Audit committee characteristics, corporate environmental sustainability and earnings management strategy: An empirical study of Saudi Arabia-listed companies

Abstract

This study aimed to explore the link between audit committee (AC) characteristics and earnings management (EM) in Saudi listed companies and assess the effect of corporate environmental sustainability (assessed using corporate social responsibility (CSR)-related measures) on the relationship between the two. The study draws data from a panel of 131 firms listed on the Saudi Exchange from 2015 to 2021, comprising 917 firm-year observations. In the baseline model, the results show that meetings between the AC and the board are negatively related to EM. In the baseline analysis, however, there were no significant effects on the size and independence of the AC. Furthermore, the moderating analysis shows that the interaction between CSR and AC size is positive and statistically significant, while the interaction between CSR and AC independence is positive and marginally significant. However, the relationship between CSR and AC meetings is not statistically significant. The results indicate that the effect of AC characteristics on EM is dependent on firms’ CSR involvement. The results from the robustness tests conducted using feasible generalized least squares (FGLS) and two-stage least squares (2SLS) estimations also give results similar to those of the baseline model, which ensures the reliability and stability of the main findings.