The effects of real earnings management on the relationship between ESG performance and investment efficiency

PurposeEnvironmental, social and governance (ESG) performance not only attracts public attention for its long-term sustainability but also helps companies improve investment decisions and avoid manipulative practices related to real earnings management (REM). This study, in an emerging economy context, examines how the relationship between strong ESG performance and investment efficiency influences REM levels.Design/methodology/approachThis study analyzes 609 Thai listed companies drawn from nonfinancial sectors for the period from 2019 to 2023. The results demonstrate the robustness of the least squares dummy variable (LSDV) regression and generalized method of moments (GMM) techniques.FindingsWe find that strong ESG performance and lower REM positively enhance investment efficiency, with strong ESG performance specifically mitigating both overinvestment and underinvestment. A lower REM level positively influences the relationship between strong ESG performance and investment efficiency by reducing overinvestment. Our findings suggest that in an emerging economy, strong ESG performance, together with investment efficiency, serves as a critical mechanism for improving capital allocation, fostering transparency and increasing investor trust in firms with lower REM.Originality/valueTo the best of our knowledge, this study is the first to provide evidence of the relationship between strong ESG performance and investment efficiency as well as the reduction of overinvestment, supports and constraints on firms that engage less in the manipulation of their real earnings.