The Illomata International Journal of Management Ilomata International Journal of Tax & Accounting P-ISSN: 2714-9838; E-ISSN: 2714-9846 Volume 4, Issue 4, October 2023 Page No. 846-862 846 | Ilomata International Journal of Tax & Accounting https://www.ilomata.org/index.php/ijtc The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID–19 Redho Rahcmatulloh1, Eddy Suranta2 12Bengkulu University, Indonesia Correspondent : redho34@gmail.com1 Received : September 10, 2023 Accepted : October 20, 2023 Published : October 31, 2023 Citation: Rachmatulloh, R., Suranta, E. (2023). The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID– 19. Ilomata International Journal of Tax and Accounting, 4(4), 846-862. https://doi.org/10.52728/ijtc.v4i4.937 ABSTRACT: The primary goal of this research is to elucidate the influence of Environmental, Social, and Corporate Governance (ESG) performance on a company's overall performance. The research employs the ESG level as the independent variable for evaluation, which is the novelty of the study. The performance of the corporation is evaluated using various indicators, including financial performance (ROA), profitability (ROE), and Tobin's Q, which are regarded as reliant variables. Additionally, the study introduces the Modified by Jones Model of earnings management as a moderating factor. The analytical approach encompasses the application of multiple linear regression techniques. To ensure a representative sample, we conducted purposive sampling to select 120 observations from manufacturing companies listed on the Indonesian Stock Exchange that consistently maintained their ESG index during the period spanning from 2018 to 2022, including the turbulent period of the COVID-19 pandemic. The findings of this research reveal that the ESG index exerts a positive and statistically significant influence on ROA, ROE, and Tobin's Q. Furthermore, it is noteworthy that earnings management does not possess the capacity to moderate the relationship between ESG and company performance. The implications of this study are substantial, as it lends support to the application of legitimacy theory and agency theory in the context of ESG and corporate performance. However, it's important to acknowledge that the study's scope is limited to Indonesia, and consequently, the findings may not be directly applicable to other developing nations. Keywords: Environmental Social Governance, Corporate Performance, Earnings Management, Covid 19 This is an open access article under the CC-BY 4.0 license. INTRODUCTION The global outbreak of the COVID-19 pandemic, which commenced in early 2020, has led to substantial disruptions across multiple sectors of the economy. The impact is not only limited to health aspects but also includes significant changes in firms performance. COVID–19 has changed https://www.ilomata.org/index.php/ijtc mailto:redho34@gmail.com https://doi.org/10.52728/ijtc.v4i4.937 The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID–19 Rahcmatulloh and Suranta 847 | Ilomata International Journal of Tax & Accounting https://www.ilomata.org/index.php/ijtc the way companies operate, affected financial markets, and presented new challenges for management. The outbreak of the coronavirus pandemic has led to a significant downturn in the worldwide stock market. It is imperative to adopt strategic measures aimed at safeguarding and sustaining the performance of these businesses, thereby assisting them in surmounting the adversities presented by this crisis (Qiu et al., 2021). Many companies experienced a decline in revenue and net profit due to the economic impact of this pandemic (Chudik et al., 2020). As a result, the role of environmental, social, and governance (ESG) in firms' performance is becoming increasingly important. The impetus for this research stems from a recognition of evolving business dynamics, where environmental, social, and governance (ESG) performance has assumed an increasingly pivotal role in organizational practices and investment strategies over the pandemic period before and still ongoing. The novelty of this research lies in its approach to assessing ESG using a level scale based on an ESG index categorized into five sections, as accessible on the official Indonesia Stock Exchange (IDX) website. ESG includes an understanding of how ESG factors, such as sustainable environmental practices, social responsibility, and good governance, can influence a firm's performance. Recent research indicates that companies with lower ESG ratings tend to exhibit improved financial performance (Cheng et al., 2023; Chininga et al., 2023). Moreover, this study introduces earnings management as a moderating variable, deepening and broadening the examination of the relationship between ESG and corporate performance before and during the pandemic. In recent times, the performance concerning environmental, social, and governance (ESG) has garnered growing interest from investors as they seek to ensure the long-term sustainability of businesses. In an increasingly complex business context, ESG management is not only a social responsibility but also has significant implications for a firm's performance (Aqabna et al., 2023) as well as attracting investors to make investment decisions in companies that have social responsibility (De Lucia et al., 2020). Firm performance describes how the business activities are carried out and what is achieved from each of these business activities. Firm performance itself is a measure of the success or failure of the firm in managing its business to generate profits. Companies are progressively acknowledging that robust social and environmental responsibility can yield long-term advantages, including enhanced performance. The pandemic has further wrought changes that have a bearing on the manner in which companies execute earnings management practices to navigate their ESG performance and corporate performance amidst the challenging circumstances. As per findings by (Azizah, 2021), it was observed that the COVID-19 pandemic had an influence on earnings management within the realm of manufacturing companies in Indonesia during the first quarter. Managers exhibited greater caution in overseeing their companies, refraining from drawing attention to underperformance amid the pandemic. This reluctance could stem from their desire not to reveal their firm's actual performance. Previous research has explored accrual earnings management as a variable affecting ESG performance and as a variable moderating the connection between ESG and corporate performance (Aqabna et al., 2023; Kolsi et al., 2023). The outcomes revealed that earnings management had an insignificant positive impact on financial performance, signifying that companies may resort to earnings management to mask the adverse consequences of unsustainable practices in pursuit of long-term advantages. https://www.ilomata.org/index.php/ijtc The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID–19 Rahcmatulloh and Suranta 848 | Ilomata International Journal of Tax & Accounting https://www.ilomata.org/index.php/ijtc The overarching objective of this study is to elucidate the repercussions of environmental, social, and governance performance on corporate performance. It also seeks to investigate the role of ESG performance in the context of the pandemic, scrutinize the impact of ESG performance on corporate performance both before and during the pandemic, and elucidate the moderating influence of accrual earnings management within this nexus. From a theoretical perspective, this study offers valuable insights for those who rely on legitimacy theory, enhancing their comprehension of the influence of ESG performance on corporate performance. Likewise, it benefits proponents of agency theory by providing a more comprehensive understanding of the moderating function of earnings management in the context of environmental, social, and governance (ESG) performance, particularly within the framework of the COVID-19 pandemic. On a practical level, companies stand to gain considerable advantages, such as the ability to make more informed strategic decisions concerning ESG management, which can in turn lead to enhanced corporate performance. Furthermore, the research delves into the nuances of how earnings management can temper the consequences. This knowledge proves invaluable for investors and policymakers alike, empowering them to more effectively assess and evaluate companies. Legitimacy Theory Legitimacy is a firm's effort to develop the firm in the future to gain legitimacy by positioning itself on the social values and norms that apply in the community (Andriani & Arsjah, 2022). This theory can clearly explain ESG, firm performance, and earnings management. According to this theory, it is postulated that an organization endeavors to align its operations consistently with established societal norms and values. The core objective of these organizational endeavors is to secure the acceptance of its business activities by the local community, thereby establishing them as legitimate and non-detrimental. The culmination of these efforts is anticipated to contribute significantly to the long-term sustainability and enhanced performance of the organization. Agency Theory Agency theory emerged because of the division of roles between business owners as principals and business managers or management as agents. A consequence of agency issues that manifest within corporate entities involves the incorporation of social and environmental responsibilities, as per the tenets of agency theory (Jensen & Meckling, 1976). In agency theory, the argument is that it is management's job to achieve maximum profits for shareholders. Therefore, if the costs of investing in corporate social responsibility practices exceed the maximum benefits that can be obtained in terms of increasing firm value, then these costs will be passed on to shareholders (Husada & Handayani, 2021). Environmental, ocial, and Governance (ESG) The ESG framework, encompassing environmental, social, and corporate governance (Qodary & Tambun, 2021), plays a pivotal role in investment practices. ESG functions as a guiding framework or metric for evaluating a company's performance. The ESG rating relies on numerical values drawn from the Indonesia Stock Exchange's (IDX) official website. https://www.ilomata.org/index.php/ijtc The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID–19 Rahcmatulloh and Suranta 849 | Ilomata International Journal of Tax & Accounting https://www.ilomata.org/index.php/ijtc The Impact of Environmental, Social, and Governance (ESG) on Corporate Performance The disclosure of environmental, social, and governance (ESG) information plays a pivotal role in the communication efforts of companies. It functions as a vital conduit through which organizations disseminate crucial information to a diverse range of stakeholders. This strategic approach to disclosure, underpinned by the principles of the legitimacy theory, is a conscious choice made by companies to nurture and fortify a positive reputation. Through ESG disclosure, companies seek to garner support and recognition from not only the broader society but also from the various stakeholders who have a vested interest in the organization's activities and impact on the environment, society, and corporate governance. In essence, this practice aims to demonstrate transparency, responsibility, and a commitment to addressing and integrating ESG factors into the core of the company's operations. It reflects a proactive approach toward engaging with stakeholders and fostering a sense of trust and credibility, which can be instrumental in sustaining the organization's long-term viability and success. This approach seeks to cultivate a positive image for the company (Zahroh & Hersugondo, 2021). Furthermore, prior research findings demonstrate a favorable correlation between the ESG index and various performance metrics, including return on assets (Aqabna et al., 2023), return on equity (Aouadi & Marsat, 2018), and Tobin's q (Melinda & Wardhani, 2020). In accordance with the principles of legitimacy theory, companies are expected to contribute added value to all stakeholders, going beyond a sole focus on profits, and operating in accordance with societal values and norms. Consequently, the research hypothesis can be formulated as follows: H1: ESG positively influences corporate performance The Moderating Role of Earnings Management in the Relationship between ESG and Corporate Performance Earnings management can be defined as a deliberate sequence of actions undertaken by an entity, both within the framework of generally accepted accounting principles and beyond, with the purpose of managing or influencing financial reports in a specific manner (Indriani et al., 2022). Furthermore, as indicated by (Aqabna et al., 2023), the moderating influence of earnings management demonstrates that corporate social responsibility has an impact on financial performance. This study also seeks to assess whether earnings management acts as a moderating factor in the relationship between ESG and corporate performance. https://www.ilomata.org/index.php/ijtc The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID–19 Rahcmatulloh and Suranta 850 | Ilomata International Journal of Tax & Accounting https://www.ilomata.org/index.php/ijtc H2: Earnings management moderates the relationship between ESG and corporate performance. Research Framework Table 2. Framework of the research METHOD Model and Research Design This research uses a quantitative type of research with a focus on explanatory studies through causality design to explain causal relationships between research variables in order to test hypotheses. This study unveils the impact of environmental, social, and governance (ESG) performance on the performance of companies, with the moderating role of earnings management taken into account. Population and Sample Selection Method The research encompasses all manufacturing enterprises that are publicly listed on the Indonesia Stock Exchange (IDX) for the duration spanning from 2018 through 2022, utilizing 2017 as the baseline year. Purposive sampling was chosen as a sample selection method for manufacturing companies that have an ESG index throughout the observation period. Data Collection Method This research uses secondary data from the ESGI dataset for manufacturing companies listed on the Indonesia Stock Exchange (IDX) which have ESG scores for the last five years (2018 – 2022) as well as annual reports from the website www.idx.co.id and the official websites of related companies. For financial reports using foreign currency, convert them to local currency according to the selling rate on the official Bank Indonesia website at the end of each year. Data Processing Method In this research, the multiple linear regression method was used with IBM SPSS Statistics 25 software. This method was applied to find out the relationship between the variable in focus https://www.ilomata.org/index.php/ijtc http://www.idx.co.id/ The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID–19 Rahcmatulloh and Suranta 851 | Ilomata International Journal of Tax & Accounting https://www.ilomata.org/index.php/ijtc (dependent variable) and other variables that function as predictors or factors that influence the focus variable. Definition Operational and Variable Measurement Table 3 Describe the process of operationalizing and measurement the study variables Variables Measurement Sources Dependent Variable ROA ROA = Niit / Tait-1 (Marietza et al., 2020) ROE ROE = Niit / Teit (Alareeni & Hamdan, 2020) Tobin’s Q (BV of Assetsit – BV of Equityit – MV of Equityit) / Tait (Chancharat & Kumpamool, 2022) Independent Variable ESG Score Level of ESG score ESGI Dataset Moderating Variable Earnings Management (DAC) The Modified By Jones (1) TACit = NIit - CFOit (2) TACit / Tat-1 = β1 (1/Tait) + β2 (Δsalesit/Tat-1) + β3 (PPEit/Tat-1) + εit (3) NDA = β1 (1/Tait) + β2 (Δsalesit – ΔRECit/Tat-1) + β3 (PPEit/Tat-1) + εit (4) DACit = (TACit / TAt-1) - NDAit (Sabrina et al., 2020) Control Variable Covid19 Dummy, Variable (0) for before pandemic covid 19 and (1) for during the pandemic (Aqabna et al., 2023) Big 4 Dummy Variable (1) for companies audited by the Big 4 {PwC, Deloitte, EY, and KPMG} and (0) for otherwise. (Hamdan et al., 2017) Leverage LEV = Total Liabilitiesit / Total Assetsit (Ruchiatna et al., 2020) Firm Size FSize = LN (Total Assetsit) (Suranta et al., 2014) https://www.ilomata.org/index.php/ijtc The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID–19 Rahcmatulloh and Suranta 852 | Ilomata International Journal of Tax & Accounting https://www.ilomata.org/index.php/ijtc RESULT AND DISCUSSION Following the application of specific purposive sampling criteria, a dataset comprising 120 observations was compiled. These observations were drawn from a pool of 22 manufacturing firms that are listed on the Indonesia Stock Exchange (IDX) and maintained a consistent ESG index throughout the observational span of 2018 to 2022. Descriptive Statistics The outcomes of the descriptive analysis pertaining to the dependent variable, independent variable, and control variables within this research are presented in the subsequent table: Table 4 Descriptive Statistics of Dependent, Independent, and Control Variables Minimum Maximum Mean Standard Deviation Before Pandemic During Pandemic ROA −0.030 0.467 0.098 0.085 0.107 0.095 ROE −0.146 1.451 0.398 0.514 1.249 0.185 Tobin's Q 0.677 18.355 2.636 2.858 3.149 2.508 ESG 1.000 4.000 1.892 0.951 1.750 1.927 DAC −0.462 0.370 0.013 0.120 0.020 0.012 Covid19 −14.035 18.401 0.697 4.692 0.910 0.644 Big4 0.000 1.000 0.600 0.492 0.000 0.750 FSize 0.000 1.000 0.833 0.374 0.833 0.833 LEV 28.836 33.655 31.173 0.999 30.998 31.217 Source: Secondary data that has been processed in 2023 Presented within Table 4, we find the descriptive statistics outlining the parameters for the dependent, independent, and control variables within the observed dataset. In terms of return on assets (ROA), as showcased in Table 4, the data portrays a spectrum of ROA values ranging from -0.030 to 0.467, with a mean value of 0.098. The standard deviation for ROA is 0.085, implying a relatively restrained extent of diversity within the ROA variable dataset. Notably, the table underscores the phenomenon of reduced ROA levels among companies in the study sample during the COVID-19 period. In the context of return on equity (ROE), the table displays a range of values, featuring the lowest recorded observation at -0.146, the highest value at 1.451, and an average of 0.398. The standard deviation associated with the ROE variable stands at 0.514, indicating a heightened level of fluctuation within the ROE values across the study observations. Correspondingly, the table reflects the substantial decline in ROE during the COVID-19 period. Further, the table unveils insights into Tobin's Q, pertaining to the companies under scrutiny, encompassing values spanning from a minimum of 0.677 to a maximum of 18.355, with a mean value of 2.636 and a standard deviation of 2.858. This underscores the considerable diversity evident in the Tobin's Q dataset. Nevertheless, the table highlights a discernible reduction in Tobin's Q values during the COVID-19 period. As for the independent variable, Table 4 provides a snapshot of the ESG index's variability, spanning a range from 1 to 4, or, when expressed as scores, with the lowest score at 17.56 and the highest score reaching 63.25, and an average value of 1.892, or, when assessing the ESG score, it equates to 37.534. The standard deviation linked to this independent variable stands at 0.951, signifying a relatively limited degree of variance, suggesting that the employed ESG variables maintain a stable profile. Interestingly, https://www.ilomata.org/index.php/ijtc The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID–19 Rahcmatulloh and Suranta 853 | Ilomata International Journal of Tax & Accounting https://www.ilomata.org/index.php/ijtc the table highlights an increase in ESG disclosure levels observed during the COVID-19 period. With regard to earnings management, referred to as DAC, the table outlines data encompassing a minimum value of -0.462, a maximum value of 0.370, and an average value of 0.013. The standard deviation for DAC surpasses the mean value by 0.020, signifying the variability discerned across the research observations. The table shows that profit management practices experienced a decline before and during the COVID–19 period. Hypothesis test Tabel 5 The results of multiple linear regression of return on assets (ROA) Dependent : ROA Unstandardized Coefficients B t Sig. 1 (Constant) .015 2.002 .048 ESG .031 4.441 .000 DAC -.047 -.633 .528 DAC_ESG -.001 -.380 .704 R Square Adjusted R Square F Sig. .175 .153 7.906 .000b Dependent : ROA Unstandardized Coefficients B t Sig. 1 (Constant) .019 1.351 .180 ESG .032 3.828 .000 DAC -.022 -.214 .835 DAC_ESG .000 -.099 .921 Covid_19 -.018 -1.610 .110 Big4 .017 .729 .467 R Square Adjusted R Square F Sig. .142 .104 3.729 .004b Dependent : ROA Unstandardized Coefficients B t Sig. 1 (Constant) .423 4.158 .000 ESG .034 4.993 .000 DAC -.088 -1.270 .207 DAC_ESG .001 .485 .629 LEV .017 .410 .682 FirmSIZE -.033 -3.945 .000 R Square Adjusted R Square F Sig. .280 .247 8.544 .000b Dependent : ROA Unstandardized Coefficients B t Sig. 1 (Constant) .449 3.998 .000 ESG .034 5.019 .000 https://www.ilomata.org/index.php/ijtc The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID–19 Rahcmatulloh and Suranta 854 | Ilomata International Journal of Tax & Accounting https://www.ilomata.org/index.php/ijtc DAC -.090 -1.214 .227 DAC_ESG .001 .449 .654 Covid19 -.001 -.437 .663 Big4 .002 .089 .929 LEV .015 .374 .709 FirmSIZE -.032 -3.829 .000 R Square Adjusted R Square F Sig. .286 .240 6.183 .000b Dependent : ROA Unstandardized Coefficients B t Sig. 1 (Constant) .132 1.303 .195 Covid19 -.002 -.354 .724 Big4 -.003 -.229 .820 LEV -.102 -3.149 .002 FirmSIZE -.004 -.661 .510 R Square Adjusted R Square F Sig. .134 .100 3.934 .005b Source: Secondary data that has been processed with IBM SPSS Statistics 25 (2023) In light of the information provided in Table 5, the results of the F-test reveal a significance (Sig.) value of 0.000. Given that this Sig. value is less than the established threshold of 0.05, it indicates that the model employed to evaluate the hypothesis is both valid and appropriate. Regarding the results derived from the Coefficient of Determination Test provided in Table 5, it elucidates an Adjusted R Square value of 0.240, equivalent to 24%. This conveys that approximately 24% of the variations observed in the return on asset (ROA) variable can be accounted for by factors such as ESG performance, earnings accrual management (DAC), the presence of COVID-19, engagement with prominent entities (commonly known as "big 4"), company size, and leverage. Nevertheless, it is imperative to acknowledge that the remaining 76% of the variability remains unexplained within the framework of the factors encompassed by this model. This shortfall in explanation is likely attributable to external variables that were not integrated into the model. Table 6 The results of multiple linear regression of return on equity (ROE) Dependent : ROE Unstandardized Coefficients B t Sig. 1 (Constant) .057 .564 .574 ESG .133 2.933 .004 DAC -1.331 -.862 .391 DAC_ESG .041 1.038 .302 R Square Adjusted R Square F Sig. .079 .053 3.079 .031b https://www.ilomata.org/index.php/ijtc The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID–19 Rahcmatulloh and Suranta 855 | Ilomata International Journal of Tax & Accounting https://www.ilomata.org/index.php/ijtc Dependent : ROE Unstandardized Coefficients B t Sig. 1 (Constant) .594 4.426 .000 ESG .056 1.299 .197 DAC -.033 -.036 .971 DAC_ESG -.067 -.142 .887 Covid_19 -.562 -6.850 .000 Big4 .045 .408 .684 R Square Adjusted R Square F Sig. .298 .267 9.680 .000b Dependent : ROE Unstandardized Coefficients B t Sig. 1 (Constant) 4.655 3.041 .003 ESG .036 .765 .446 DAC -.347 -0.357 .772 DAC_ESG .153 -.296 .769 LEV .558 2.163 .033 FirmSIZE -.147 -2.944 .004 R Square Adjusted R Square F Sig. .099 .058 2.429 .040b Dependent : ROE Unstandardized Coefficients B T Sig. 1 (Constant) 1.730 2.334 .021 ESG 0.066 2.104 .038 DAC -0.524 -0.590 .556 DAC_ESG 0.010 0.443 .658 Covid_19 -1.062 -19.384 .000 Big4 0.019 0.224 .823 LEV 0.357 2.000 .048 FirmSIZE -0.048 -1.390 .167 R Square Adjusted R Square F Sig. .343 .301 8.335 .000b Dependent : ROE Unstandardized Coefficients B t Sig. 1 (Constant) 3.925 3.075 .003 Covid_19 -.565 -7.118 .000 Big4 .070 .664 .508 LEV .483 2.110 .037 FirmSIZE -.110 -2.646 .009 R Square Adjusted R Square F Sig. https://www.ilomata.org/index.php/ijtc The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID–19 Rahcmatulloh and Suranta 856 | Ilomata International Journal of Tax & Accounting https://www.ilomata.org/index.php/ijtc .335 .312 14.505 .000b Source: Secondary data that has been processed with IBM SPSS Statistics 25 (2023) Drawing insights from the data presented in Table 6, the results of the F Test reveal Sig values of 0.000. This outcome underscores the suitability of the employed model for hypothesis testing, given that the Sig value adheres to the criterion of being less than 0.05. Concerning the Coefficient of Determination Test within Table 6, it unveils an Adjusted R Square value of 0.301, equivalent to 30.1%. This implies that approximately 30.1% of the variation observed in the return on equity (ROE) variable can be accounted for by factors including ESG performance, accrual earnings management (DAC), the presence of COVID-19, the involvement of big 4 entities, company size, and leverage. Nonetheless, it is essential to acknowledge that the remaining 69.9% of the variance remains explicable by external factors not incorporated within this equation. Tabel 7 The results of multiple linear regression of Tobin’s Q Dependent : TobinsQ Unstandardized Coefficients B t Sig. 1 (Constant) .496 3.538 .001 ESG .443 3.046 .003 DAC -.301 -.134 .893 DAC_ESG .010 .009 .992 R Square Adjusted R Square F Sig. .083 .058 3.296 .023b Dependent : TobinsQ Unstandardized Coefficients B t Sig. 1 (Constant) .201 1.460 .147 ESG .427 3.284 .001 DAC .868 .484 .540 DAC_ESG -.559 -.615 .349 Covid_19 .141 .940 .251 Big4 .414 1.155 .251 R Square Adjusted R Square F Sig. .121 .078 2.826 .020b Dependent : TobinsQ Unstandardized Coefficients B t Sig. 1 (Constant) 9.004 4.732 .000 ESG .510 3.796 .000 DAC -.280 -.141 .888 DAC_ESG -.005 -.005 .996 LEV -.438 -.485 .628 FirmSIZE -.762 -4.288 .000 R Square Adjusted R Square F Sig. https://www.ilomata.org/index.php/ijtc The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID–19 Rahcmatulloh and Suranta 857 | Ilomata International Journal of Tax & Accounting https://www.ilomata.org/index.php/ijtc .286 .253 8.585 .000b Dependent : TobinsQ Unstandardized Coefficients B t Sig. 1 (Constant) 8.287 4.278 .000 ESG .525 3.905 .000 DAC .026 .013 .989 DAC_ESG -.167 -.170 .865 Covid19 -.316 -1.731 .086 Big4 .004 .018 .986 LEV -.633 -.696 .488 FirmSIZE -.682 -3.703 .000 R Square Adjusted R Square F Sig. .308 .261 6.662 .000b Dependent : TobinsQ Unstandardized Coefficients B t Sig. 1 (Constant) .001 3.503 .001 Covid19 -.289 -1.502 .136 Big4 -.061 -.258 .797 LEV -1.433 -1.550 .124 FirmSIZE -.529 -2.791 .006 R Square Adjusted R Square F Sig. .201 .171 6.789 .000b Source: Secondary data that has been processed with IBM SPSS Statistics 25 (2023) F Test Results from table 6 with Sig value. 0.000, then the model used is a good model for testing hypotheses (Sig. < 0.05). The results from the Coefficient of Determination Test in Table 6 reveal an Adjusted R Square value of 0.261, equivalent to 26.1%. This suggests that approximately 26.1% of the variability observed in the Tobin's Q variable can be accounted for by the assortment of independent, moderating, and control variables included in the model. Nonetheless, it's crucial to recognize that the remaining 73.9% of the variance can be attributed to external variables that exist beyond the scope of this particular equation. Testing and Discussion from First Hypothesis Results from the hypothesis testing and analysis are as follows: Hypothesis 1: Influence of ESG on Company Performance The primary hypothesis aims to explore the impact of environmental, social, and governance (ESG) performance on a company's overall performance, utilizing return on assets (ROA), return on equity (ROE), and Tobin's Q as surrogate indicators. The findings presented in Table 5 unveil a constructive and statistically significant connection between ESG and firm performance: The ROA measure demonstrates a coefficient of 0.031, accompanied by a Sig. value of 0.000 (0.000 < 0.050), indicating that enhancements in ESG performance contribute positively to companies' https://www.ilomata.org/index.php/ijtc The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID–19 Rahcmatulloh and Suranta 858 | Ilomata International Journal of Tax & Accounting https://www.ilomata.org/index.php/ijtc financial performance, particularly concerning ROA. These outcomes are consistent with the conclusions drawn by Safriani & Utomo (2020), which assert that higher ESG ratings are linked to improved asset returns. Likewise, ROE reveals a coefficient of 0.133, with a Sig. value of 0.004 (below 0.050), providing confirmation that ESG performance substantially elevates return on equity. These results is support the prior studies (Zhao et al., 2018). Parallel to the trends observed in ROA and ROE, ESG also exerts a constructive and significant impact on Tobin's Q, as evidenced by a regression coefficient of 0.443 and a Sig. value of 0.003 (0.003 < 0.050). In essence, the initial hypothesis is substantiated. This investigation sets itself apart from prior research (Aqabna et al., 2023; Atan et al., 2018; Kamatra & Kartikaningdyah, 2015), which did not uncover a connection between ESG and an upsurge in ROE. Consequently, it validates that ESG has a positive and noteworthy influence on company performance, as evidenced by ROA, ROE, and Tobin's Q. Moreover, even amid the challenges of the COVID-19 pandemic, ESG scores continue to exert a positive influence on company performance. The research outcomes elucidate: ROA displays a significant and positive impact, characterized by a coefficient value of 0.034 and a Sig. value of 0.000 (0.000 < 0.050). ROE similarly exhibits a favorable influence with a regression coefficient value of 0.066 and a significance level of 0.038 (0.038 < 0.050). Likewise, Tobin's Q maintains consistent findings, with a regression coefficient value of 0.525 and a significance level of 0.000 (0.000 < 0.050). This underscores the positive impact of ESG on firm performance during the COVID-19 pandemic, aligning with the research results observed both before and during the pandemic. Hypothesis 2: Earnings Management Moderation of ESG and Company Performance The second hypothesis investigates the potential moderating role of earnings accrual management (DAC) in the correlation between ESG and firm performance. The outcomes unveil the following: Earnings management diminishes the connection between ESG and financial performance (ROA). The regression coefficient holds a value of -0.001, accompanied by a Sig. value of 0.704 (0.704 > 0.050), indicating a lack of significance. In the case of ROE, moderation strengthens the bond between ESG and firm performance, as evidenced by a regression coefficient value of 0.291 and a significance level of 56.5% (0.565 > 0.050). Earnings management also does not emerge as significant in this context. Similarly, Tobin's Q exhibits non-significant moderation, characterized by a regression coefficient value of 0.010 and a significance level of 0.992 (0.992 > 0.050). Hence, Tobin's Q fails to demonstrate significance in moderating the link between ESG and firm performance. In light of these findings, the second hypothesis is refuted, signifying that earnings accrual management (DAC) does not exert a moderating influence on the relationship between ESG and firm performance, aligning with the research conducted by (Aqabna et al., 2023), which similarly reported no impact of earnings management on the association between ESG and firm performance. This study underscores the significance of companies striving to present a favorable image amidst the challenges of the COVID-19 pandemic, despite its detrimental effects on their performance. Management frequently employs earnings management as a tactic to enhance their attractiveness to investors. Nevertheless, the results demonstrate that during the COVID-19 pandemic, earnings management failed to yield a substantial impact on a company's performance. https://www.ilomata.org/index.php/ijtc The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID–19 Rahcmatulloh and Suranta 859 | Ilomata International Journal of Tax & Accounting https://www.ilomata.org/index.php/ijtc CONCLUSION The primary goal of this research is to assess the potential influence of environmental, social, and governance (ESG) performance on the overall performance of companies. Furthermore, this study delves into the possible role of earnings management in shaping the connection between ESG performance and firm performance. Earlier research has demonstrated the effect of ESG on firm performance (Aqabna et al., 2023; Buallay et al., 2020). Following an extensive data analysis, the results undeniably validate that ESG performance exerts a positive and statistically significant impact on firm performance, as measured by key indicators such as return on assets (ROA), return on equity (ROE), and Tobin's Q. These findings are aligned with the principles of ESG performance, consistent with the legitimacy theory, which posits that companies aligning their operations with prevailing societal norms and values tend to achieve greater sustainability and improved overall corporate performance (Lelkes, 2016). Remarkably, even in the challenging context of the COVID-19 pandemic, ESG performance maintains a noticeable, positive, and statistically significant influence on financial performance metrics, including ROA, ROE, and Tobin's Q. Conversely, the introduction of accruals earnings management, as a moderating variable in this study, does not appear to have a significant impact on firm performance. This observation holds true even under the adverse conditions of the COVID-19 pandemic, where earnings management fails to moderate the relationship between ESG and firm performance. The outcomes of this study are consistent with the fundamental principles of agency theory, which propose that a company's efforts to optimize resource allocation for cost efficiency could potentially lead to unfavorable outcomes for firm wealth and shareholder profitability (Xaviera & Rahman, 2023). Drawing from these conclusions, the research team suggests numerous potential avenues for future exploration. These include broadening the spectrum of variables under scrutiny, encompassing aspects tied to corporate governance, like the dimensions of the board (e.g., its size and independence). Additionally, extending the research timeline is advisable, enabling the exploration of ESG performance in the context of a company's performance across periods that precede, coincide with, and follow the COVID-19 pandemic. REFERENCE Alareeni, B. A., & Hamdan, A. (2020). ESG impact on performance of US S&P 500-listed firms. Corporate Governance (Bingley), 20(7), 1409–1428. https://doi.org/10.1108/CG-06-2020-0258 Andriani, N., & Arsjah, R. J. (2022). Pengaruh Intellectual Capital Dan Esg Terhadap Manajemen Laba Yang Dimoderasi Oleh Profitabilitas. Jurnal Ekonomi Trisakti, 2(2), 595–610. https://doi.org/10.25105/jet.v2i2.14646 Aouadi, A., & Marsat, S. (2018). Do ESG Controversies Matter for Firm Value? Evidence from International Data. Journal of Business Ethics, 151(4), 1027–1047. https://doi.org/10.1007/s10551-016-3213-8 Aqabna, S. M., Aga, M., & Jabari, H. N. (2023). Firm Performance, Corporate Social Responsibility and the Impact of Earnings Management during COVID-19: Evidence from MENA Region. Sustainability, 15(2), 1485. https://doi.org/10.3390/su15021485 https://www.ilomata.org/index.php/ijtc The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID–19 Rahcmatulloh and Suranta 860 | Ilomata International Journal of Tax & Accounting https://www.ilomata.org/index.php/ijtc Atan, R., Alam, M. M., Said, J., & Zamri, M. (2018). The impacts of environmental, social, and governance factors on firm performance: Panel study of Malaysian companies. Management of Environmental Quality: An International Journal, 29(2), 182–194. https://doi.org/10.1108/MEQ- 03-2017-0033 Azizah, W. (2021). Covid-19 in Indonesia: Analysis of Differences Earnings Management in the First Quarter. Jurnal Akuntansi, 11(1), 23–32. https://doi.org/10.33369/j.akuntansi.11.1.23- 32 Buallay, A., Fadel, S. M., Al-Ajmi, J. Y., & Saudagaran, S. (2020). Sustainability reporting and performance of MENA banks: is there a trade-off? Measuring Business Excellence, 24(2), 197– 221. https://doi.org/10.1108/MBE-09-2018-0078 Chancharat, N., & Kumpamool, C. (2022). Working capital management, board structure and Tobin’s q ratio of Thai listed firms. Managerial Finance, 48(4), 541–556. https://doi.org/10.1108/MF-08-2021-0361 Cheng, R., Kim, H., & Ryu, D. (2023). ESG performance and firm value in the Chinese market. Investment Analysts Journal, 0(0), 1–15. https://doi.org/10.1080/10293523.2023.2218124 Chininga, E., Alhassan, A. L., & Zeka, B. (2023). ESG ratings and corporate financial performance in South Africa. Journal of Accounting in Emerging Economies. https://doi.org/10.1108/JAEE- 03-2023-0072 Chudik, A., Mohaddes, K., Pesaran, M. H., Raissi, M., & Rebucci, A. (2020). Economic consequences of Covid-19: A counterfactual multi-country analysis. VoxEU.Org, Mi, 3–7. https://voxeu.org/article/economic-consequences-covid-19-multi-country-analysis De Lucia, C., Pazienza, P., & Bartlett, M. (2020). Does good ESG lead to better financial performances by firms? Machine learning and logistic regression models of public enterprises in Europe. Sustainability (Switzerland), 12(13), 1–26. https://doi.org/10.3390/su12135317 Hamdan, A. M., Buallay, A. M., & Alareeni, B. A. (2017). The moderating role of corporate governance on the relationship between intellectual capital efficiency and firm’s performance: Evidence from Saudi Arabia. International Journal of Learning and Intellectual Capital, 14(4), 295– 318. https://doi.org/10.1504/IJLIC.2017.087377 Husada, E. V., & Handayani, S. (2021). Pengaruh Pengungkapan Esg Terhadap Kinerja Keuangan Perusahaan (Studi Empiris Pada Perusahaan Sektor Keuangan Yang Terdaftar Di Bei Periode 2017-2019). Jurnal Bina Akuntansi, 8(2), 122–144. https://doi.org/10.52859/jba.v8i2.173 Indriani, R., Suranta, E., Midiastuty, P. P., & Bengkulu, U. (2022). Manajemen Laba Pada Setiap Tahapan Siklus Hidup Perusahaan: Suatu Pendekatan Pola Arus Kas. JIAFE (Jurnal Ilmiah Akuntansi Fakultas Ekonomi), 8(1), 1–20. https://doi.org/10.34204/jiafe.v8i1.4726 Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/https://doi.org/10.1016/0304-405X(76)90026-X Kamatra, N., & Kartikaningdyah, E. (2015). Effect corporate social responsibility on financial performance. International Journal of Economics and Financial Issues, 5(2013), 157–164. https://www.ilomata.org/index.php/ijtc The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID–19 Rahcmatulloh and Suranta 861 | Ilomata International Journal of Tax & Accounting https://www.ilomata.org/index.php/ijtc Kolsi, M. C., Al-Hiyari, A., & Hussainey, K. (2023). Does environmental, social, and governance performance mitigate earnings management practices? Evidence from US commercial banks. Environmental Science and Pollution Research, 30(8), 20386–20401. https://doi.org/10.1007/s11356-022-23616-2 Lelkes, Y. (2016). Winners , Losers , and the Press : The Relationship Between Political Parallelism and the Legitimacy Gap Winners , Losers , and the Press : The Relationship. Political Communication, 33(4), 523–543. https://doi.org/10.1080/10584609.2015.1117031 Marietza, F., Wijayanti, I. O., & Agusrina, M. (2020). Pengaruh Good Corporate Governance Dan Reporting Lag Terhadap Kinerja Keuangan Perusahaan (Studi Empiris Pada Perusahaan Yang Terdaftar Di Bursa Efek Indonesia Periode 2012-2016). Jurnal Riset Terapan Akuntansi, 4(2), 109–129. https://jurnal.polsri.ac.id/index.php/jrtap/article/view/1985 Melinda, A., & Wardhani, R. (2020). the Effect of Environmental, Social, Governance, and Controversies on Firms’ Value: Evidence From Asia. International Symposia in Economic Theory and Econometrics, 27, 147–173. https://doi.org/10.1108/S1571-038620200000027011 Qiu, S. (Charles), Jiang, J., Liu, X., Chen, M. H., & Yuan, X. (2021). Can corporate social responsibility protect firm value during the COVID-19 pandemic? International Journal of Hospitality Management, 93(June 2020), 102759. https://doi.org/10.1016/j.ijhm.2020.102759 Qodary, H. F., & Tambun, S. (2021). Pengaruh Environmental, Social, Governance (ESG) Dan Retentiom Ratio Terhadap Return Saham Dengan Nilai Perusahaan Sebagai Variabel Moderating. Juremi: Jurnal Riset Ekonomi, 1(2), 159–171. Ruchiatna, G., Midiastuty, P. P., & Suranta, E. (2020). Pengaruh karakteristik komite audit terhadap fraudulent financial reporting ( The effect of audit committee characteristics on fraudulent financial reporting ). Jurnal Akuntansi, Keuangan, Dan Manajemen (Jakman), 1(4), 255–264. Sabrina, O. Z., Fachruzzaman, Midiastuty, P. P., & Suranta, E. (2020). Pengaruh Koneksitas Organ Corporate Governance, Inneffective Monitoring dan Manajemen Laba Terhadap Fraudulent Financial Reporting (The Effect of Corporate Governance, Ineffective Monitoring and Earnings Management Concept On Fraudulent Financial Reportin. Jurnal Akuntansi Keuangan Dan Manajemen, 1(2), 109–122. Safriani, M. N., & Utomo, D. C. (2020). Pengaruh Environmental, Social, Governance (ESG) Disclosure terhadap Kinerja Perusahaan. Diponegoro Journal of Accounting, 9(3), 1–11. http://ejournal-s1.undip.ac.id/index.php/accounting Suranta, E., Midiastuty, P. P., Marietza, F., & Ramadhani, F. (2014). Pengaruh Grup Bisnis Terhadap Manajemen Laba Dimoderasi Oleh Kepemilikan Saham Pengendali, Perencanaan Pajak, Dan Arus Kas Operasi. Xaviera, A., & Rahman, A. (2023). Pengaruh Kinerja ESG Terhadap Nilai Perusahaan Dengan Siklus Hidup Perusahaan Sebagai Moderasi: Bukti Dari Indonesia. Jurnal Akuntansi Bisnis, 16(2), 226–247. Zahroh, B., & Hersugondo. (2021). Pengaruh Kinerja Environmental, Social, dan Governance Terhadap Kinerja Keuangan Dengan Kekuatan CEO Sebagai Variabel Moderasi. Diponegoro Journal of Management, 10(3), 1–15. http://ejournal-s1.undip.ac.id/index.php/accounting https://www.ilomata.org/index.php/ijtc The Effect of Environmental, Social, and Governance (ESG) on Firm Performance With Earnings Management As a Moderation: Empirical Evidence Around COVID–19 Rahcmatulloh and Suranta 862 | Ilomata International Journal of Tax & Accounting https://www.ilomata.org/index.php/ijtc Zhao, C., Guo, Y., Yuan, J., Wu, M., Li, D., Zhou, Y., & Kang, J. (2018). ESG and corporate financial performance: Empirical evidence from China’s listed power generation companies. Sustainability (Switzerland), 10(8), 1–18. https://doi.org/10.3390/su10082607 https://www.ilomata.org/index.php/ijtc