Corporate Social Responsibility (CSR) and Earnings Management (EM): An Analysis from the National Culture Perspective.

Abstract

This research investigates the influence of national culture dimensions on the relationship between corporate social responsibility (CSR) and earnings management (EM) in order to understand whether the culture of countries influences the informational behavior of companies engaging in CSR activities. We evidenced that the social and environmental practices have a negative relation with the ones of the EM in the 19,635 companies located in the 24 countries, in an analysis without considering the influence of the national culture. By inserting Hofstede's cultural dimensions, we find that individualism, masculinity, and indulgence impact CSR and EM practices, so that companies seem to get more involved with EM and also to disclose more social and environmental practices, is in line with the opportunistic approach of CSR. On the other hand, we show that the power distance influences for a negative relationship between CSR and EM, which reveals that organizations maintain their informational behavior in this context. These results were confirmed for the total sample of 157,080 observations and also for the sample generated through the Propensity Score Matching, which matched 37,428 observations from companies that disclose CSR practices or not, considering the matching between sizes and industries. These findings may contribute to the literature by explaining the range of divergent results on CSR and EM, generating evidence that some dimensions of national culture may help to explain why, in certain scenarios, CSR has a positive relation to EM, while in others, it shows the opposite. Moreover, through this evidence, organizations, especially those with subsidiaries/affiliates in other countries, can focus on control mechanisms aimed to mitigate the opportunistic behavior of managers, triggered by the cultural influence of individualism, masculinity, and indulgence.