Doing Good with Creative Accounting? Linking Corporate Social Responsibility to Earnings Management in Market Economy, Country and Business Sector Contexts

Abstract

The mandate of doing good with earnings management has been a subject of inconclusive findings from the past literature and leave issues on the benefits of socially responsible activities and financial reporting of the company. This study investigates the effects of corporate social responsibility (CSR) on accrual-based (AEM) and real-activities earnings management (REM). This study hypothesized that the trade-off exists between these two earnings management strategies, in light of increasing attention of CSR among Asian firms. In addition, this study examines whether the performance of firms in socially responsible activities exhibit different patterns of effect across the two measures of earnings management under the market economy, country, and business sector contexts. This study contemplates on 3906 firm-year observations from 2011 to 2017 of eleven countries in Asia. Our findings show that CSR conceals AEM while it constrains REM. These effects vary according to the market economy classifications, country, and business sector types. Each market, country and business sector has different standpoints in implementing CSR activities and earnings management relevant to the culture, macroeconomic considerations and demands from the stakeholders. Lastly, the discernment on the relevance of building corporate citizenship on financial reporting transparency is elaborated.

Effect of Leverage on Real Earnings Management: Evidence from Korea

“…Our study employs total, short-term, and long-term debt as independent variables, while it is important to introduce the ratio of long-term to short-term debt to determine the preference for long-term borrowings over short-term borrowings in capital structure decisions. Furthermore, we do not include industry-adjusted leverage (difference between firm-specific leverage and the median leverage for the same quarter and industry) as an independent variable in the fixed effects model; however, it can be used in the random-effects model, given that Korean firms show the highest financial leverage mean compared to firms from ten Asian countries [42]. For future research, the authors suggest including a portfolio analysis according to the degree of real earnings manipulation activities and introducing cost stickiness as an independent variable to validate our findings in suspicious firms.…”

The Influence of a Company’s Ownership Structure on Upward Real Earnings Management

“…There are also links between corporate social responsibility (CSR) and earnings management. CSR conceals accounting earnings management, while it constrains real earnings management [14].…”

Integrity of the Corporate Social Responsibility and Management of Financial Services in the Digital Era

“…Corporate social responsibility (CSR) is defined broadly "as actions that appear to further some social good, beyond the interests of the firm and what is required by law" [39,40], this definition has gained a prominent position in management literature. The definition of CSR according to the World Business Council for Sustainable Development stresses that "CSR is the ongoing commitment by business to behave ethically and contribute to economic development while improving the quality of the workforce and their families as well as of the local community at large" [41,42]. CSR is described as the management concept expressing how firms manage the business processes to manufacture and sell products or provide services and moreover producing an overall positive impact on society.…”