What is it about?
In this paper, we check if socially responsible firms adopt transparent financial reporting strategy, or opportunistically manipulate accounting figures, although engaged in social activities, in order to mislead potential shareholders.
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Why is it important?
Using a sample of 34 listed companies during five years (2010-2014), our results show a positive relationship between abnormal accruals and the level of CSR disclosures thereby enhancing the opportunistic hypothesis of earnings management but not the transparent financial reporting hypothesis. By contrast, we find no relationship between CSR disclosures and the three real manipulation proxies: Abnormal operating cash-flows, abnormal production costs and abnormal discretionary expenses. These results indicate that CSR disclosures act as additional constraint for real manipulations or can be simply induced by errors in estimating real manipulation proxies. Moreover, there is a positive relationship between CSR disclosures and the extent of income smoothing consistent with the opportunistic perspective of earnings management. Our results remain robust to additional sensitivity checks such as manipulation proxies, CSR measures or the estimation method. Overall, our study shows that opportunistic and transparent financial reporting perspectives are not mutually exclusive since earnings management practice conducted by socially responsible firms may be context-oriented.
Perspectives
Our study highlights useful directives for investors when allocating resources in socially responsible firms, for regulators and governmental authorities when issuing new rules and requirements related to social activities and finally value the role of social activities for the entire community. It contributes to the current literature related to the interaction between CSR and EM as it highlights the superiority of the opportunistic perspective over the transparent financial reporting hypothesis for ADX socially responsible firms. Our study presents some limitations: First, due to the smaller size of our sample, our results cannot be generalized to other contexts. Second, errors in estimating both discretionary accruals and real manipulations proxies remain common features of studies related to earnings management. Finally, CSR measurement still lack consensus among empirical studies. Future researches should include incentives for earnings management such as public offering, tax avoidance, loans granting, along with the elaboration of more accurate and specific index for social activities, then it will be worthwhile to investigate the relationship between opportunistic/transparent financial reporting earnings management and the extent of CSR disclosures.
associate professor Mohamed Chakib kolsi
University of Sfax & Emirates College of Technology
Read the Original
This page is a summary of: Are socially responsible firms less engaged in earnings management? Evidence from ADX listed companies, International Journal of Business Innovation and Research, January 2018, Inderscience Publishers,
DOI: 10.1504/ijbir.2018.10017182.
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