.

A comparative assessment with alternative estimation techniques—namely, fixed effects, random effects, and Pooled Ordinary Least Squares (POLS)—highlighted the limitations of these traditional models. Fixed and random effects models do not adequately account for cross-sectional dependence and assume homogeneity in slope coefficients [101]. POLS, meanwhile, assumes independence and homogeneity across observations, making it unsuitable for this study’s data structure. Given these considerations, the AMG estimator emerged as the most robust and appropriate technique for generating valid empirical results. The general form of the AMG model is presented as:

$$y_{it}={\alpha }_{it}+{{\beta }_i^{\mathrm{ᵎ}}}_{X_{it}}+{\lambda }_t+u_{it}$$

where “$y_{it}\mathrm{”}$ is the dependent variable for unit i at time t.

$X_{it}$ is the vector of explanatory variables for unit iii at time t.

${\alpha }_{it}$ is the individual- specific factors

${\beta }_i$ is the vector of coefficients for the explanatory variables $X_{it}$ specific to each cross-sectional unit i

${\lambda }_i$ is the common dynamic process (common factors) affecting all units.

$u_{it}$ is the error term

The study employed fixed effects with Driscoll-Kraay standard errors to verify the accuracy of the AMG estimation results. This method, chosen for its thoroughness, effectively addresses autocorrelation, heteroskedasticity, and cross-sectional correlation, hence enhancing the accuracy of standard errors [102]. The fixed effects assumption accounts for unobserved firm-specific characteristics that remain constant over time, reducing the likelihood of omitted variable bias occurring. The alternative model rectifies these issues and provides a dependable standard. This indicates that the principal outcomes remain consistent regardless of the estimation methods employed, and they persist unchanged even when the data and statistical assumptions are modified.

3.5. Model Specification

To examine the impact of earnings management and IFRS adoption on corporate sustainability performance—and to assess the moderating roles of institutional ownership and board independence—this study employed five econometric models. Model 1 captures the direct effects of earnings management and IFRS adoption on sustainability performance. Models 2 and 3 assess the moderating effect of institutional ownership on these relationships. Models 4 and 5 explore how board independence moderates the link between earnings management, IFRS adoption, and sustainability performance. The specified models are presented below:

Model 1:

$$\begin{array}{c}{CPSUPM}_{F,n}={\beta 0}_{F,n}+{\beta 1DISCC}_{F,n}+{\beta 2IFRS}_{F,n}+{\beta 3AUDITQ}_{F,n}+{\beta 4FIMSE}_{F,n}+{\beta 5FIMGE}_{F,n}+{\beta 6CAPTTY}_{F,n}\\ +{\beta 7INSOWN}_{F,n}+{\beta 8BADPEN}_{F,n}+u_{F,n}\hfill \end{array}$$

Model 2:

$$\begin{array}{c}{CPSUPM}_{F,n}={\beta 0}_{F,n}+{\beta 1DISCC}_{F,n}+{\beta 2IFRS}_{F,n}+{\beta 3AUDITQ}_{F,n}+{\beta 4FIMSE}_{F,n}\\ +{\beta 5FIMGE}_{F,n}+{\beta 6CAPTTY}_{F,n}+{\beta 7INSOWN}_{F,n}+{\beta 8BADPEN}_{F,n}\hfill \\ +{\beta 9DISCC\ast INSOWN}_{F,n}+u_{F,n}\hfill \end{array}$$

Model 3:

$$\begin{array}{c}{CPSUPM}_{F,n}={\beta 0}_{F,n}+{\beta 1DISCC}_{F,n}+{\beta 2IFRS}_{F,n}+{\beta 3AUDITQ}_{F,n}+{\beta 4FIMSE}_{F,n}\\ +{\beta 5FIMGE}_{F,n}+{\beta 6CAPTTY}_{F,n}+{\beta 7INSOWN}_{F,n}+{\beta 8BADPEN}_{F,n}\hfill \\ +{\beta 9IFRS\ast INSOWN}_{F,n}+u_{F,n}\hfill \end{array}$$

Model 4:

$$\begin{array}{c}{CPSUPM}_{F,n}={\beta 0}_{F,n}+{\beta 1DISCC}_{F,n}+{\beta 2IFRS}_{F,n}+{\beta 3AUDITQ}_{F,n}+{\beta 4FIMSE}_{F,n}\\ +{\beta 5FIMGE}_{F,n}+{\beta 6CAPTTY}_{F,n}+{\beta 7INSOWN}_{F,n}+{\beta 8BADPEN}_{F,n}\hfill \\ +{\beta 9DISCC\ast BADPEN}_{F,n}+u_{F,n}\hfill \end{array}$$

Model 5:

$$\begin{array}{c}{CPSUPM}_{F,n}={\beta 0}_{F,n}+{\beta 1DISCC}_{F,n}+{\beta 2IFRS}_{F,n}+{\beta 3AUDITQ}_{F,n}+{\beta 4FIMSE}_{F,n}\\ +{\beta 5FIMGE}_{F,n}+{\beta 6CAPTTY}_{F,n}+{\beta 7INSOWN}_{F,n}+{\beta 8BADPEN}_{F,n}\hfill \\ +{\beta 9IFRS\ast BADPEN}_{F,n}+u_{F,n}\hfill \end{array}$$

4. Data Analysis, Results and Interpretation

4.1. The Descriptive Statistics

The descriptive statistics of the study variables are presented in Table 5. The mean score for corporate sustainability performance suggests that firms demonstrate a moderate commitment to sustainability, reflecting a growing orientation toward long-term ESG objectives. The average level of discretionary accruals indicates that companies engage in moderate earnings management, balancing financial transparency with some flexibility in reporting practices. The mean IFRS score shows that most firms have adopted international financial reporting standards, demonstrating a strong commitment to global reporting consistency and regulatory compliance.

The average audit quality score indicates that a significant proportion of firms are audited by Big Four accounting firms, reflecting high governance standards and increased stakeholder confidence in financial disclosures. The average firm size suggests that the sampled companies are large and resource-rich, likely exerting considerable influence within their industries and having the capacity to implement sustainability initiatives.

The average firm age reveals that most companies have been in operation for a considerable time, implying industry experience, institutional stability, and resilience to market fluctuations. The mean capital intensity score shows that firms rely significantly on tangible assets to generate revenue, suggesting the need for sustained investment in infrastructure and industrial capacity.

The average institutional ownership level indicates a strong presence of institutional investors, implying active external monitoring, which may enhance governance and strategic decision-making. Lastly, the average board independence score reflects a considerable proportion of independent directors on company boards, facilitating greater oversight and accountability in executive decision-making (Table 5).

Table 5. Descriptive Statistics.

Variable	Obs	Mean	Std. Dev.	Min	Max
Corporate sustainability performance	5704	52.071	27.178	0	99.84
Discretionary accruals	5704	1.058	0.163	0.09	1.493
IFRS	5704	0.867	0.339	0	1
Audit quality	5704	0.971	0.167	0	1
Firm size	5704	9.089	1.076	0.021	11.614
Firm age	5704	45.954	36.104	1	206
Capital intensity	5704	1.309	1.047	0.001	3.547
Institutional ownership	5704	3.604	3.39	0	65.87
Board independence	5704	64.843	30.236	0.143	100

Table 5. Descriptive Statistics.

Variable	Obs	Mean	Std. Dev.	Min	Max
Corporate sustainability performance	5704	52.071	27.178	0	99.84
Discretionary accruals	5704	1.058	0.163	0.09	1.493
IFRS	5704	0.867	0.339	0	1
Audit quality	5704	0.971	0.167	0	1
Firm size	5704	9.089	1.076	0.021	11.614
Firm age	5704	45.954	36.104	1	206
Capital intensity	5704	1.309	1.047	0.001	3.547
Institutional ownership	5704	3.604	3.39	0	65.87
Board independence	5704	64.843	30.236	0.143	100

4.2. Correlation Matrix Analysis

This study employed correlation matrix analysis to assess multicollinearity among the independent variables by examining the strength of their interrelationships as shown in

Table 6. Matrix of correlations.

Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)
(1) Sustainability performance	1.000
(2) Discretionary accruals	−0.033	1.000
(3) IFRS	0.004	0.082	1.000
(4) Audit quality	0.027	−0.010	0.004	1.000
(5) Firm size	0.033	0.100	0.146	−0.019	1.000
(6) Firm age	0.012	0.019	0.108	0.001	−0.010	1.000
(7) Capital intensity	0.044	0.033	0.001	0.024	0.047	0.042	1.000
(8) Institutional ownership	0.034	−0.009	−0.020	−0.040	−0.007	−0.012	−0.109	1.000
(9) Board independence	0.003	−0.016	0.002	−0.005	−0.032	0.012	0.081	0.042	1.000

. A correlation coefficient above 0.70 is generally considered indicative of multicollinearity [103]. In this study, all correlation coefficients were below the 0.70 threshold, suggesting that the variables are statistically independent and exhibit minimal overlap. These results confirm the absence of multicollinearity within the dataset.

4.3. Testing of the Hypothesis

The results of the Augmented Mean Group (AMG) estimation, presented in

Table 7. Augmented Mean Group estimation results.

	Corporate Sustainability Performance
	Model 1	Model 2	Model 3	Model 4	Model 5
Discretionary accruals	−0.783 *** (0.303)	−0.621 *** (0.248)	−0.709 ** (0.315)	−0.894 *** (0.276)	−0.812 *** (0.291)
IFRS	0.512 ** (0.201)	0.436 *** (0.150)	0.478 ** (0.213)	0.529 *** (0.167)	0.501 *** (0.174)
Audit quality	0.238 ** (0.098)	0.304 *** (0.088)	0.187 ** (0.092)	0.266 *** (0.081)	0.249 ** (0.089)
Firm size	1.129 *** (0.412)	0.964 ** (0.385)	1.201 *** (0.401)	1.045 *** (0.393)	1.082 *** (0.402)
Firm age	0.379 *** (0.146)	0.401 *** (0.132)	0.354 ** (0.140)	0.388 *** (0.126)	0.395 *** (0.139)
Capital intensity	0.441 ** (0.179)	0.398 ** (0.171)	0.466 *** (0.162)	0.435 ** (0.175)	0.419 ** (0.168)
Institutional ownership	0.288 ** (0.116)	0.345 *** (0.102)	0.326 *** (0.107)	0.291 ** (0.113)	0.314 *** (0.109)
Board independence	0.614 *** (0.225)	0.572 *** (0.209)	0.645 ** (0.231)	0.589 *** (0.214)	0.603 *** (0.228)
Discretionary accruals * Institutional ownership		0.518 ** (0.177)
IFRS * Institutional ownership			0.318 ** (0.140)
Discretionary accruals * Board independence				0.769 *** (0.265)
IFRS * Board independence					0.205 ** (0.093)
Number of observations	5704	5704	5704	5704	5704
Wald tests	49.32 ***	52.87 ***	47.11 ***	55.04 ***	50.91 ***
CD-statistic	1.884 **	2.301 **	2.056 **	2.144 **	2.198 **
RMSE	0.418	0.401	0.429	0.394	0.412

*** p < 0.01, ** p < 0.05, * p < 0.1.

, formed the basis for evaluating the study’s hypotheses and guiding the empirical discussion.

The analysis revealed that discretionary accruals had a negative and significant effect on corporate sustainability performance, thereby supporting and confirming Hypothesis H1. Similarly, IFRS adoption demonstrated a positive and significant influence on sustainability performance, validating Hypothesis H2.

Furthermore, the moderating role of institutional ownership in the relationships between discretionary accruals, IFRS adoption, and sustainability performance was positive and significant. These results confirm Hypotheses H3 and H4.

In addition, the moderating effect of board independence on the relationship between both discretionary accruals and IFRS adoption and sustainability performance was also positive and significant. These findings support and confirm Hypotheses H5 and H6.

4.4. Robustness Testing

To verify the reliability and validity of the results presented in Table 7, this study conducted a robustness test using the fixed effects model with Driscoll-Kraay standard errors. The results are displayed in

Table 8. Fixed effect with Driscoll-Kray standard error (Robustness testing).

	Corporate Sustainability Performance
	Model 1	Model 2	Model 3	Model 4	Model 5
Discretionary accruals	−0.692 ** (0.281)	−0.578 ** (0.265)	−0.645 ** (0.293)	−0.712 *** (0.270)	−0.735 *** (0.289)
IFRS	0.489 ** (0.191)	0.512 *** (0.172)	0.456 ** (0.198)	0.474 *** (0.169)	0.498 *** (0.183)
Audit quality	0.221 ** (0.087)	0.266 *** (0.079)	0.202 ** (0.085)	0.247 *** (0.077)	0.233 ** (0.081)
Firm size	1.056 *** (0.387)	1.112 *** (0.372)	1.085 *** (0.391)	1.098 *** (0.369)	1.123 *** (0.376)
Firm age	0.362 *** (0.134)	0.386 *** (0.127)	0.341 ** (0.130)	0.359 *** (0.121)	0.375 *** (0.129)
Capital intensity	0.419 ** (0.167)	0.386 ** (0.158)	0.442 *** (0.153)	0.414 ** (0.163)	0.428 ** (0.160)
Institutional ownership	0.301 ** (0.112)	0.327 *** (0.099)	0.314 *** (0.105)	0.297 ** (0.111)	0.320 *** (0.107)
Board independence	0.585 *** (0.213)	0.549 *** (0.201)	0.611 ** (0.220)	0.572 *** (0.206)	0.596 *** (0.215)
Discretionary accruals * Institutional ownership		0.494 ** (0.171)
IFRS * Institutional ownership			0.309 ** (0.133)
Discretionary accruals * Board independence				0.751 *** (0.259)
IFRS * Board independence					0.193 ** (0.087)
Constant	1.102 *** (0.312)	1.189 *** (0.298)	1.158 *** (0.306)	1.174 *** (0.294)	1.167 *** (0.301)
Number of observations	5704	5704	5704	5704	5704
R-square	0.371	0.386	0.354	0.398	0.377

*** p < 0.01, ** p < 0.05, * p < 0.1.

. A thorough comparison was made between the findings in Table 7 and Table 8, focusing on the consistency in the direction, magnitude, and statistical significance of the effects. Although there were some variations in coefficient estimates and standard errors between the two models, the positive and significant relationships of the independent, control, and moderating variables with the dependent variable remained consistent. This consistency affirms the robustness of the findings and reinforces the validity of the AMG model results through cross-verification with the fixed effects model using Driscoll-Kraay standard errors.

4.5. Dealing with Endogeneity and Evaluation of GMM Model Fitness

The Durbin-Wu-Hausman (DWH) test, as presented in

Table 9. Endogeneity tests.

Endogeneity Tests	Corporate Sustainability Performance
Durbin-Wu-Hausman (DWH) Test	33.036 ***

*** p < 0.01.

, revealed the presence of endogeneity among the independent variables, making it necessary to apply a structured multi-step estimation strategy. To address this, the regression model was initially specified using dynamic regressors, where past values of the dependent variables were included. This specification helped to account for autocorrelation, minimize omitted variable bias, and reduce potential reverse causality by allowing past outcomes to inform current values.

To further mitigate endogeneity concerns, the endogenous independent variables were lagged (lag 1) and employed as internal instruments, while additional lagged variables (return on assets, return on equity, total assets) were used as external instruments. This approach limited estimation bias, captured unobserved shocks, and addressed challenges related to omitted variables and reverse causality, thereby improving the reliability of the results [104].

The robustness of the Generalized Method of Moments (GMM) estimates was then verified through diagnostic tests. Results from the Arellano-Bond AR(1) and AR(2) tests showed significant AR(1) but insignificant AR(2) values, confirming the absence of second-order autocorrelation and supporting the validity of the model specification [105]. The Sargan test produced insignificant results, which confirmed instrument exogeneity, while the Hansen J-test, with p-values between 0.10 and 0.30, supported the validity of the instruments and their lack of correlation with error terms [106,107].

The two-step GMM results, summarized in

Table 10. Two-Step Generalized Method of Movement (difference GMM).

	Corporate Sustainability Performance
	Model 1	Model 2	Model 3	Model 4	Model 5
Corporate sustainability performance (−1)	0.834 *** (0.272)	0.642 *** (0.183)	0.721 *** (0.199)	0.803 *** (0.221)	0.781 *** (0.207)
Discretionary accruals	−0.158 *** (0.052)	−0.247 *** (0.067)	−0.192 *** (0.063)	−0.304 *** (0.078)	−0.276 *** (0.072)
IFRS	0.441 *** (0.139)	0.327 *** (0.118)	0.392 *** (0.124)	0.478 *** (0.136)	0.365 *** (0.121)
Audit quality	0.284 *** (0.095)	0.352 *** (0.101)	0.297 *** (0.089)	0.419 *** (0.112)	0.308 *** (0.097)
Firm size	0.521 *** (0.173)	0.463 *** (0.158)	0.504 *** (0.169)	0.582 *** (0.181)	0.495 *** (0.166)
Firm age	0.263 *** (0.084)	0.318 *** (0.092)	0.289 *** (0.087)	0.341 *** (0.094)	0.276 *** (0.085)
Capital intensity	0.374 *** (0.121)	0.447 *** (0.135)	0.392 *** (0.128)	0.414 *** (0.131)	0.386 *** (0.125)
Institutional ownership	0.612 *** (0.207)	0.534 *** (0.188)	0.587 *** (0.196)	0.649 *** (0.214)	0.572 *** (0.193)
Board independence	0.298 *** (0.099)	0.351 *** (0.106)	0.332 *** (0.102)	0.417 *** (0.117)	0.306 *** (0.098)
Discretionary accruals and Institutional ownership		0.526 *** (0.163)
IFRS and Institutional ownership			0.389 *** (0.123)
Discretionary accruals and Board independence				0.374 *** (0.112)
IFRS and Board independence					0.341 *** (0.112)
Number of observations	5521	5521	5521	5521	5521
AR (1)	−2.84 ***	−2.71 ***	−2.96 ***	−2.87 ***	−2.75 ***
AR (2)	0.63	0.54	0.71	0.68	0.59
Sargan test	0.42	0.37	0.48	0.53	0.44
Hansen test	0.28	0.24	0.27	0.29	0.26

*** p < 0.01.

, satisfied all requirements for model validity, demonstrating that the issues of endogeneity, omitted variables, and reverse causality were effectively addressed. Notably, the significant positive and negative effects obtained were consistent with the baseline results in Table 7, which strengthened confidence in the study’s conclusions. The main difference between the two estimation techniques lies in the magnitude of the coefficient estimates and the associated standard errors.

4.6. Discussion of Findings

The study found that discretionary accruals have a significant and negative impact on corporate sustainability performance, consistent with findings by Nguyen [29] and grounded in agency theory, which addresses the misalignment between managerial and shareholder interests. Managers may manipulate short-term financial results through discretionary accruals, compromising long-term value creation and sustainability [108]. Such practices can obscure operational issues or misallocate resources away from sustainability initiatives to meet immediate targets. This behavior represents agency costs, where managerial goals, such as income or job security, supersede shareholder and societal interests [109]. These accounting manipulations weaken the credibility of financial disclosures and diminish stakeholder trust [110].

The economic implication implies that poor earnings quality, reflected in higher discretionary accruals, undermines sustainability performance by eroding stakeholder trust, increasing financing costs, and restricting firms’ capacity to secure long-term responsible investments. Investors should interpret high levels of discretionary accruals as potential signals of opportunism, prompting greater scrutiny of both financial and sustainability disclosures [111]. For management, these practices may erode stakeholder confidence, reduce ESG performance ratings, and invite regulatory attention.

IFRS adoption was found to positively and significantly influence corporate sustainability performance. This aligns with agency theory by improving transparency, consistency, and accountability in financial reporting [112]. IFRS limits managerial discretion, reduces information asymmetry, and aligns managerial actions with stakeholder interests [113]. Enhanced disclosure builds stakeholder trust, encouraging firms to invest meaningfully in ESG initiatives instead of superficial reporting [114].

The economic implication implies that IFRS adoption enhances transparency and comparability, fostering investor confidence, lowering information asymmetry, and enabling firms to access capital more efficiently to strengthen long-term sustainability performance. The adoption of IFRS signals a firm’s commitment to transparent operations and ethical reporting [115]. It allows for comparability across firms and industries and helps align sustainability efforts with corporate strategy. Consequently, IFRS promotes resource allocation to projects with long-term societal and business value.

Audit quality was also positively associated with sustainability performance, reinforcing agency theory by enhancing external oversight and reducing managerial opportunism [116]. High-quality audits increase the reliability of sustainability disclosures and compel management to act in stakeholders’ best interests. Effective auditors detect misrepresentations and support accurate sustainability claims [117]. As a result, companies subject to robust audits exhibit stronger ESG performance and governance. The economic implication implies that higher audit quality strengthens accountability and reduces earnings manipulation, thereby improving trust among stakeholders, enhancing firm reputation, and supporting sustainable value creation over the long term.

Firm size had a positive and significant impact on sustainability performance. Larger firms possess greater financial and technological resources to implement sustainability programs and are subject to greater public and regulatory scrutiny [118]. These characteristics foster transparency and accountability, in line with agency theory. Larger firms are also better positioned to meet stakeholder demands and manage internal controls [119]. Their scale supports long-term sustainability, improves governance, and enhances stakeholder engagement. The economic implication implies that larger firms possess greater resources and visibility, enabling stronger sustainability investments, improved stakeholder confidence, and enhanced long-term competitiveness in both domestic and international markets.

Firm age was also positively associated with sustainability performance. Older firms benefit from accumulated experience, established processes, and stakeholder relationships, enabling more effective adaptation to ESG demands [120]. Their history of compliance and ethical conduct builds investor trust and reduces the incentive for earnings manipulation [121]. These firms are perceived as more stable and credible in ESG reporting. The economic implication implies that older firms, with established experience and stability, are better positioned to integrate sustainability practices, enhance resilience, and build long-term trust with stakeholders and investors.

Capital intensity showed a positive and significant relationship with sustainability performance. Capital-intensive firms, due to substantial investments in fixed assets, require long-term planning and responsible resource allocation [122]. Their operational complexity discourages short-term profit manipulation and aligns with agency theory through improved oversight and accountability. Such firms often face greater scrutiny and are more likely to commit to sustainability initiatives to maintain legitimacy [94]. The economic implication implies that higher capital intensity strengthens sustainability performance by enabling investment in advanced technologies and efficient processes, which improve productivity, reduce environmental costs, and create long-term competitive advantages.

Institutional ownership was found to positively moderate the relationship between discretionary accruals and sustainability performance. Institutional investors serve as effective monitors, reducing the risk of opportunistic earnings management [123]. Their demand for transparency and long-term value discourages practices that distort performance metrics [4]. Institutional oversight ensures earnings adjustments reflect economic reality rather than manipulation [48]. This emphasizes the value of ownership structure in aligning corporate behavior with sustainability goals. The economic implication implies that greater institutional ownership enhances sustainability performance by exerting monitoring pressure on management, aligning corporate strategies with long-term ESG goals, and fostering investor confidence in sustainable value creation.

Similarly, institutional ownership positively moderated the effect of IFRS adoption on sustainability performance. Institutional investors enhance the effectiveness of IFRS by ensuring compliance and promoting long-term strategic alignment [124]. Their demand for accurate and timely information strengthens financial integrity and ESG practices [125]. This underscores the importance of external governance mechanisms in supporting financial regulation and sustainability [126].

Board independence was also a significant moderator of the relationship between discretionary accruals and sustainability performance. Independent directors provide impartial oversight, reducing the likelihood of earnings manipulation [127]. Their objectivity enhances transparency and ensures alignment with long-term goals [28]. This highlights the role of board structure in safeguarding sustainability, even amid managerial attempts to distort financial outcomes [128,129].

Finally, the study found that board independence positively moderated the relationship between IFRS adoption and sustainability performance. Independent boards reinforce adherence to IFRS and help align reporting standards with broader ESG commitments [67]. Their involvement promotes ethical conduct, improves strategic planning, and supports trust-building with stakeholders [47,115]. This demonstrates that governance quality amplifies the benefits of standardized financial reporting frameworks. The study confirms that strong governance structures—via institutional ownership and board independence—enhance the effectiveness of financial reporting practices like IFRS and limit the adverse effects of earnings management, thereby fostering corporate sustainability.

5. Conclusions and Managerial Implications

The findings of this study hold important implications for executives managing companies listed on the London Stock Exchange (LSE), especially regarding the influence of governance structures and financial reporting regulations on corporate sustainability performance. Managers should prioritize improving the clarity and accountability of financial reports by establishing robust internal systems aligned with IFRS standards, conducting regular compliance audits, and training finance personnel on updated disclosure requirements. Fostering a culture of transparency can build stakeholder trust and reduce the risks associated with misleading financial disclosures, such as loss of investor confidence, legal exposure, and reputational harm.

A key managerial takeaway is the importance of strengthening board governance. Boards must maintain independence and active engagement to effectively oversee management and support fair, well-informed decisions. Managers should regularly evaluate board composition to ensure it includes diverse expertise, particularly in sustainability and risk oversight. Providing non-executive directors with timely and accurate performance data enables them to exercise effective oversight and guide the company toward strategies that deliver long-term value for both shareholders and society.

In addition, managers should recognize the strategic importance of institutional investors and actively involve them in corporate governance. Establishing transparent communication channels, regularly reporting ESG performance, and organizing investor forums can facilitate mutual understanding and align investor expectations with corporate objectives. This inclusive engagement enhances decision-making by integrating both immediate operational needs and long-term sustainability goals.

Executives must also treat sustainability as a strategic priority rather than a secondary initiative. This involves embedding measurable ESG targets into operational plans, linking executive compensation to sustainability performance, and incorporating environmental and social risk assessments into major investment decisions. Such practices align the firm with global sustainability benchmarks and enhance its competitiveness in markets that increasingly value ethical and long-term corporate performance.

6. Practical Implication

The results highlight the need for companies to strengthen their internal governance and financial transparency to foster long-term sustainable performance. Managers should prioritize transparent financial reporting and adopt strong accounting practices to minimize opportunistic behaviors that erode trust. Establishing tighter internal control systems and ensuring independent oversight can reduce risks associated with earnings manipulation while supporting credibility with external stakeholders. Firms can also integrate sustainability considerations into financial disclosures to enhance both transparency and accountability.

Sustainability outcomes further benefit from aligning operational structures with international standards and recognized best practices. Firms should continuously adopt and update global reporting frameworks, leverage technology to improve audit processes, and invest in quality assurance mechanisms. Encouraging collaboration between auditors, boards, and managers ensures sustainability initiatives are embedded into monitoring practices. By adhering to international benchmarks, firms can attract foreign investors and expand market opportunities, ultimately building resilience in a competitive global environment.

Corporate strategies must focus on building resilience through resource optimization and stakeholder engagement. Investing in sustainable technologies, efficient resource use, and long-term projects ensures capital is deployed effectively for future growth. Firms should also engage institutional investors and independent boards to guide decisions toward long-term sustainability goals. Training and capacity development for managers and employees in sustainability practices can enhance awareness and commitment, ensuring day-to-day operations align with broader sustainability objectives. These measures foster trust, competitiveness, and sustainable value creation.

7. Limitations and Future Directional Studies

The first notable limitation of this study was the reduction in sample size, which resulted in a final usable sample of 248 companies. Although the initial pool of firms was larger, applying the inclusion and exclusion criteria—particularly the specified time frame and missing data—led to a smaller dataset. This reduction may limit the generalizability of the findings.

A second limitation was the study’s exclusive focus on non-financial firms listed on the LSE. While the LSE offers a highly regulated environment conducive to robust analysis, the findings may not be representative of firms operating in other regions or under different regulatory regimes. Future research should consider examining firms across various economies, regional exchanges, or industry sectors to determine whether the observed relationships hold under different institutional settings.

Further studies should also explore additional moderating variables such as board gender diversity and executive compensation structures to gain a more nuanced understanding of how governance mechanisms influence firm performance. Longitudinal case studies are recommended to examine how governance practices affect financial integrity and long-term sustainability over time, offering deeper insights into the evolving relationship between board dynamics and corporate outcomes.