Environmental regulation and real earnings management—Evidence from the SO2 emissions trading system in China

•The link between China's sulfur dioxide emissions trading program and real earnings management is examined.•Employing a difference-in-differences method, the negative effect of the emissions trading program on real earnings management is found.•Environmental regulation plays a critical role in mitigating information asymmetry and improving corporate governance in China.•Market-based environmental regulations incentivize firms to provide better earnings quality in a weak institutional environment.