Corporate Social Responsibility and Earnings Quality in the Context of Changing Regulatory Regimes

29 Pages Posted: 12 Dec 2016 Last revised: 14 Jan 2020

See all articles by Zhangfan Cao

Zhangfan Cao

Nanjing Audit University

Bill Rees

University of Edinburgh - Accounting and Finance

Tatiana Rodionova

University of Edinburgh - Business School

Date Written: 2019

Abstract

We examine the relationship of corporate social responsibility (CSR) with earnings management in the context of changing regulatory regimes. We find firms with higher CSR engagement are more likely to have higher discretionary accruals before the Sarbanes Oxley Act of 2002 (SOX) whereas discretionary accruals have been significantly lowered by SOX. We find the relationship between CSR and discretionary accruals is moderated by the manager-shareholder incentive alignment. Firms practicing CSR with low incentive alignment are more likely to have high discretionary accruals and therefore receive more regulatory scrutiny from SOX. In contrast, CSR firms engage less in costly real earnings management in both pre- and post-SOX periods. Using the recent financial crisis as an external shock via the difference-in-difference (DID) method, our results also show that high-CSR firms engage less in earnings management in the financial crisis. Our study shows that when facing the trade-off between different types of earnings management, firms with higher CSR engagement are likely to engage in earnings management that is less costly.

Keywords: Corporate social responsibility, discretionary accruals, real earnings management, Sarbanes Oxley Act

JEL Classification: M14, M38, M41

Suggested Citation

Cao, Zhangfan and Rees, William and Rodionova, Tatiana, Corporate Social Responsibility and Earnings Quality in the Context of Changing Regulatory Regimes (2019). Available at SSRN: https://ssrn.com/abstract=2883387 or http://dx.doi.org/10.2139/ssrn.2883387

Zhangfan Cao (Contact Author)

Nanjing Audit University ( email )

86 Yushan W Rd
Pukou, Jiangsu 210017
China

William Rees

University of Edinburgh - Accounting and Finance ( email )

29 Buccleuch Place
Edinburgh, EH8 9JS
United Kingdom
+44 131 651 5244 (Phone)

HOME PAGE: http://www.business-school.ed.ac.uk

Tatiana Rodionova

University of Edinburgh - Business School ( email )

29 Buccleuch Place
Edinburgh, EH8 9JS
United Kingdom

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