Does corporate social responsibility mitigate earnings management?
ISSN: 0025-1747
Article publication date: 25 March 2022
Issue publication date: 10 November 2022
Abstract
Purpose
This study aims to examine the association between earnings management (EM) and corporate social responsibility (CSR), as well as whether a firm's CSR orientation moderates the trade-off between accruals earnings management (AEM) and real earnings management (REM).
Design/methodology/approach
Firm-year pooled regressions, based on unbalanced panel data and controlling for country, year and sector fixed effects, were estimated using a sample composed of European companies from 16 countries.
Findings
Results suggest a negative relationship between EM and CSR, consistent with the idea that socially responsible activities are associated with more ethical behavior. Moreover, social responsibility orientation seems to mitigate strongly ERM, which may suggest that managers use less REM in order to protect firm's long-term profitability.
Practical implications
The authors' findings have practical implications for a large group of stakeholders, such as regulators, investors and business partners. Thus, from an ethical perspective, more socially responsible firms present more trustworthy financial information and more sustainable economic performance, which decreases risk assessment from their business partners and remaining stakeholders.
Originality/value
Prior literature focuses mainly on discretionary accruals to study the association between EM and CSR. The authors contribute to the literature by considering both EM strategies, accruals and real operations in a European context, which allows for a better understanding of the relationship between CSR and financial information transparency and quality.
Keywords
Acknowledgements
Funding: The authors would like to thank Fundação para a Ciência e Tecnologia, Portugal (Award Number: UID/SOC/04521/2020).
Citation
Gaio, C., Gonçalves, T. and Sousa, M.V. (2022), "Does corporate social responsibility mitigate earnings management?", Management Decision, Vol. 60 No. 11, pp. 2972-2989. https://doi.org/10.1108/MD-05-2021-0719
Publisher
:Emerald Publishing Limited
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