Why Do Socially Responsible Firms Manage Earnings?
Posted: 9 Sep 2014 Last revised: 12 Sep 2014
Date Written: September 11, 2014
We examine the incentives of socially responsible firms, relative to a set of control firms, to engage in earnings management. We measure socially responsible behavior using various proxies of corporate social responsibility, and earnings management using abnormal levels of accruals, cash flows, inventory production, and discretionary expenses. We find that socially responsible firms manage earnings mainly to meet analysts’ earnings forecasts and to reduce financing and tax costs, rather than to opportunistically to increase management’s compensation or equity stakes. Our findings suggest that whether firms view earnings management as socially responsible depends on the manner and reasons for managing earnings.
Keywords: financial reporting quality; earnings management; accounting choice; corporate social responsibility
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