Inhibition or inducement? The impact of carbon emissions trading scheme (ETS) on corporate earnings management from the perspective of public pressure

As the burden of corporate environmental governance increases following the implementation of the carbon emissions trading scheme (ETS), companies may engage in earnings management to disguise their actual financial condition. The diminished authenticity of earnings information may damage the interests of other market participants. Utilizing the time-varying difference-in-differences (DID) method, this study examines the impact and mechanisms of ETS on corporate earnings management based on the data of China's listed companies. The findings reveal several key points. Firstly, ETS is positively correlated with corporate earnings management, indicating that ETS has an inducement effect on corporate earnings management, rather than an inhibition effect. Secondly, the relationship between ETS and corporate earnings management is negatively moderated by public pressure, including government environmental attention and media attention. After further distinguishing the media sentiment, this paper finds that more positive media sentiment can weaken the tendency of ETS to induce earnings management. Thirdly, heterogeneity analysis shows that the inducement effect is more significant in high competition industries and low analyst coverage companies. Finally, the mechanism tests show that ETS induces corporate earnings management through channels of corporate financial risk and debt financing cost. The study's findings provide policy recommendations for improving and monitoring the quality of corporate earnings information in the carbon trading market.