Corporate social responsibility and earnings management in the EU: a panel data analysis approach

Abstract

PurposeOver the past decades, corporate social responsibility (CSR) has been considered as a significant corporate strategy and also has been documented as a main information dissemination mechanism of corporations to shareholders, creditors and other external stakeholders. This fact makes the CSR activities and CSR performance interconnected with the quality of firms’ financial reporting. The purpose of this paper is to study the impact of CSR performance on the earnings management (EM) behaviour using a sample from 24 European Union (EU) countries summing up to 121,154 firm-year observations over the period 2003–2018.Design/methodology/approachThe study uses a multi-country data set with various dimensions of CSR performance including indexes regarding workforce, community relations, product responsibility and human rights protection. The empirical analysis is conducted with panel data regressions.FindingsEvidence supports the negative association between CSR and EM indicating that high CSR performing firms are associated with less income smoothing and discretionary accruals, thus with higher financial reporting quality.Practical implicationsRegulatory agencies in the EU could use the findings of the study for the improvement of the accounting framework via enhancing the use and publications of social and environmental responsibility information and reports.Social implicationsAlso, the current paper could be of interest not only to academic researchers but also to potential and existing investors in European corporations. The negative association between CSR performance and EM could be used by investors in assessing the risk of firms and the quality and reliability of their financial information.Originality/valueThis is the first study within the EU, which considers the multi-facet characteristics of CSR on the quality of accounting earnings and offers useful policy implications for regulators and investors.