Journal of Business & Economic Policy

Back on Track? Role of Managerial Ability between Sustainable Practices and Earnings Management
Tzu-Yi Fang

Abstract
Sustainable development is a current business trend and academic field of interest. This study investigates the relationship between sustainable practices (SPs) and use of earnings management (EM) and the effect of managerial ability (MA) on this relationship. An SP is any practice aiming to achieve or support a sustainable value. Three indicators of EM are employed: abnormal cash flow from operating activities; production costs; and sales, general, and administrative expenses. The research sample in this study is Taiwanese electronics firms. A significant negative correlation is discovered between SPs and real EM, but SPs is found to not influence the accrual-based management strategies used to manipulate earnings. The interaction term between SPs and MA is determined to be significantly negative; thus, MA strengthen the effect of SPs on the likelihood of real EM. To the best of our knowledge, this is the first study that extends the investigation of SPs to the EM setting and tests the SPs–EM relationship. The results show the likelihood of real EM is lower for firms if they are promoting SPswith higher MA. One such SP, sustainability information disclosure, can improve profits or minimize losses, further reducing the motivation of managers to engage in real EM.

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