Corporate social responsibility and earnings quality: do institutional features matter?

Abstract

Purpose This paper aims to examine whether corporate social responsibility (CSR) is associated with firms’ earnings quality (EQ) and how this association is context-specific. The authors consider specific institutional differences in strength of corporate governance (CG) attributes, quality of law enforcement and level of investor protection found between Anglo-American, European and South-Eastern Asian CG models to test the impact of above country-level factors on this association. Design/methodology/approach To test the association between CSR and EQ, the authors consider EIRIS (Ethical Investment Research Service) (2018) CSR issues of sustainability indicators as proxy to capture CSR. Following Rezaee and Tuo’s (2019) study, the authors classify EQ into innate earnings quality (IEQ) and discretionary earnings quality (DEQ). The authors investigate the innate (discretionary) EQ as to refer to firm’s inherent operating uncertainty (earnings management). Several dependency models for panel data applying the generalized method of moment (GMM) estimator of Arellano and Bond (1991) are ruled based on archival data of 4,206 non-financial international listed firms over the period 2012-2017. Findings Univariate and GMM multivariate cross-country analyses show that CSR is positively associated with EQ and that this association is more pronounced for firms within countries where good CG tools and higher investor right protection are preserved. The authors interpret the findings as evidence that the CSR-EQ association is shaped by the degree of monitoring role played by institutional features at the country level. The results are robust to a battery of robustness tests. Originality/value The originality of this research is twice. On the one hand, it examines whether CSR is a reflection of manager’s ethical opportunistic behavior resultant on earnings quality derived from a firm’s innate traits. On the second hand, it tests whether CSR is a reflection of discretionary earnings quality manifested by earnings management behavior. This paper is the first to support that institutional features significantly matter when investigating the association between CSR and EQ.

Earning Quality Effect on Stock Returns: GCG and CSR Mechanism

“…This study's findings are consistent with previous studies by Hutasoit et al (2020), which reports that CSR disclosure has no impact on earnings quality. However, this differs from previous research (Park & Ha, 2020;Rezaee et al, 2019;Jouber, 2019: Bagus & Djaddang, 2018, which claims that CSR disclosure has a positive impact on earnings quality. The more companies perform CSR, the greater the confidence of market participants in the information on earnings.…”

“…However, the company's social reporting is simply a management strategy for manipulating earnings efficiency. It is confirmed by previous research by Park & Ha (2020), Suwarno et al (2020), Rezaee et al (2019) and Jouber (2019) and (Bagus and Djaddang (2018), indicating that companies with good CSR disclosure have higher earnings efficiency.…”

“…Due to managerial opportunism, managers use CSR practices as opportunistic incentives to hide company wrongdoings. CSR disclosure will intensify agency issues and trigger profit-seeking insiders to conceal the company's actual performance (Jouber, 2019). according to Theory Agency (Jensen & Meckling, 1976), The managerial opportunism hypothesis predicts a negative relationship between CSR disclosure and Earning Quality.…”

“…One reason for management to do social reporting is that CSR activities will provide a shield for management to exploit revenue (Muttakin el at, 2015). Previous research on the relationship between CSR disclosure and earnings quality (Park & Ha, 2020), (Suwarno et al, 2020), (Rezaee et al, 2019), (Jouber, 2019) and (Bagus & Djaddang, 2018) has shown that companies with good CSR disclosure will likely have better earnings quality. It contrasts with the findings of a study by Hutasoit et al (Hutasoit et al, 2020), which found that CSR disclosure has no impact on earnings quality.…”

Does corporate social responsibility affect dividend policy? Empirical evidence in the French context

“…According to stakeholder theory, the disclosure of societal information at the level of annual reports makes it possible to reduce the asymmetry of information between the various stakeholders in the company (Nguyen et al , 2017; Yang et al , 2018; Shen et al , 2020). It follows that companies are able to control social risks, have a good reputation (Jouber, 2019; Dakhli, 2021) and better financial performance (Nyeadi et al , 2018). Therefore, the commitment to CSR contributes to additional added value (Nyeadi et al , 2018), and a higher earning (Yu et al , 2018) with a lower bankruptcy risk (Sun and Cui, 2014).…”