Is Earnings Quality Associated with Corporate Social Responsibility?
Santa Clara University - Leavey School of Business
Myung Seok Park
Virginia Commonwealth University (VCU) - School of Business
Virginia Commonwealth University
July 30, 2011
Accounting Review, Forthcoming
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.
Number of Pages in PDF File: 51
Keywords: Corporate social responsibility, transparency in financial reporting, earnings management, discretionary accruals, real activities manipulation
JEL Classification: M41, M14
Date posted: July 31, 2011 ; Last revised: January 4, 2012