Is Earnings Quality Associated with Corporate Social Responsibility?

51 Pages Posted: 31 Jul 2011 Last revised: 4 Jan 2012

Yongtae Kim

Santa Clara University - Leavey School of Business

Myung Seok Park

Virginia Commonwealth University (VCU) - School of Business

Benson Wier

Virginia Commonwealth University

Date Written: July 30, 2011

Abstract

This study examines whether socially responsible firms behave differently from other firms in their financial reporting. Specifically, we question whether firms that exhibit corporate social responsibility (CSR) also behave in a responsible manner to constrain earnings management, thereby delivering more transparent and reliable financial information to investors as compared to firms that do not meet the same social criteria. We find that socially responsible firms are less likely (1) to manage earnings through discretionary accruals, (2) to manipulate real operating activities, and (3) to be the subject of SEC investigations, as evidenced by Accounting and Auditing Enforcement Releases against top executives. Our results are robust to (1) controlling for various incentives for CSR and earnings management, (2) considering various CSR dimensions and components, and (3) using alternative proxies for CSR and accruals quality. To the extent that we control for the potential effects of reputation and financial performance, our findings suggest that ethical concerns are likely to drive managers to produce high quality financial reports.

Keywords: Corporate social responsibility, transparency in financial reporting, earnings management, discretionary accruals, real activities manipulation

JEL Classification: M41, M14

Suggested Citation

Kim, Yongtae and Park, Myung Seok and Wier, Benson, Is Earnings Quality Associated with Corporate Social Responsibility? (July 30, 2011). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1899071

Yongtae Kim (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
(408) 554-4667 (Phone)
(408) 554-2331 (Fax)

Myung Seok Park

Virginia Commonwealth University (VCU) - School of Business ( email )

301 W. Main St.
School of Business
Richmond, VA 23284-4000
United States
(804)828-3161 (Phone)

Benson Wier

Virginia Commonwealth University ( email )

School of Business 301 W. Main St.
Richmond, VA 23284
United States
804-828-7162 (Phone)
804-828-8884 (Fax)

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