The link between CSR and earnings quality: evidence from Egypt

Abstract

Purpose The purpose of this paper is to investigate the relationship between corporate social responsibility (CSR) and earnings quality, as proxied by accrual earnings management, in Egyptian firms. This research is conducted in a bidirectional fashion using simultaneous equations and considers two theoretical perspectives. Design/methodology/approach The study employs CSR annual scores from the Egyptian environmental, social and governance index (S&P/ESG index) for the 100 highest scoring firms from 2007 to 2015. It utilizes three earnings quality measures, in addition to considering reverse causality and endogeneity. Findings The results indicate that CSR has a positive association with earnings quality only in the top CSR scoring firms (top 30 ranked firms according to the index). Engaging in CSR in such firms enhances the quality of their earnings. This suggests that firms with relatively lower CSR scores (bottom 70 ranked firms according to the index) may use CSR to “greenwash” weaker earnings. Research limitations/implications The findings suggest that researchers, analysts and policy makers should consider earnings quality when estimating the real value of a firm’s CSR score. In particular, the Egyptian S&P/ESG index committee could further develop the index by incorporating earnings quality measures. Originality/value The study contributes to the literature by exploring in-depth the causal relationship between CSR practices and accrual earnings management in an emerging market. The results provide a nuanced story of CSR practices, with accruals earnings management (earnings quality) acting as a mediator of CSR’s inherent value.

Corporate social responsibility, board gender diversity and real earnings management: The case of Jordan

“…This result is consistent with the ethical perspective: Jordanian managers in firms with higher CSR activities are less likely to engage in REM. The findings are in line with those reporting a negative CSR-EM relationship based on discretionary accruals (Almahrog et al, 2018;Garcia-Sanchez et al, 2020;Gras-Gil et al, 20162019m2012Kumala & Siregar, 2020Mohmed et al, 2019). The current results support the moral and ethical perspective that engagement in CSR activities leads to reducing EM practices in an emerging market, Jordan.…”

“…It was found that socially responsible firms are less likely to manage earnings (Almahrog et al, 2018; Y. Kim et al, 2012;Mohmed et al, 2019). Kumala and Siregar (2020) report a negative association between CSR and EM in firms listed on the Indonesia Stock Exchange.…”

“…Although the majority of previous studies comprehensively try to investigate the direct relationship between CSR activities and EM (Almahrog et al, 2018;Buertey et al, 2020;Grougiou et al, 2014;Habbash & Haddad, 2019;Y. Kim et al, 2012;Kumala & Siregar, 2020;Mohmed et al, 2019), this relationship can be differentiated based on presence of female directors. Researchers argue that female directors tend to focus on solving social concerns more than male directors do (Hussain et al, 2018).…”

“…Corporate social responsibility (CSR) reporting can improve the quality of reported information and thereby diminish information asymmetry between agents (managers) and principals (owners and other stakeholders) (Jensen & Meckling, 1976;Mohmed et al, 2019). Several recent studies have examined the direct association between the two practices, CSR and EM (Buertey et al, 2020;Habbash & Haddad, 2019;Kumala & Siregar, 2020;Mohmed et al, 2019), although the results remain bidirectional.…”

“…Corporate social responsibility (CSR) reporting can improve the quality of reported information and thereby diminish information asymmetry between agents (managers) and principals (owners and other stakeholders) (Jensen & Meckling, 1976;Mohmed et al, 2019). Several recent studies have examined the direct association between the two practices, CSR and EM (Buertey et al, 2020;Habbash & Haddad, 2019;Kumala & Siregar, 2020;Mohmed et al, 2019), although the results remain bidirectional. Despite previous studies have examined the moderating effect of countryspecific (i.e., industry differences and political and regulatory pressure) and firm-specific factors (i.e., board size, Big4 audit firms, ownership structure, and corporate governance quality) on the CSR-EM relationship, many other features such as managerial attributes and managers' social orientation are still under-examined (Ehsan et al, 2020).…”