As countries implement stringent climate policies, understanding how environmental regulations affect corporate financial reporting becomes crucial for maintaining market integrity. This study examines the relationship between carbon peaking pressure and corporate earnings management using data from China's listed industrial enterprises during 2014-2020. Employing two-stage least squares with Bartik instrumental variables, we find that carbon peaking pressure exhibits significant time-varying effects on earnings management. Initially, it increases earnings management through heightened compliance costs and operational inefficiencies. However, two-period lag analysis reveals a fundamental reversal, with carbon peaking pressure ultimately reducing earnings management as innovation and digital transformation benefits emerge. Mechanism analysis validates these underlying pathways, confirming the roles of financial pressures, innovation activities, and digital transformation in explaining the observed temporal dynamics. Heterogeneity analysis shows these effects are more pronounced for firms in regions with weaker institutional quality, stronger government intervention capability, smaller enterprises, highly competitive industries, those with lower information transparency, and those under intense stakeholder monitoring. Our findings extend the Porter Hypothesis to financial reporting quality, demonstrating that environmental regulations can ultimately enhance corporate transparency through innovation-driven mechanisms.
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