The Unintended Consequence of Environmental Regulations on Earnings Management: Evidence from Emissions Trading Scheme in China

Abstract

This study extends the existing research on the impact of environmental regulations from an earnings management perspective. Using the difference-in-differences approach, the study contributes to the understanding of the relationship between corporate earnings management and the implementation of China’s carbon emissions trading program. In particular, the study finds a positive relationship between corporate earnings management and the implementation of China’s carbon emissions trading program. Furthermore, our analysis reveals that this positive correlation is much stronger for firms facing tighter financial constraints, higher information opacity, less intense competition, and higher pressure to reduce emissions. These findings illustrate the unintended consequences of market-based environmental regulations and provide new evidence for assessing the efficiency of much-promoted market-based environmental regulations.