Earnings management and CSR report tone: Evidence from China

Abstract

This study explores whether and how the management manipulates the tone of CSR reports to greenwash earnings management. Using the dataset of Chinese Ashare companies that published CSR reports over period 2007-2017, we discover that corporates with higher abnormal discretionary accruals and those with zero or slightly positive earnings changes are likely to release CSR reports with a more optimistic tone. Additional analyses show that this greenwash behavior is stronger when the management manages earnings upward than downward. Furthermore, the supplementary association between CSR report tone and earnings management is reduced in firms with assured CSR reports, lower financing demands and equity issue, higher accounting conservatism, as well as a better information disclosure environment, whereas the relationship is not correlated with the manner of the reporting disclosure. This study reveals that managers strategically employ CSR report tone to hide earnings management and shape stakeholders' expectations, and provides insights into both qualitative and quantitative disclosure literature.

Impact of executive pay gap on environmental, social, and governance disclosure in China: Is there a strategic choice?

“…Thus, real earnings management partially mediates the relationship between the executive pay gap and ESG disclosure, supporting Hypothesis 2. This finding is consistent with the conclusions of Li et al (2023) and Gong et al (2018), which suggest that ESG information is likely to be strategically utilized to optimize a firm's image.…”

“…In 2014, the Standing Committee of the National People's Congress of the People's Republic of China passed the revised “Environmental Protection Law of the People's Republic of China,” which stipulates that “key polluting units should truthfully disclose the names, discharge methods, discharge concentrations and totals of their major pollutants, excess discharge situations, and the construction and operation of pollution prevention facilities to the public and accept social supervision.” The implementation of these ESG‐related institutional regulations has significantly increased the amount of ESG disclosure (Amor‐Esteban et al, 2019; Zeng et al, 2012). However, this externally‐driven ESG disclosure, although showing a significant increase in quantity (Lu & Li, 2010), tends to be selective, responsive, and self‐interested in nature, with more positive and difficult‐to‐verify descriptive information and less negative information on resource consumption and pollutant emissions (Wang et al, 2013), which is not optimistic in quality (Li et al, 2023; Tang et al, 2021). This indicates that external institutional constraints have not led firms to fully and truthfully disclose ESG information (Zhu et al, 2019).…”

“…(Amor-Esteban et al, 2019;Zeng et al, 2012). However, this externally-driven ESG disclosure, although showing a significant increase in quantity (Lu & Li, 2010), tends to be selective, responsive, and self-interested in nature, with more positive and difficult-to-verify descriptive information and less negative information on resource consumption and pollutant emissions (Wang et al, 2013), which is not optimistic in quality (Li et al, 2023;Tang et al, 2021). This indicates that external institutional constraints have not led firms to fully and truthfully disclose ESG information (Zhu et al, 2019).…”

“…Secondly, this study delves deeper into the strategic decision‐making behind the promotion of firms' ESG disclosure resulting from the executive pay gap. Previous research has demonstrated that due to the non‐quantifiable nature of ESG information, it can be strategically employed as a “window dressing” to enhance a firm's image (Gong et al, 2018; Li et al, 2023; Lu et al, 2015). In firms with a larger executive pay gap, the core executives have greater influence and higher standing, often exerting a critical impact on the firm's ESG disclosure decisions (Wang et al, 2021).…”

Can Mandatory Disclosure of CSR Information Drive the Transformation of Firms towards High-Quality Development?

“…Hence, future research endeavors could explore alternative methodologies for TFP calculations. Secondly, apart from mechanisms like financing constraints and agency costs, forthcoming research could delve into the influence of external factors that are more pertinent to CSR, such as the firms' green reputation [36,37] and media sentiment [38,39], on firm development. Thirdly, in developed countries, voluntary disclosure of CSR information is the norm, while China's CSR process is less developed, so mandatory CSR reports tend to be more reliable than voluntary ones, as reflected in the comprehensiveness, identifiability, and horizontal comparability of disclosures.…”