Earnings Management -- Does Corporate Sustainability Performance Matter?

University of Zurich, Department of Business Administration, UZH Business Working Paper No. 358

21 Pages Posted: 17 Nov 2015

See all articles by Katrin Hummel

Katrin Hummel

WU Vienna University of Economics and Business

Peter Ising

Accenture AG

Date Written: October 1, 2015

Abstract

This study investigates the relationship between corporate sustainability performance and earnings management practices in a European setting. We measure earnings management based on discretionary accruals (cash flow approach) and real activity management. Corporate sustainability performance is a multi-dimensional construct that is measured based on data provided by the CSRHub database. Employing a European sample of 1,426 firm-year observations, our results reveal a negative relationship between corporate sustainability performance and earnings management activities. This finding supports the notion that a broad and integrated approach of sustainability performance constrains the use of earnings management practices. The results are consistent with recent research on U.S. non-financial companies (Kim et al. 2012), indicating the application of similar principles in U.S. and European settings. Additional analyses reveal that this relationship is particularly applicable to the environmental and community dimensions of sustainability, whereas we find only limited empirical evidence on this relationship for the employee dimension. Taken together, our study provides further evidence regarding the relevance of corporate sustainability in the financial context.

Keywords: corporate sustainability performance, earnings management, discretionary accruals, real activity management, legitimacy theory, stakeholder theory

JEL Classification: M14, M41

Suggested Citation

Hummel, Katrin and Ising, Peter, Earnings Management -- Does Corporate Sustainability Performance Matter? (October 1, 2015). University of Zurich, Department of Business Administration, UZH Business Working Paper No. 358, Available at SSRN: https://ssrn.com/abstract=2687917 or http://dx.doi.org/10.2139/ssrn.2687917

Katrin Hummel (Contact Author)

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Peter Ising

Accenture AG ( email )

Fraumuensterstr. 16
Zurich, 8001
Switzerland

HOME PAGE: http://www.accenture.com

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