Do socially responsible companies use earnings management more rarely and (or) less aggressively? Evidence from Lithuania

Abstract

This paper examines the problem of (in)compatibility between the performance of socially responsible enterprises and the use of earnings management, as well as the extent to which earnings management is likely prevalent in Lithuanian socially responsible enterprises. Although it seems that socially responsible companies make value-based commitments, the use of earnings management is incompatible with them, and various research studies have produced contradictory results. In Lithuania, there has been no research conducted on accounting manipulation in socially responsible enterprises, so it has not been possible to evaluate whether and how Lithuanian socially responsible enterprises manipulate financial information. Therefore, this study aims to compare the spread of earnings management’s use among Lithuanian socially responsible companies and other companies in order to reveal the prevalence of opportunistic or conceptual approaches to social responsibility in these companies. The study compared two groups of companies for the period 2017-2021: one group of companies that disclose information on socially responsible performance in their reports and a control group of companies that do not disclose information on socially responsible performance. The Jones (1991) model, modified by Dechow et al, chosen to investigate whether companies use accrual-based earnings management, is the most commonly adopted one for such studies. In order to determine if companies use real earnings management, Roychowdhury's (2016) model, which consists of three elements: sales manipulation, overproduction, and reduction of discretionary expenditures, was applied. The results showed that Lithuanian socially responsible companies use both accrual-based and real earnings management less frequently and/or less aggressively than other companies do. Therefore, it can be concluded that they follow a conceptual approach and pursue social responsibility for the sake of the idea and the concept, not to gain an advantage and to be able to influence the decisions of stakeholders in the market.