Relationship Between Earnings Quality and Sustainability of Companies

ABSTRACT The primary purpose of this study is to examine the relationship between companies' earnings quality and sustainability performance. In addition, it analyzes how the interaction between earnings quality and sustainability performance can be optimized and contribute to companies' long‐term value creation. In the study, sustainability performance covers the practices and results companies report in environmental, social, and economic areas. Earnings quality focuses on the accuracy, sustainability, and reliability of the profitability companies report in their financial reports. The study examined the sustainability reports of 18 companies in Borsa Istanbul (BIST). The Sustainability Index between the years 2015–2023 was examined using the content analysis method. The sustainability performances of the companies were ranked using the Technical Optimal Solution Approach (TOPSIS) method, and the McNichols model was used to measure earnings quality. The data were evaluated using the Driscoll‐Kraay panel data analysis method, and the relationship between corporate sustainability performance and earnings quality was analyzed. The results of the analysis show that increasing companies' social and environmental sustainability performance positively affects earnings quality. On the other hand, a negative relationship was determined between economic sustainability performance and earnings quality. This study provides important evidence on the relationship between companies' sustainability performance and earnings quality. The findings reveal that companies with high sustainability performance also have high earnings quality in their financial reports. While the research results emphasize the importance of social and environmental sustainability practices in companies' long‐term value‐creation processes, they also indicate that the possible adverse effects of economic sustainability performance on earnings quality should be analyzed in detail.