Ahlem Selma Messai

Type of the article: Research Article

Abstract
This study investigates whether fiscal reforms influence the effectiveness of Environmental, Social, and Governance performance in the control of accrual-based earnings management. Previous studies report inconsistent findings about the relationship between sustainability performance and earnings management, while limited attention has been paid to the role of tax policy reforms in this relationship. Using an unbalanced panel of 334 non-financial companies listed on the Tadawul exchange over the period 2017–2024 (2,128 firm-year observations), the study investigates the moderating role of value-added tax reforms introduced in 2018 and increased in 2020. The empirical analysis employs feasible generalized least squares and a difference-in-differences approach. The findings indicate that Environmental, Social, and Governance performance is negatively associated with earnings management (β = −0.0147, p < 0.05). The result indicates that stronger sustainability engagement reduces discretionary reporting practices. In contrast, the value-added tax rate variable is positively associated with earnings management (β = 0.2094, p < 0.05). However, the interaction term between Environmental, Social, and Governance and value-added tax reforms is negative (β = −0.1542, p < 0.05). The results suggest that sustainability-oriented governance practices reduce the adverse effect of fiscal reforms on earnings manipulation. These findings demonstrate that Environmental, Social, and Governance performance serves as an effective internal governance mechanism during periods of fiscal transition. The study also provides policy-relevant implications for improving financial transparency in emerging markets subject to tax reforms.

Acknowledgement
This work was supported by the Deanship of Scientific Research, Vice Presidency for Graduate Studies and Scientific Research, King Faisal University, Saudi Arabia. [Grant No. KFU264262]