Whether corporate social responsibility is used to suppress earnings management practices and could corporate governance mechanisms prevent them? An empirical study

Abstract

PurposeThis study examines whether managers adopt corporate social responsibility (CSR) disclosures to suppress earnings management practices and whether corporate governance mechanisms could limit such practices.Design/methodology/approachA quantitative approach was followed, in which secondary data from listed firms from 2014 to 2019 were gathered. Descriptive statistics and inferential techniques were performed, which included correlation, ordered logistic regression and 2SLS panel regression analyses.FindingsThe findings indicate that firms use CSR disclosure to conceal managers' opportunistic behaviour via earnings management as an entrenchment strategy and that corporate governance mechanisms could significantly constrain such behaviour.Research limitations/implicationsThis study goes beyond the conventional agency theory by incorporating additional theoretical perspectives from stakeholder and legitimacy theories, resulting in a multi-theoretical perspective in conceptualizing the study.Practical implicationsThe findings are expected to have significant policy implications, especially in limiting the opportunistic use of CSR disclosures and reducing earnings management practices to safeguard stakeholders' interests and ensure the sustainability of business entities.Originality/valueThe levels of CSR and board governance practices are captured using comprehensive indices. Moreover, earnings management was operationalized using both accrual-based and real earnings management proxies. Furthermore, while addressing an empirical dearth noted, the findings provide significant policy implications for limiting managers' opportunistic and unethical use of CSR disclosures with corporate governance mechanisms.

Evaluating the Impact of Digital Transformation and Sustainability Strategies on Earnings Management: A Text Mining Approach

“…This definition is derived from the concept of sustainability in business and ethics, which states that a corporation must take into account not just its financial performance but also its effects on society and the environment in order to succeed over the long run. The studies also referred the Sustainable Development Goals (SDGs) of the United Nations General Assembly as a framework for business sustainability in areas like poverty, inequality, environmental degradation, and climate change (Choi et al, 2020;Dissanayake et al, 2023;Gonçalves et al, 2021;Guevara et al, 2021;Velte, 2019).…”

“…Sustainability reflected a longterm perspective and a commitment to ethical and transparent reporting, which reduced the incentives and opportunities for earnings management (Choi et al, 2020;Dissanayake et al, 2023;Grimaldi et al, 2020;Nguyen, 2022;Velte, 2019). Companies that place a high priority on sustainability consider how their decisions will affect society, the environment, and the economy over the long run.…”

“…Our research is part of an ongoing effort by the Indonesian government to accelerate digital transformation and achieve digital sovereignty while committing to SDGs achievement by 2030. With the rapid growth of digital transformation, its consequences on financial reporting quality outcome have become an important topic in academic discussions (Wang, 2021;Jia et al, 2022;Li et al, 2023;Choi et al, 2020;Dissanayake et al, 2023;Grimaldi et al, 2020;Nguyen, 2022;Velte, 2019). Digital transformation and sustainability strategies are relevant to earnings management practice.…”