Corporate Social Responsibility as a Strategic Shield Against Costs of Earnings Management Practices

Abstract

We highlight how Corporate Social Responsibility (CSR) can be strategically used against the negative perception from earnings management (EM). Using international data, we analyse the effect of CSR and EM on the cost of capital and corporate reputation. Results confirm that CSR strategy is positively valued by investors and other stakeholders. Contrary to EM, CSR has a positive effect on corporate reputation and lowers the cost of capital. In addition, we also find that the favorable effect of CSR on cost of capital is consistently more intense in firms that show signs of EM indicating that the market does not identify when CSR practices are used as a strategy to mask EM. We also demonstrate how institutional factors influence the above relationship.

The Effect of Earnings Management Practice on Corporate Borrowing Capacity through Corporate Reputation

“…This finding is in accordance with a previous research finding 6 that earnings management practice decreases corporate reputation. Another study 5 also pointed out the negative impact of discretionary accounting practice on company value.…”

“…This finding is in accordance with a previous research finding 6 that earnings management practice decreases corporate reputation. Another previous study 8 pointed out that a positive corporate reputation can be used as collateral by banks to grant loans, while another research finding 7 also pointed out the positive association between corporate reputation and corporate borrowing capacity.…”

“…A previous study 5 pointed out the negative impact of discretionary accounting practices on the value of companies, their transactions, their reputation, and their corporate image. Previous research 6 has also found that earnings management practices decrease corporate reputation. Thus, the public will perceive opportunistic earnings management as damaging for corporate reputation.…”

“…The outside parties, including investors and creditors, would not prefer a lower quality of reported earnings. Managers who overly pursue earnings management will be deemed to be not truthful in reporting earnings, and these perceptions can directly affect the manager and the wider corporate reputation, with previous studies [4][5][6] having pointed out the negative effect of discretionary accounting practices on corporate reputation. In summary, earnings management will exert a negative impact on corporate reputation.…”

Corporate Social Responsibility Drivers and Barriers According to Managers’ Perception; Evidence from Spanish Firms

“…Highlighted aspects include the country-level institutional factors [92], the role that governments can play [93], institutional pressure [10,94] and developing an institutional framework [8]. (3) Reputation management: CSR has a positive effect on corporate reputation [36], and lowering the cost of capital [95], on loyalty [29] with the integration of the organization into its host community [27] on improving firms' reputations in relation to their stakeholders [96,97] and their performance in the eyes of governments [98]. This is also one of the most commonly mentioned aspects as a CSR driver, cited in 13.6% of the papers.…”