Moderating Effects of Profitability on The Relationship between ESG Reporting and Earnings Quality in African Manufacturing Firms

Abstract

This study examines the impact of Environmental, Social and Governance (ESG) reporting on ‎earnings quality of African listed manufacturing firms while adopting profitability, proxied by ‎Return on Assets (ROA) and Return on Equity (ROE), as a moderating variable. Adopting an ex ‎post facto research design and panel data of 49 firms over the period 2012-2023, the study ‎applies fixed-effects regression with robust standard errors to account for firm-specific ‎heterogeneity. It is found that the effect of ESG reporting on earnings quality is not uniform for the ‎three proxies: JMAQ, MJEQ, and DAEQ. Environmental reporting strengthens accruals ‎magnitude-based JMAQ, but weakens accrual-based MJEQ and DAEQ, emphasizing differences ‎between substantive and symbolic disclosure. The social and governance disclosures also have ‎mixed results, suggesting that the quality of disclosure is related to the genuineness of the practice ‎behind it. ROA exerts a positive impact on the quality of earnings in the ESG-earnings quality ‎relation in all firms, which implies that financially strong firms have greater potential to turn their ‎ESG engagements into believable reporting. On the other hand, ROE exhibits weaker and ‎inconsistent interaction effects. The study indicates the central importance of profitability in ‎determining whether ESG reporting will strengthen or weaken earnings quality for African ‎manufacturing firms and suggests that stronger governance monitoring, the convergence of ESG ‎disclosure standards, and the introduction of mandatory assurance regimes should be incorporated ‎moving forward to support credible sustainability reporting.