Corporate social responsibility disclosures and earnings quality

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.

La asociación entre las Actividades de Responsabilidad Social Corporativa y la calidad de los ingresos: Evidencia de la industria extractiva

“…findings do not lend support to our alternate hypothesis H 1 . These findings are consistent with the results of Muttakin et al (2015) and Prior et al (2008), who argue that the managers are using CSR activity and report as opportunistic incentive to cover up company misconduct. All the variables are defined in Table 2.…”

“…Along the same line Gil et al, 2016, note that a greater engagement in CSR activity signals EQ and managers are trying to satisfy all the firms' stakeholders, using a data set from Spanish companies. Another viewpoint of research, the associate negative link between CSR and EQ (Muttakin et al, 2015;Prior et al, 2008), concluded that managers are using CSR activity and report as opportunistic incentive to cover up company misconduct. Supporting this viewpoint Martinez-Ferrero et al 2015, argue that managers might engage in CSR activity and disclosure to compensate for poor EQ.…”

“…Following the prior study, we added several control variables that could affect CSRD and financial reporting behavior (Li and Xia, 2018;Timbate and Park, 2018;Alsaadi et al, 2017;8 Gil et al, 2016;Muttakin et al, 2015;Kim et al, 2012). First, we control leverage (Lev) an indicator of the firm's financial structure.…”

“…Consistent with the prior studies (Li and Xia, 2018;Alsaadi et al, 2017;Gil et al, 2016;Muttakin et al, 2015), the basic model was estimated through panel data regressions applying a fixed effect. We detected multicollinearity among our variables applying the Variance Inflation Factor (VIF).…”

“…While few prior study has documented a positive (negative) impact of CSR on EQ (Prior et al, 2008); Hong & Andersen, 2011;Kim et al, 2012;Scholtens & Kang, 2013;Martinez-Ferrero et al, 2015;Muttakin et al, 2015;Bozzolan et al, 2015;Gil et al, 2016;Martinez-Ferrero et al, 2016;Alsaadi et al, 2017;Timbate and Park, 2018;Li and Xia, 2018, these prior studies focuses almost exclusively on CSRD index, without considering that both positive and negative indicators of CSRD appear to provide information that reduces earning management activity and increase earnings quality. The interpretation of positive and negative indicators can be different for each investor, to avoid losing useful information about CSRD.…”