Corporate Social Responsibility and Earnings Quality: International Evidence

Abstract

In this paper, we investigate whether the corporate social responsibility (CSR) orientation of a firm affects its reporting incentives, in terms of the trade-off between real earnings management (REM) and accrual-based earnings management (AEM). Furthermore, relying on previous literature on the relationship between legal enforcement and the trade-off between AEM and REM, we consider whether the CSR orientation plays a moderating role in this relationship. We base our study on a sample of 5,863 firm-year observations for 1,141 unique firms, covering 24 different countries over the period [2003][2004][2005][2006][2007][2008][2009]. We find that CSR-oriented firms are less likely to engage in REM than in AEM. Moreover, we document that in strong legal enforcement countries, incentives to use REM instead of AEM are significantly lower in companies with a high CSR orientation than in companies with a low CSR orientation. These findings are consistent with the expectation that CSR-oriented companies are less likely to engage in the more costly but harder to detect earnings management strategy, i.e. the strategy that alters the underlying real operations of the company (REM). We provide additional evidence for our arguments that CSR-oriented firms are more likely to give up REM than AEM because of its detrimental value on future performance. All together our evidence suggests that CSR orientation acts as a constraint for REM and in doing so it contributes to the creation of value for all stakeholders.

The Effects of Corporate Social Responsibility on Real and Accrual‐based Earnings Management: Evidence from China

“…Meanwhile, Bozzolan et al. () find that enhanced CSR is likely to discourage REM but encourage AEM since REM undermines firms’ long‐term value. But, according to Cohen et al.…”

“…Nonetheless, Kuo et al. () imply that Kim et al.’s () and Bozzolan et al.’s () findings are not necessarily consistent with the EM practices of Chinese firms.…”

“…; Bozzolan et al. ). Further, although there are some anecdotal studies in relation to Chinese CSR (e.g., Noronha et al.…”

Do socially responsible firms provide more readable disclosures in annual reports?

“…First, it adds to the accounting research on financial reporting and disclosure practices of CSR-oriented firms (Bozzolan et al, 2015;Chih et al, 2008;Kim et al, 2012;Lee, 2017) by providing further evidence on the effect of CSR on overall disclosure transparency. To the best of our knowledge, this is the first study to test the association between CSR orientation and the syntactic complexity of financial reports.…”

CEO Risk Incentives and Real Earnings Management

“…For instance, Fabrizi, Mallin and Michelon (2014) use the yearly mean of the equity incentives and bonuses provided to the CEOs of all firms belonging to the 2-digits SIC code of the firm as an instrument for executives' incentives. Similarly, Bozzolan, Fabrizi, Mallin and Michelon (2015) use as an instrument for CSR orientation of firm i in year t the mean of the CSR orientation in year t of all firms belonging to firm is 2-digits SIC code. We estimate equations (A) and (B) through three-stage least square (3SLS) estimates.…”