The Effect of Sustainability Reporting on Earnings Quality: Evidence from Non-Mediterranean Africa
Author(s)
Ibukun FALAYI , OwoOla R. IBUKUN-FALAYI , Amos Olafusi TOMOMEWO ,
Download Full PDF Pages: 01-17 | Views: 19 | Downloads: 4 | DOI: 10.5281/zenodo.14355986
Abstract
Earnings quality is of significant interest to multiple stakeholders while sustainability reporting has been tipped as an apt ethical communication reflecting the firm’s commitment towards resolution of sustainability concerns. The work sets out to produce empirical evidence from Non-Mediterranean Africa on the effect of sustainability reporting on earnings quality. The research design is ex-post facto while data was extracted from the published financial statement and sustainability reports or integrated reports of 10 quoted companies spanning natural resources, health care, oil and gas, consumer goods and industrial goods from Nigeria, Kenya and South Africa (2011 - 2020). Panel data regression was employed to analyze the data.
The study found that sustainability reporting significantly impacted earnings persistence but did not have a significant effect on accruals' quality and value relevance. Not only that, control variables exhibited positive associations with value relevance, even though these relationships lacked statistical significance. Leverage was linked to better accruals' quality and value relevance, although the effect was not statistically significant.
The study recommended that firms should step up their compliance level with the globally accepted requirements of sustainability reporting in the best interests of investors, regulators and multinational organizations.
Keywords
Sustainability Reporting, Earnings Quality, Legitimacy Theory
References
Akintoye, I. R., Adegbie, F. F., & Falayi, I. (2021). Sustainability reporting and discretionary accruals of multinational corporations in Sub-Saharan Africa. Research Journal of Finance and Accounting, 12 (24), 16 – 27.
Akintoye, I. R., Taiwo, O. J., & Owolabi, B. A. (2020). Sustainability accounting and competitive advantage of quoted companies in Nigeria. International Journal of Accounting and Financial Reporting, 10 (2), 119-134.
Al Wahaibi, A. A. A., Al Aamri, H. I., Al Rawahi, S. H., Al Shibli, Z. H., & Puthukulam, G. (2023). The impact of corporate disclosure on earnings quality and fair financial reporting in selected Omani firms. Global Scientific Journal, 11 (6), 1058 – 1069.
Ali, A., Chen, T.Y., & Radhakrishnan, S. (2007). Corporate disclosures by family firms. Journal of Accounting and Economics, 44(1), 238-286.
Ali, A., Hwang, L.S. (2000), Country-specific factors related to financial reporting and the value relevance of accounting data. Journal of Accounting Research, 38, 1-21.
Alipour, M., Ghanbari, M., Jamshidinavid, B., & Taherabadi, A. (2019). The relationship between environmental disclosure quality and earnings quality: A panel study of an emerging market. Journal of Asia Business Studies, 13 (2), 326-347.
An, Y. (2017). Measuring earnings quality over time. International Journal of Economics and Financial Issues, 7(3), 82-87.
Boonlert-U-Thai, K., Meek, G.K., & Nabar, S. (2006). Earnings attributes and investor-protection: International evidence. The International Journal of Accounting, 41(4), 327-357.
Chikwendu, O. U., Okafor, G. O., and Jesuwunmi, C. D. A. (2019). Effect of sustainability reporting on Nigerian listed companies performance. Canadian Contemporary Research Journal, 1(1), 96-111.
Ching, Y.H.; Gerab, F.; Toste, T.H. The quality of sustainability reports and corporate financial performance: Evidence from Brazilian listed companies. SAGE Open, 7, 1–9.
Collins, D.W., Maydew, E.L., & Weiss, I.S. (1997). Changes in the value relevance of earnings and book values over the past forty years. Journal of Accounting and Economics, 24(1), 39-67.
Dang, H. N., & Pham, C. D. (2022). The effects of earning quality on sustainable reports: An empirical study from Vietnam. Economic Research-Ekonomska Istraživanja, 1 – 18.
Dechow, P.M., & Dichev, I.D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77(S-1), 35-59.
Deegan, C. (2000). Financial Accounting Theory. McGraw Hill Book Company: Sydney.
Deegan, C. (2002). The legitimising effect of social and environmental disclosures–a theoretical foundation. Accounting, Auditing and Accountability Journal, 15(3), 282-311.
Dowling, J., & Pfeffer, J. (1975). Organizational legitimacy: social values and organizational behavior. Pacific Sociological Review, 18 (1), 122–136.
Echobu, J., Ekundayo, O. O., & Abu, S. O. (2022). Value relevance of sustainability reporting in the oil and gas sector in Nigeria. International Journal of Accounting Research, 7 (1), 36 – 42.
Egbunike, C. F., & Odum, A. N. (2018). Board leadership structure and earnings quality: Evidence from quoted manufacturing firms in Nigeria. Asian Journal of Accounting Research, 3 (1), 82 – 111.
Enerson, J., & Adegbie, F. F. (2021). Environmental accounting practices and environmental capacity for sustainable economy. The International Journal of Business & Management, 9 (4), 225 – 232.
Fonou‑Dombeu, N. C., Mbonigaba, J., Olarewaju, O. M., & Nomlala, B. C. (2022). Earnings quality measures and stock return volatility in South Africa. Future Business Journal, 8 (4), 1-15.
Francis, J., LaFond, R., Olsson, P., Schipper, K. (2005), The market pricing of accruals quality. Journal of Accounting and Economics, 39(2), 295-327.
Francis, J., Nanda, D., & Olsson, P. (2008). Voluntary disclosure, earnings quality and cost of capital. Journal of Accounting Research, 46(1), 53–99.
Garg, P. (2015). Impact of sustainability reporting on firm performance of companies in India. International Journal of Marketing and Business Communication, 4(3) 38-45.
Guthrie, J., Cuganesan, S., & Ward, L. (2006). Legitimacy theory: A story of reporting social and environmental matters within the Australian food and beverage industry. SSRN, 1–35.
Ha, T. V., Sibghatullah, A., Chae, S. S., & Aldeehani, T. M. (2022). The impact of environmental and social disclosure on earnings persistence. International Journal of Energy Economics and Policy, 10(6), 690-696.
Hahn, R., & Kühnen, M. (2013). Determinants of sustainability reporting: a review of results, trends, theory, and opportunities in an expanding field of research. Journal of cleaner production, 59, 5- 21.
Healy, P.M. and Wahlen, J.M. (1999). A review of the earnings management literature and its implications for standards setting. Accounting Horizons, 13 (4), 365-383.
Herlambang , D. M. A., & Faisal, F. (2022). The influence of implementation and quality of integrated reporting on earnings quality with agency cost as the moderating variable. Diponegoro Journal of Accounting, 2 (4), 1 – 11.
Hoang, T. C., Abeysekera, I., & Ma, S. (2019). Earnings quality and corporate social disclosure: The moderating role of state and foreign ownership in Vietnamese listed firms. Emerging Markets Finance and Trade, 55 (2), 272-288.
Jia, J., & Li, Z. (2022). Corporate environmental performance and financial distress: Evidence from Australia. Australian Accounting Review, 101 (32), 188–200.
Joshua, A.A., & Akintoye, R.I. (2022). Sustainability reporting: A Panacea to corporate earnings management in the 21st century. Journal of Management Information and Decision Sciences, 25(S6), 1-16.
Kareem Al Ani, M. (2021). Corporate social responsibility disclosure and financial reporting quality: Evidence from Gulf Cooperation Council countries. Borsa Istanbul Review, 21, S25 –S37.
Khamesluei, M. Y., Izadinia, N., & Arabsalehi, M. (2018). Effects of disclosure of the extent of sustainability indicators on earnings quality. Journal of Accounting Knowledge, 9 (1), 7-34.
Khuong, N.V., Rahman, A.A.A., Meero, A., Anh, L.H.T., Liem, N.T., Thuy, C.T.M., & Ly, H.T.N. (2022). The impact of corporate social responsibility disclosure and accounting comparability on earnings persistence. Sustainability, 14 (2752), 1 – 14.
Lindblom, C. K. (1993). The implication of organization legitimacy for corporate social performance and disclosure. Paper presented at the Critical Perspectives in Accounting Conference, New York.
Loh, L., Thomas, T., & Wang, Y. (2017). Sustainability reporting and firm value: Evidence from Singapore-listed companies. Sustainability, 9 (2112), 1 – 12.
Menicucci, E. (2020). Earnings Quality: How to Define. In: Earnings Quality. Palgrave Pivot, Cham. https://doi.org/10.1007/978-3-030-36798-5_1
Mikhail, M.B., Walther, B.R., Willis, R.H. (2003), Reactions to dividend changes conditional on earnings quality. Journal of Accounting, Auditing and Finance, 18(1), 121-152.
Mobus, J. L. (2005). Mandatory environmental disclosures in a legitimacy theory context. Accounting, Auditing & Accountability Journal, 18(4), 492-517.
Mohammady, A. (2010). Earnings quality constructs and measures. Available at SSRN: https://ssrn.com/abstract=1678461
Nangih, E., Emeka-Nwokeji, N. A., & Peters, G T. (2022). Environmental disclosures and earnings quality of listed consumer goods firms in Nigeria. Journal of Accounting Information and Innovation, 8 (4), 1 -17.
O’Donovan, G. (2002). Environmental disclosures in the annual report. Accounting, Auditing & Accountability Journal, 15(3), 344-371.
Owen, D. (2008). Chronicles of wasted time? A personal reflection on the current state of, and future prospects for, social and environmental accounting research. Accounting, Auditing & Accountability Journal, 21(2), 240-267.
Owolabi, S. A., Emeke, E., & Ogundeyi, A. O. (2021). Corporate sustainability reporting and market value of listed oil and gas firms in Nigeria. Imo State University /Business & Finance Journal, 12 (3), 66 – 82.
Pereira, C., Monteiro, A., Silva, D., & Lima, A. (2023). Do the levels of environmental sustainability disclosure and indebtness affect the quality of earnings? Sustainability, 15, 2 – 13.
Perotti, P., & Wagenhofer, A. (2014). Earning quality measures and excess return. Journal of Business Financial Accounting, 41(5), 545 – 571.
Richardson, S.A., Sloan, R.G., Soliman, M.T., Tuna, A. (2001), Information in Accruals about the Quality of Earnings. Working Paper. Ann Arbor: The University of Michigan.
Sastrodiharjo, I., Trireksani, T., & Manurung, D. T. H. (2020). The impact of corporate social responsibility disclosure on the future earnings response coefficient (ASEAN banking analysis). Sustainability, 12 (9671), 1-16.
Schaltegger, S., Etxeberria, I. Á.,& Ortas, E. (2017). Innovating corporate accounting and reporting for sustainability–attributes and challenges. Sustainable Development, 25(2), 113-122
Shocker, A. D., & Sethi, S. P. (1973). An Approach to Incorporating Societal Preferences in Developing Corporate Action Strategies. California Management Review, XV (4), 97 – 105.
Souza, J. A. S., Flach, L., Borba, J. A., & Broietti, C. (2019). Financial reporting quality and sustainability information disclosure in Brazil. Brazilian Business Review, 16, 555 -575.
Suchman, M. (1995). Managing Legitimacy: Strategic and Institutional Approaches. Academy of Management Review, 20 (3), 57l-610.
Sutopo, B., Kot , S., Adiati , A. R., & Ardila, L. N. (2018). Sustainability reporting and value relevance of financial statements. Sustainability, 10 (678), 1-14.
Uwuigbe, U., Teddy, O., Uwuigbe, O. R., Emmanuel, O., Asiriuwa, O., Eyitomi, G. A., and Taiwo, O. S. (2018). Sustainability reporting and firm performance: A bi-directional approach. Academy of Strategic Management Journal, 17 (3), 1-16.
Waddock, S. A., & Graves, S. B. (1997).The corporate social performance–financial performance link. Strategic management journal, 18(4), 303-319.
Yalçin, N. (2022). The relationship between corporate sustainability performance and earnings quality. Journal of Research in Business, 7 (1), 208-228.
Cite this Article: