Can Corporate Social Responsibility Decrease the Negative Influence of Financial Distress on Accounting Quality?

Abstract

This study aimed to test how corporate social responsibility (CSR) can affect the impact of corporate financial distress on earnings management. Based on the existing literature, distressed firms tend to hide their financial crises through earnings manipulation. However, as CSR can positively affect companies in terms of performance, risk reduction, and market response, the better a firm’s CSR is the less managers will attempt earnings management even if they experience temporary distress. Consistent with the literature, test results using Korean-listed companies show that distress increased earnings management, and we confirmed that CSR weakened the positive effect of distress on earnings management. After testing each of the CSR subcategories, significant results were found mainly on environmental performance, reflecting the globally increasing interest in environmental issues. This study contributes to the literature on distress and earnings management, which rarely considers CSR as a moderating factor.

Class‐imbalanced financial distress prediction with machine learning: Incorporating financial, management, textual, and social responsibility features into index system

“…Regarding social responsibility indicators, ecological social responsibility indicators outperform ethical social responsibility indicators. This result is similar to the last study (Choi et al, 2021), indicating that the mitigation effect of social responsibility indicators on financial distress emerges in companies that are mainly actively involved in environmental problems, rather than in governance performance. In general, from a first‐level indicator perspective, among indicators with significant value, financial indicators account for the majority, followed by social responsibility, textual, and management indicators.…”

“…Social responsibility indicators play a positive role in promoting company development. Relevant studies mainly calculated the CSR score as an independent variable and utilized the ordinary least squares (OLS) regression model to explore the relationship between CSR and financial distress (Boubaker et al, 2020; Choi et al, 2021; Wu et al, 2020). As mentioned above, statistical methods rely on restrictive assumptions, and their application scope is limited; therefore, it is not sufficient to only take CSR scores as input for machine learning algorithms.…”

“…In addition, social responsibility indicators can also decrease the negative influence of financial distress (Gupta & Krishnamurti, 2018; Inekwe, 2016). Many scholars have verified the internal relationship between social responsibility and financial distress, showing that corporate social responsibility (CSR) can positively affect companies via financing acceleration, risk reduction, and market response to lower the probability of experiencing financial distress (Al‐Hadi et al, 2019; Choi et al, 2021; Wu et al, 2020). However, most of the existing studies used statistical models to explore the relationship between social responsibility indicators and financial distress, while not integrating these into the FDP index system as the input of the machine learning model.…”

Pengaruh Financial Distress terhadap Kualitas Laba Perusahaan yang Terdaftar di Jakarta Islamic Indeks 70 JII (70)

“…Setiap perusahaan berusaha untuk meningkatkan laba karena pentingnya informasi laba bagi penggunanya. Namun, beberapa orang menggunakan informasi laba perusahaan untuk mencapai tujuan pribadi mereka (Choi, 2021;Santacroce, 2020). Karena itu, manajemen perusahaan juga jarang terlibat dalam manipulasi laba karena mereka sangat menyadari keadaan di dalam organisasi.…”

Accounting Manipulation of Financially Distressed Firms: Malaysian Evidence

“…This shift is due to accrual manipulation possibly being restricted in an environment with high-quality corporate regulation and national-level agency mechanisms; thus, managers presumably perceive the risks and costs of detection to be higher than the benefits (Ghazali et al, 2019;Ghazali, Shafie & Mohd Sanusi, 2015;Cohen, Dey & Lys, 2008). According to existing literature (Choi et al, 2021;Srivastava, 2019;Muljono & Kim, 2018;Roychowdhury, 2006), firms facing pending financial distress are unlikely to rely solely on accruals manipulation.…”