The relationship between financial reporting quality and sustainability reporting disclosures: An application on Borsa Istanbul and German Stock Exchange companies

This thesis empirically examines the relationship between financial reporting quality (FRQ) and sustainability reporting disclosures based on the samples of Turkey and Germany. The study covers data from 75 Turkish companies listed on Borsa Istanbul (BIST) and 140 companies listed on German Stock Exchange (GSE) for the period 2019–2022. All financial and environmental, social and governance (ESG) data employed in this study were sourced from the Refinitiv database, a subsidiary of the London Stock Exchange Group (LSEG). The empirical analysis utilised a range of statistical techniques, including panel data regression analyses, independent samples t-test, and cross-sectional dependence tests. The measurement of financial reporting quality (FRQ) was grounded in earnings management (EM) proxies, specifically the Modified Jones Model and the Performance-Matched Modified Jones Model. In the analyses conducted for the Turkish sample, no statistically significant relationship was identified between overall ESG scores and financial reporting quality. However, the management score variable exhibited a positive and statistically significant association with financial reporting quality as measured by both the Modified Jones Model (FRQ1) and the Performance-Matched Modified Jones Model (FRQ2). Furthermore, within the framework of the Modified Jones Model (FRQ1), a negative and statistically significant relationship was observed between financial reporting quality and the emissions score variable. These findings indicate that certain ESG subcomponents, albeit to a limited extent, exert significant effects on financial reporting quality. Moreover, during the 2019–2021 period, firms engaged in sustainability reporting demonstrated statistically significantly higher financial reporting quality compared to non-reporting firms. However, this difference lost its statistical significance as of 2022. In the analyses for the German sample, financial reporting quality, as measured by the Modified Jones Model (FRQ1) and the Performance-Matched Modified Jones Model (FRQ2), was found to have negative and statistically significant associations with the management score, CSR (Corporate Social Responsibility score) strategy score and emissions trading participation variables. In contrast, a positive and statistically significant relationship was identified between financial reporting quality, under both models, and the governance score. These findings suggest that the variables in question significantly influence the quality of firms' financial reporting practices. The findings of this study demonstrate that the relationship between sustainability reporting and financial reporting quality is influenced not only by institutional contexts but also by external factors such as regulatory frameworks and investor expectations. This outcome underscores the necessity, from the perspective of policymakers and regulatory bodies, of developing strategies aimed at enhancing the content of sustainability disclosures. Furthermore, it provides a meaningful contribution to the international literature based on comparative analyses. Keywords: Borsa Istanbul, ESG Scores, German Stock Exchange, Financial Reporting Quality, Sustainability Reporting Disclosures.