Are corporate social responsibility active firms less involved in earnings management? Empirical evidence from China
Abstract
This paper investigates whether corporate social responsibility active (CSR active) firms operate dissimilarly from other firms in their financial reporting. Specifically, we examine whether the corporate social responsibility (CSR) attitude of a firm sways its reporting incentives, in respect of the extent of earning management. To test our predictions, we use a sample of 25,861 year-company observations, corresponding to 3538 Chinese listed companies, for the period 2009–2019. We find a significant positive association between CSR activity and earning management assessed by the level of discretionary accruals in Chinese listed companies. Moreover, we document that Chinese CSR active firms engage more in earnings management through discretionary accruals than CSR inactive firms. These findings are consistent with the opportunistic financial reporting hypothesis: advances in CSR used by managers to safeguard their position by evading scrutiny from stakeholder activists. This study contributes to the growing awareness among investors, stakeholders and researchers that we should distinguish between CSR active firms and socially responsible firms and that being the latter entail something more than just mechanically produce CSR reports.
Keyword : corporate social responsibility, earnings management, discretionary accruals, opportunistic behaviour, earnings quality, China
How to Cite
Pasko, O., Chen, F., Proskurina, N., Mao, R., Gryn, V., & Pushkar, I. (2021). Are corporate social responsibility active firms less involved in earnings management? Empirical evidence from China. Business: Theory and Practice, 22(2), 504-516. https://doi.org/10.3846/btp.2021.14940
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Ben Amar, A., & Chakroun, S. (2018). Do dimensions of corporate social responsibility affect earnings management? Journal of Financial Reporting and Accounting, 16(2), 348–370. https://doi.org/10.1108/JFRA-05-2017-0033
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Cespa, G., & Cestone, G. (2007). Corporate social responsibility and managerial entrenchment. Journal of Economics & Management Strategy, 16(3), 741–771. https://doi.org/10.1111/j.1530-9134.2007.00156.x
Chen, R. C. Y., & Hung, S. (2021). Exploring the impact of corporate social responsibility on real earning management and discretionary accruals. Corporate Social Responsibility and Environmental Management, 28(1), 333–351. https://doi.org/10.1002/csr.2052
Chih, H.-L., Shen, C.-H., & Kang, F.-C. (2008). Corporate social responsibility, investor protection, and earnings management: Some international evidence. Journal of Business Ethics, 79(1–2), 179–198. https://doi.org/10.1007/s10551-007-9383-7
Cho, E., & Chun, S. (2016). Corporate social responsibility, real activities earnings management, and corporate governance: Evidence from Korea. Asia-Pacific Journal of Accounting & Economics, 23(4), 400–431. https://doi.org/10.1080/16081625.2015.1047005
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Choi, J. H., Kim, S., Yang, D.-H., & Cho, K. (2021). Can corporate social responsibility decrease the negative influence of financial distress on accounting quality? Sustainability, 13(19), 11124. https://doi.org/10.3390/su131911124
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Dechow, P. M., & Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77(s-1), 35–59. https://doi.org/10.2308/accr.2002.77.s-1.35
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Ehsan, S., Nurunnabi, M., Tahir, S., & Hashmi, M. H. (2020). Earnings management: A new paradigm of corporate social responsibility. Business and Society Review, 125(3), 349–369. https://doi.org/10.1111/basr.12198
Foster, M. J. (2021). Does CSR activity amount to socially responsible management? Philosophy of Management, 20, 391–410. https://doi.org/10.1007/s40926-020-00158-6
Garcia-Sanchez, I.-M., & Garcia-Meca, E. (2017). CSR engagement and earnings quality in banks. The moderating role of institutional factors. Corporate Social Responsibility and Environmental Management, 24(2), 145–158. https://doi.org/10.1002/csr.1405
Gargouri, R. M., Shabou, R., & Francoeur, C. (2010). The relationship between corporate social performance and earnings management. Canadian Journal of Administrative Sciences / Revue Canadienne Des Sciences de l’Administration, 27(4), 320–334. https://doi.org/10.1002/cjas.178
Gazzola, P., Amelio, S., Papagiannis, F., & Michaelides, Z. (2019). Sustainability reporting practices and their social impact to NGO funding in Italy. Critical Perspectives on Accounting, 79, 102085. https://doi.org/10.1016/j.cpa.2019.04.006
Goncalves, T., Gaio, C., & Ferro, A. (2021). Corporate social responsibility and earnings management: Moderating impact of economic cycles and financial performance. Sustainability, 13(17), 9969. https://doi.org/10.3390/su13179969
Gras-Gil, E., Palacios Manzano, M., & Hernandez Fernandez, J. (2016). Investigating the relationship between corporate social responsibility and earnings management: Evidence from Spain. BRQ Business Research Quarterly, 19(4), 289–299. https://doi.org/10.1016/j.brq.2016.02.002
Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193–228. https://doi.org/10.2307/2491047
Kim, Y., Park, M. S., & Wier, B. (2012). Is earnings quality associated with corporate social responsibility? The Accounting Review, 87(3), 761–796. https://doi.org/10.2308/accr-10209
Kolsi, M. C., & Attayah, O. F. (2018). Are socially responsible firms less engaged in earnings management? Evidence from ADX listed companies. International Journal of Business Innovation and Research, 17(4), 536–560. https://doi.org/10.1504/IJBIR.2018.096373
KPMG. (2020). The time has come. KPMG Survey of Sustainability Reporting 2020. https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/11/the-time-has-come.pdf
Lee, E., Walker, M., & Zeng, C. (Colin). (2017). Do Chinese state subsidies affect voluntary corporate social responsibility disclosure? Journal of Accounting and Public Policy, 36(3), 179–200. https://doi.org/10.1016/j.jaccpubpol.2017.03.004
Lin, L. W. (2010). Corporate social responsibility in China: Window dressing or structural change. Berkeley Journal of International Law, 28(1), 64–100.
Martinez-Martinez, D., Andrades, J., Larran, M., Muriel, M. J., & Lechuga Sancho, M. P. (2021). Determinants of earnings management in Spanish SMEs and its relationship with CSR: The relevance of sector life cycle stage. Journal of Small Business and Enterprise Development, 28(3), 399–428. https://doi.org/10.1108/JSBED-07-2020-0257
Mendes, C. A., Rodrigues, L. L., & Esteban, L. P. (2012). Evidence of earnings management using accruals as a measure of accounting discretion. Tékhne, 10(1), 3–14. https://doi.org/10.1016/S1645-9911(12)70002-6
Muriithi, S. G., Walters, B. A., McCumber, W. R., & Robles, L. R. (2021). Managerial entrenchment and corporate social responsibility engagement: The role of economic policy uncertainty. Journal of Management and Governance. https://doi.org/10.1007/s10997-021-09569-7
Muttakin, M. B., Khan, A., & Azim, M. I. (2015). Corporate social responsibility disclosures and earnings quality. Managerial Auditing Journal, 30(3), 277–298. https://doi.org/10.1108/MAJ-02-2014-0997
Noronha, C., Tou, S., Cynthia, M. I., & Guan, J. J. (2013). Corporate social responsibility reporting in China: An overview and comparison with major trends. Corporate Social Responsibility and Environmental Management, 20(1), 29–42. https://doi.org/10.1002/csr.1276
Pasko, O., Chen, F., Oriekhova, A., Brychko, A., & Shalyhina, I. (2021). Mapping the literature on sustainability reporting: A Bibliometric analysis grounded in Scopus and Web of science core collection. European Journal of Sustainable Development, 10(1), 303−322. https://doi.org/10.14207/ejsd.2021.v10n1p303
Pasko, O., Minta, S., Rudenko, S., & Hordiyenko, M. (2020). Do poor and good performing companies report differently? The readability and impression management in corporate narrative documents: Evidence from Northern Europe. Business: Theory and Practice, 21(2), 835–849. https://doi.org/10.3846/btp.2020.12583
Prior, D., Surroca, J., & Tribo, J. A. (2008). Are socially responsible managers really ethical? Exploring the relationship between earnings management and corporate social responsibility. Corporate Governance: An International Review, 16(3), 160–177. https://doi.org/10.1111/j.1467-8683.2008.00678.x
Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335–370. https://doi.org/10.1016/j.jacceco.2006.01.002
Scholtens, B., & Kang, F.-C. (2013). Corporate social responsibility and earnings management: Evidence from Asian Economies. Corporate Social Responsibility and Environmental Management, 20(2), 95–112. https://doi.org/10.1002/csr.1286
Silva, S. (2021). Corporate contributions to the sustainable development goals: An empirical analysis informed by legitimacy theory. Journal of Cleaner Production, 292, 125962. https://doi.org/10.1016/j.jclepro.2021.125962
Sun, N., Salama, A., Hussainey, K., & Habbash, M. (2010). Corporate environmental disclosure, corporate governance and earnings management. Managerial Auditing Journal, 25(7), 679–700. https://doi.org/10.1108/02686901011061351
Wysocki, P. (2011). New institutional accounting and IFRS. Accounting and Business Research, 41(3), 309–328. https://doi.org/10.1080/00014788.2011.575298
Yang, M., Bento, P., & Akbar, A. (2019). Does CSR influence firm performance indicators? Evidence from Chinese Pharmaceutical Enterprises. Sustainability, 11(20), 5656. https://doi.org/10.3390/su11205656
Zengul, F. D., Oner, N., Byrd, J. D., & Savage, A. (2021). Revealing research themes and trends in 30 Top‐ranking accounting journals: a text‐mining approach. Abacus, 57(3), 468–501. https://doi.org/10.1111/abac.12214
Zhang, Z., Yap, T. L., & Park, J. (2021). Does voluntary CSR disclosure and CSR performance influence earnings management? Empirical evidence from China. International Journal of Disclosure and Governance, 18, 161–178. https://doi.org/10.1057/s41310-021-00104-6
Almahrog, Y., Ali Aribi, Z., & Arun, T. (2018). Earnings management and corporate social responsibility: UK evidence. Journal of Financial Reporting and Accounting, 16(2), 311–332. https://doi.org/10.1108/JFRA-11-2016-0092
Arthur, N., Chen, H., & Tang, Q. (2019). Corporate ownership concentration and financial reporting quality. Journal of Financial Reporting and Accounting, 17(1), 104–132. https://doi.org/10.1108/JFRA-07-2017-0051
Ball, R., & Shivakumar, L. (2006). The role of accruals in asymmetrically timely gain and loss recognition. Journal of Accounting Research, 44(2), 207–242. https://doi.org/10.1111/j.1475-679X.2006.00198.x
Ben Amar, A., & Chakroun, S. (2018). Do dimensions of corporate social responsibility affect earnings management? Journal of Financial Reporting and Accounting, 16(2), 348–370. https://doi.org/10.1108/JFRA-05-2017-0033
Bozzolan, S., Fabrizi, M., Mallin, C. A., & Michelon, G. (2015). Corporate social responsibility and earnings quality: International evidence. The International Journal of Accounting, 50(4), 361–396. https://doi.org/10.1016/j.intacc.2015.10.003
Cespa, G., & Cestone, G. (2007). Corporate social responsibility and managerial entrenchment. Journal of Economics & Management Strategy, 16(3), 741–771. https://doi.org/10.1111/j.1530-9134.2007.00156.x
Chen, R. C. Y., & Hung, S. (2021). Exploring the impact of corporate social responsibility on real earning management and discretionary accruals. Corporate Social Responsibility and Environmental Management, 28(1), 333–351. https://doi.org/10.1002/csr.2052
Chih, H.-L., Shen, C.-H., & Kang, F.-C. (2008). Corporate social responsibility, investor protection, and earnings management: Some international evidence. Journal of Business Ethics, 79(1–2), 179–198. https://doi.org/10.1007/s10551-007-9383-7
Cho, E., & Chun, S. (2016). Corporate social responsibility, real activities earnings management, and corporate governance: Evidence from Korea. Asia-Pacific Journal of Accounting & Economics, 23(4), 400–431. https://doi.org/10.1080/16081625.2015.1047005
Choi, B. B., Lee, D., & Park, Y. (2013). Corporate social responsibility, corporate governance and earnings quality: Evidence from Korea. Corporate Governance: An International Review, 21(5), 447–467. https://doi.org/10.1111/corg.12033
Choi, J. H., Kim, S., Yang, D.-H., & Cho, K. (2021). Can corporate social responsibility decrease the negative influence of financial distress on accounting quality? Sustainability, 13(19), 11124. https://doi.org/10.3390/su131911124
Connelly, B. L., Certo, S. T., Ireland, R. D., & Reutzel, C. R. (2011). Signaling theory: A review and assessment. Journal of Management, 37(1), 39–67. https://doi.org/10.1177/0149206310388419
Dechow, P. M., & Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77(s-1), 35–59. https://doi.org/10.2308/accr.2002.77.s-1.35
Dechow, P. M., Kothari, S. P., & L. Watts, R. (1998). The relation between earnings and cash flows. Journal of Accounting and Economics, 25(2), 133–168. https://doi.org/10.1016/S0165-4101(98)00020-2
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1996). Causes and consequences of earnings manipulation: An analysis of firms subject to enforcement actions by the SEC. Contemporary Accounting Research, 13(1), 1–36. https://doi.org/10.1111/j.1911-3846.1996.tb00489.x
Ehsan, S., Nurunnabi, M., Tahir, S., & Hashmi, M. H. (2020). Earnings management: A new paradigm of corporate social responsibility. Business and Society Review, 125(3), 349–369. https://doi.org/10.1111/basr.12198
Foster, M. J. (2021). Does CSR activity amount to socially responsible management? Philosophy of Management, 20, 391–410. https://doi.org/10.1007/s40926-020-00158-6
Garcia-Sanchez, I.-M., & Garcia-Meca, E. (2017). CSR engagement and earnings quality in banks. The moderating role of institutional factors. Corporate Social Responsibility and Environmental Management, 24(2), 145–158. https://doi.org/10.1002/csr.1405
Gargouri, R. M., Shabou, R., & Francoeur, C. (2010). The relationship between corporate social performance and earnings management. Canadian Journal of Administrative Sciences / Revue Canadienne Des Sciences de l’Administration, 27(4), 320–334. https://doi.org/10.1002/cjas.178
Gazzola, P., Amelio, S., Papagiannis, F., & Michaelides, Z. (2019). Sustainability reporting practices and their social impact to NGO funding in Italy. Critical Perspectives on Accounting, 79, 102085. https://doi.org/10.1016/j.cpa.2019.04.006
Goncalves, T., Gaio, C., & Ferro, A. (2021). Corporate social responsibility and earnings management: Moderating impact of economic cycles and financial performance. Sustainability, 13(17), 9969. https://doi.org/10.3390/su13179969
Gras-Gil, E., Palacios Manzano, M., & Hernandez Fernandez, J. (2016). Investigating the relationship between corporate social responsibility and earnings management: Evidence from Spain. BRQ Business Research Quarterly, 19(4), 289–299. https://doi.org/10.1016/j.brq.2016.02.002
Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193–228. https://doi.org/10.2307/2491047
Kim, Y., Park, M. S., & Wier, B. (2012). Is earnings quality associated with corporate social responsibility? The Accounting Review, 87(3), 761–796. https://doi.org/10.2308/accr-10209
Kolsi, M. C., & Attayah, O. F. (2018). Are socially responsible firms less engaged in earnings management? Evidence from ADX listed companies. International Journal of Business Innovation and Research, 17(4), 536–560. https://doi.org/10.1504/IJBIR.2018.096373
KPMG. (2020). The time has come. KPMG Survey of Sustainability Reporting 2020. https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/11/the-time-has-come.pdf
Lee, E., Walker, M., & Zeng, C. (Colin). (2017). Do Chinese state subsidies affect voluntary corporate social responsibility disclosure? Journal of Accounting and Public Policy, 36(3), 179–200. https://doi.org/10.1016/j.jaccpubpol.2017.03.004
Lin, L. W. (2010). Corporate social responsibility in China: Window dressing or structural change. Berkeley Journal of International Law, 28(1), 64–100.
Martinez-Martinez, D., Andrades, J., Larran, M., Muriel, M. J., & Lechuga Sancho, M. P. (2021). Determinants of earnings management in Spanish SMEs and its relationship with CSR: The relevance of sector life cycle stage. Journal of Small Business and Enterprise Development, 28(3), 399–428. https://doi.org/10.1108/JSBED-07-2020-0257
Mendes, C. A., Rodrigues, L. L., & Esteban, L. P. (2012). Evidence of earnings management using accruals as a measure of accounting discretion. Tékhne, 10(1), 3–14. https://doi.org/10.1016/S1645-9911(12)70002-6
Muriithi, S. G., Walters, B. A., McCumber, W. R., & Robles, L. R. (2021). Managerial entrenchment and corporate social responsibility engagement: The role of economic policy uncertainty. Journal of Management and Governance. https://doi.org/10.1007/s10997-021-09569-7
Muttakin, M. B., Khan, A., & Azim, M. I. (2015). Corporate social responsibility disclosures and earnings quality. Managerial Auditing Journal, 30(3), 277–298. https://doi.org/10.1108/MAJ-02-2014-0997
Noronha, C., Tou, S., Cynthia, M. I., & Guan, J. J. (2013). Corporate social responsibility reporting in China: An overview and comparison with major trends. Corporate Social Responsibility and Environmental Management, 20(1), 29–42. https://doi.org/10.1002/csr.1276
Pasko, O., Chen, F., Oriekhova, A., Brychko, A., & Shalyhina, I. (2021). Mapping the literature on sustainability reporting: A Bibliometric analysis grounded in Scopus and Web of science core collection. European Journal of Sustainable Development, 10(1), 303−322. https://doi.org/10.14207/ejsd.2021.v10n1p303
Pasko, O., Minta, S., Rudenko, S., & Hordiyenko, M. (2020). Do poor and good performing companies report differently? The readability and impression management in corporate narrative documents: Evidence from Northern Europe. Business: Theory and Practice, 21(2), 835–849. https://doi.org/10.3846/btp.2020.12583
Prior, D., Surroca, J., & Tribo, J. A. (2008). Are socially responsible managers really ethical? Exploring the relationship between earnings management and corporate social responsibility. Corporate Governance: An International Review, 16(3), 160–177. https://doi.org/10.1111/j.1467-8683.2008.00678.x
Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335–370. https://doi.org/10.1016/j.jacceco.2006.01.002
Scholtens, B., & Kang, F.-C. (2013). Corporate social responsibility and earnings management: Evidence from Asian Economies. Corporate Social Responsibility and Environmental Management, 20(2), 95–112. https://doi.org/10.1002/csr.1286
Silva, S. (2021). Corporate contributions to the sustainable development goals: An empirical analysis informed by legitimacy theory. Journal of Cleaner Production, 292, 125962. https://doi.org/10.1016/j.jclepro.2021.125962
Sun, N., Salama, A., Hussainey, K., & Habbash, M. (2010). Corporate environmental disclosure, corporate governance and earnings management. Managerial Auditing Journal, 25(7), 679–700. https://doi.org/10.1108/02686901011061351
Wysocki, P. (2011). New institutional accounting and IFRS. Accounting and Business Research, 41(3), 309–328. https://doi.org/10.1080/00014788.2011.575298
Yang, M., Bento, P., & Akbar, A. (2019). Does CSR influence firm performance indicators? Evidence from Chinese Pharmaceutical Enterprises. Sustainability, 11(20), 5656. https://doi.org/10.3390/su11205656
Zengul, F. D., Oner, N., Byrd, J. D., & Savage, A. (2021). Revealing research themes and trends in 30 Top‐ranking accounting journals: a text‐mining approach. Abacus, 57(3), 468–501. https://doi.org/10.1111/abac.12214
Zhang, Z., Yap, T. L., & Park, J. (2021). Does voluntary CSR disclosure and CSR performance influence earnings management? Empirical evidence from China. International Journal of Disclosure and Governance, 18, 161–178. https://doi.org/10.1057/s41310-021-00104-6