Corporate social responsibility and earnings quality in family firms

Abstract

PurposeThe purpose of this paper is to investigate the relationship between corporate social responsibility and earnings quality, specifically in family firms.Design/methodology/approachBased on a sample of French-listed firms from the period 2005 to 2016, the authors use the instrumental variable approach based on a two-stage least-squares (2SLS) estimator.FindingsThe results show that Corporate Social Responsibility (CSR) performance is positively associated with the relevance and faithful representation of earnings. This means that companies that commit to CSR activities are more likely to provide high earnings quality. The results also show that the positive association between CSR performance and earnings quality is more prevalent in family firms suggesting that socially responsible family firms are willing to preserve their socio-emotional wealth by disclosing high quality earnings.Research limitations/implicationsThe results suggest that French firms commit to CSR to satisfy the interests of their stakeholders by disclosing high-quality information supporting the conflict resolution view of CSR. The findings also support the socio-emotional wealth perspective and suggest that family firms that engage in CSR activities provide a rich informational environment through high earnings quality.Practical implicationsThis study’s findings can be thus useful to investors for their portfolio management decisions by enabling them to identify the profile of companies with high earnings quality. These results may also help standard-setters and capital-market regulators improve market transparency by introducing new requirements to encourage investing in CSR.Originality/valueThis study extends the research on the relationship between CSR and earnings quality by focusing on two fundamental characteristics including relevance and faithful representation. This paper focuses on the effect of CSR on earnings quality in the specific context of family firms. This study offers then a better understanding of whether socially responsible family firms communicate stronger or weaker earnings quality than non-family firms based on the agency and socio-emotional wealth perspectives.

Corporate social responsibility and financial reporting quality: evidence from US firms

“…Focusing on US firms, Kim et al (2012) demonstrate that socially responsible firms are more likely to produce high-quality financial reports, indicated by a lower level of earnings management, less manipulation of real operating activities and a lower probability of being investigated by the US Securities and Exchange Commission. Evidence consistent with the positive link between CSR and reporting quality is presented for firms in South Korea (Cho and Chun, 2016;Choi et al, 2013), Spain (Gras-Gil et al, 2016, ten Asian countries (Scholtens and Kang, 2013), India (Patten and Trompeter, 2003), France (Brahem et al, 2022) and Indonesia (Suteja et al, 2016).…”

Earnings quality and firm valuation: evidence from several European countries

“…As Dechow et al (2010, p. 344) mention, scholars have used numerous proxies such as “ persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness and external indicators such as restatements and SEC enforcement releases. ” These attributes of EQ have been rigorously studied with regard to the consequences of governance at micro and macro level (namely, as corporate governance and country-level governance) (Agnes Cheng et al , 2007; Chiang et al , 2017; Gaio and Raposo, 2014; Harymawan and Nowland, 2016; Jiang et al , 2008; Islam et al , 2022; Lobanova et al , 2019; Machuga and Teitel, 2009; Rezaee and Safarzadeh, 2023; Salehi et al , 2018; Salehi et al , 2020; Seifzadeh et al , 2021; Thesing and Velte, 2021), International Financial Reporting Standards (IFRS) adoption (Ho et al , 2015; Houqe et al , 2012, 2016; Ismail et al , 2013; Kabir et al , 2010; Krishnan and Zhang, 2019; Liu and Sun, 2015; Sun et al , 2011), audit quality (Chen et al , 2018; Huang et al , 2016; Lambert et al , 2017; Lennox et al , 2016), organizational outcome (Charitou et al , 2011; Elsiddig Ahmed, 2020; Elzahaby, 2021; Fonou-Dombeu et al , 2022; Francis et al , 2008; Gaio and Raposo, 2011; Ma and Ma, 2017; Mensah and Onumah, 2023; Moardi et al , 2020; Nguyen et al , 2022; Saleh et al , 2020), and CSR (Bozzolan et al , 2015; Brahem et al , 2022; Choi et al , 2013; Dang and Pham, 2022; Jacobsen, 2013; Kim et al , 2012; Mohmed et al , 2019; Muttakin et al , 2015; Rezaee et al , 2020).…”

CEO power, audit committee effectiveness and earnings quality

“…This study on earnings quality is not new. Extant studies on the stock market have used faithful representation and relevance to assess earnings quality (Brahem et al. , 2022; Benkraiem et al.…”

“…This study on earnings quality is not new. Extant studies on the stock market have used faithful representation and relevance to assess earnings quality (Brahem et al, 2022;Benkraiem et al, 2021). However, these studies were conducted in industrialized nations, and panel data was the source for the earnings quality proxies used.…”

“…As an illustration, Benkraiem et al (2021) measured the quality of earnings using a composite of accurate depiction (accrual quality) and relevance (persistence, predictability, value relevance and timeliness). Discretionary accruals and earnings informativeness were used by Brahem et al (2022) as alternate metrics for faithful representation and relevance, respectively. Using the Jones Model (1991) of discretionary accruals to account for earnings exploitation and accrual ambiguity, other studies (e.g.…”