Beat around the bush: earnings management, CSR spending and CSR report readability

Abstract

Purpose The purpose of this paper is to investigate the relationship between corporate social responsibility (CSR) report readability and earnings management (EM). Additionally, the authors examine the association between CSR spending and CSR report readability to understand the clarity in disclosure when the firms’ investment in CSR is higher. Design/methodology/approach The sample for this study consists of 156 publicly traded firms in India spanning 2016–2021. The authors use the Fog Index to measure the readability of CSR reports and absolute discretionary accruals and absolute accrual EM as the proxy for EM. The empirical models are tested using a two-stage system GMM dynamic panel data model. Findings The authors find a negative association between the Fog Index and EM, indicating that the readability of CSR reports decreases when EM increases in a firm. Managers use complex words to mislead the stakeholders when there are more EM practices. The authors’ additional analysis shows a positive association between CSR spending and CSR report readability, indicating that the firm spends more reports on the initiatives more precisely, avoiding words with more syllables. Originality/value This study offers novel evidence by examining the readability of CSR reports published by Indian firms. Given the mandatory requirement of CSR in India, the readability of disclosures is associated with EM. The authors’ unique focus on CSR report readability provides a new direction for future researchers as they can explore the influence of regulatory mandates on CSR reporting practices.