Corporate Hypocrisy: Role of Non-Profit Corporate Foundations in Earnings Management of For-Profit Founder Firms

Liping Xu,Li Chen,Shuxia Zhang,Ning Liu

doi:10.3390/su10113991

Liping Xu, Li Chen + Show 2 more

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https://doi.org/10.3390/su10113991

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Abstract

The purpose of this study is to examine whether for-profit firms make opportunistic use of their corporate foundations to pursue self-serving earnings objectives in China. Using data on corporate foundations and a sample of firms listed on the A-share market from 2010 to 2016, we first use the propensity score matching method to explore the effect of corporate foundations on earnings management of their founder firms. We find that the overall discretionary accruals of firms with corporate foundations are significantly higher than for those without corporate foundations. Given the ownership property with Chinese characteristics, we further find that the significant difference is driven by privately-owned firms. Then we develop a model of discretionary donation expenditures to measure the magnitude of earnings management associated with corporate foundations. We observe that firms with small profits and consecutive earnings increase record income-increasing discretionary donation expenditures. While firms that record income-decreasing discretionary donation expenditures create earnings reserves that they can use in subsequent periods to report consecutive earnings increases. The results demonstrate that the visibly ethical behavior of establishing corporate foundations does not necessarily represent the consistent embodiment of corporate social responsibility (CSR), but can be regarded as corporate hypocrisy with self-interest embedded in benevolence.

Highlights

In recent years, many for-profit firms have been engaged in improving the social and environmental consequences of their activities by implementing a set of corporate social responsibility (CSR) initiatives and philanthropic initiatives in particular [1,2]
The results indicate that corporate foundations significantly increase the overall earnings management levels of their founder firms, which is consistent with H1
In Model 3, the coefficient of the interaction between Above and String is −0.037 and is significant at the 5% level while the coefficient of Above is insignificant, which suggests that the lower discretionary donation expenditures of firms with small earnings increases can be attributed to higher stock price sensitivity

Summary

Introduction

Many for-profit firms have been engaged in improving the social and environmental consequences of their activities by implementing a set of CSR initiatives and philanthropic initiatives in particular [1,2]. Firms can support external charitable causes through intermediary corporate foundations or donating directly to public charities [3]. As the intermediary organization, corporate foundations promote public welfare and charity by transferring funds from their founder firms to external charitable causes [4]. Their services cover a wide range of social fields including education, health, poverty relief, public security, culture, environment, and animal protection. In China, corporate foundations are growing explosively in number, size, and importance in recent years [5]. Corporate foundations have been playing a much more important role in corporate philanthropy, they are still a novelty in China where they were almost non-existent until the Regulations on the Administration of Foundations (RAF) was issued in June 2004 [6]

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