Abstract
This study aimed to test how corporate social responsibility (CSR) can affect the impact of corporate financial distress on earnings management. Based on the existing literature, distressed firms tend to hide their financial crises through earnings manipulation. However, as CSR can positively affect companies in terms of performance, risk reduction, and market response, the better a firm’s CSR is the less managers will attempt earnings management even if they experience temporary distress. Consistent with the literature, test results using Korean-listed companies show that distress increased earnings management, and we confirmed that CSR weakened the positive effect of distress on earnings management. After testing each of the CSR subcategories, significant results were found mainly on environmental performance, reflecting the globally increasing interest in environmental issues. This study contributes to the literature on distress and earnings management, which rarely considers CSR as a moderating factor.
Highlights
This study aimed to test how corporate social responsibility (CSR) can affect the impact of corporate financial distress on earnings management
This study investigated whether good CSR involvement suppresses opportunistic managerial motivations that stem from financial hardship
Since this study investigated the role of CSR in the relationship between financial hardship and earnings management, we constructed the test model as follows
Summary
This study aimed to test how corporate social responsibility (CSR) can affect the impact of corporate financial distress on earnings management. Consistent with the literature, test results using Korean-listed companies show that distress increased earnings management, and we confirmed that CSR weakened the positive effect of distress on earnings management. This study contributes to the literature on distress and earnings management, which rarely considers CSR as a moderating factor. We tested the moderating effect of CSR on the relationship between financial distress and earnings management. While financial distress increases the risk of management’s opportunistic choices as previous studies have reported, such an effect will be reduced by CSR performance
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