The relationship between earnings management and corporate sustainability performance: A comparison of Borsa Istanbul and Dow Jones world sustainability indices

The purpose of financial reporting is to provide business stakeholders with accurate, reliable and useful financial information to inform their decision-making. Low information quality or the distortion of shared information may lead stakeholders to make misguided decisions. Business managers play a decisive role in shaping this information when preparing financial reports. In financial reports, the process of manipulating earnings for managerial purposes by taking advantage of legal flexibility and accounting policy options is referred to as earnings management. Thus, there is a significant relationship between corporate sustainability performance and managers' propensity for earnings management practices, which can be influenced positively or negatively. The aim of this thesis is to measure the relationship between corporate governance performance and earnings management and earnings quality using a two-stage model by selecting indices that represent and adopt the sustainability approach, which has become an important issue worldwide. The study included data from 29 companies in the BIST Sustainability Index representing Türkiye and 231 companies in the Dow Jones Sustainability World Index representing the global level for the years 2018-2022. In the first stage, Environmental, Social, and Governance performances were added to the model separately, and their relationship with 1. accrual-based earnings management, 2. real earnings management, and 3. earnings quality was examined from three different frameworks. In the second stage, Governance performance was removed, and 16 variables representing Governance sub-components were included in the model, which was then restructured. Thus, the relationship between governance performance components and companies' earnings management and earnings quality was examined in depth. The findings of the study reveal mostly different results for the two samples in terms of the relationship between earnings management, earnings quality, and governance performance. For companies in the BIST Sustainability Sample, only the Management theme variables are significant, whereas for companies in the DJSI World Sample, Management and Shareholder themes are dominant. Additionally, CSR Strategy appears to be particularly effective on real earnings management and earnings quality. In the BIST Sustainability Sample, it can be said that earnings management is not shareholder-driven or CSR-related, but rather board-driven. Shareholder pressure and CSR are present in the DJSI World Sample.