Sustainable or Opportunistic? The Moderating Effect of ESG Performance on Ownership Concentration and Earnings Management in China

This research aims to investigate the relationship between ownership concentration and earnings management (EM) practices in China, focusing on the highly debated role of ESG performance as a moderator. Using data from 36,569 firm-year observations of A-share listed firms in China from 2010 through 2023, we observe a positive link where more concentrated ownership corresponds to higher levels of EM. Crucially, high ESG performance markedly weakens this positive link, suggesting it serves as a substantive governance mechanism rather than an opportunistic tool. Furthermore, our mechanism analysis reveals that this relationship is channeled through the exacerbation of Type II agency costs. The principal findings of our research remain robust following various tests designed to address endogeneity. Overall, this evidence demonstrates that, in the unique institutional setting of China, ESG performance acts as a substantive governance mechanism that effectively mitigates the agency problems associated with highly concentrated ownership.