Corporate social responsibility and its effect on earnings management: an empirical research on Spanish firms

Abstract

The ethics of financial reporting assumes a centre stage in the corporate world in the background of an emerging understanding of Corporate Social Responsibility (CSR). The purpose of this paper is to investigate whether the CSR orientation of a firm affects its reporting incentives, in terms of the accrual-based earnings management. The main argument is that CSR induces transparency and reduces the propensity towards the number of opportunities for earnings management. Using archival data from a panel sample of 100 most reputable Spanish firms between 2011 and 2015, we find a negative impact of CSR practices on earnings management. The findings demonstrate the socially responsible firms are inclined to foster long–term relationships with stakeholders rather than maximise their short-term profit. In this regard, providing quality earnings is closely connected to CSR activities, especially in that both aim to meet the needs of the stakeholders. Our findings have important implications for shareholders, investors and analysts who may consider CSR as an expression of ‘ethical’ investing and a possible reflection of the quality of financial reporting. These groups should be very cautious in relying on CSR information for Spanish firm's analysis, since CSR is found to have significant impact on earnings management.