Corporate social responsibility and income smoothing: Supply chain perspectives

Abstract

This paper investigates how the supplier-buyer relationship affects the income-smoothing behavior of socially responsible companies. Prior research finds that companies tend to smooth earnings to maintain the supply chain relationship. This paper argues that the income-smoothing behavior of socially responsible companies is conditioned on how their supply chain partners treat corporate social responsibility (CSR). The findings show that companies engaging in higher levels of CSR performance who have greater dependence on the supplier-buyer relationship are associated with lower levels of income smoothness. In addition, this paper finds that the capital market perceives the smoothed earnings of firms with superior CSR performance to be less informative than the earnings of other firms, implying that faithful representation is consistent with the interests of both shareholders and stakeholders. Collectively, the findings suggest that the growing CSR demand in the supply chain is in line with the interests of shareholders and stakeholders.