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Corporate social responsibility disclosures and earnings quality: Are they a reflection of managers’ opportunistic behavior?

Mohammad Badrul Muttakin (School of Accounting, Economics and Finance, Deakin University, Melbourne, Australia)
Arifur Khan (Accounting, Economics and Finance, Deakin University, Melbourne, Australia)
Mohammad I Azim (Department of Accounting, Swinburne University of Technology, Melbourne, Australia)

Managerial Auditing Journal

ISSN: 0268-6902

Article publication date: 2 March 2015

Abstract

Purpose

This paper aims to explore the relationship between corporate social responsibility (CSR) disclosures and earnings quality proxied by earnings accruals. Specifically, we examine whether CSR disclosures are context-specific, that is, whether companies dominated by powerful stakeholders are obliged to behave in a responsible manner to constrain earnings management, thereby reporting higher-quality earnings to investors.

Design/methodology/approach

This paper explores the relationship between CSR disclosures and earnings quality proxied by earnings accruals. Specifically, we examine whether CSR disclosures are context-specific, that is, whether companies dominated by powerful stakeholders are obliged to behave in a responsible manner to constrain earnings management, thereby reporting higher-quality earnings to investors.

Findings

Results show that managers in an emerging economy manage earnings when they provide more CSR disclosures. Such earnings management is achieved through income increasing discretionary accruals. Furthermore, companies from export-oriented industries dominated by powerful stakeholders (international buyers) disclosing more CSR activities, provide transparent financial reports through constraining earnings management.

Originality/value

The findings of this study are significant for both investors and policymakers. Investors should not take for granted that firms engage in CSR activities, behave ethically and provide transparent financial reports. As we document that firms might manipulate earnings through discretionary accruals and provide less transparent financial reports to shareholders, the credibility of firms’ CSR policies should be assessed with caution. Policies directing at promoting socially responsible practices instead of motivating the desired behaviour, may provide managers with additional incentives to utilise CSR for opportunistic behaviour. Thus, policymakers need to be cautious about this opportunistic behaviour and enhance monitoring to enforce social compliance. Possibly, some guidelines can be introduced to confirm that CSR disclosures are based on actual practice and not just a “green wash” statement to deceive stakeholders.

Keywords

Citation

Muttakin, M.B., Khan, A. and Azim, M.I. (2015), "Corporate social responsibility disclosures and earnings quality: Are they a reflection of managers’ opportunistic behavior?", Managerial Auditing Journal, Vol. 30 No. 3, pp. 277-298. https://doi.org/10.1108/MAJ-02-2014-0997

Publisher

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Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited