Corporate Social Responsibility and Earnings Quality in the Context of Changing Regulatory Regimes
29 Pages Posted: 12 Dec 2016 Last revised: 14 Jan 2020
Date Written: 2019
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: Suggested Citation