Abstract
This paper aims at examining the effect of corporate social responsibility on earnings management in the Indonesian banking industry. Using Indonesian publicly listed banking firms in the years of 2013–2015 as the sample, we generate 94 firm-year observations as the final sample. The results show that corporate social responsibility positively affects earnings management, suggesting that the higher the corporate social responsibility score, the greater earnings management. Further, the study investigates the effects of corporate social responsibility on absolute earnings management, positive earnings management, and negative earnings management. The results robustly demonstrate the positive effects of corporate social responsibility on earnings management. Thus, this study implies that investors need to be cautious of banks that engage in higher corporate social responsibility because they are more likely to exhibit greater earnings management. While most of the previous studies in this issue focus on developed countries as their research settings, this study provides empirical evidence on the relationship between corporate social responsibility in Indonesia as an emerging market.
Highlights
There are two important regulations regarding corporate social responsibility in Indonesia, namely Law Nu.40/2007 on limited liability corporation and Law Nu.25/2007 on investment
The results show that firms with higher corporate social responsibility activities exhibit a greater ethical level and are less likely to engage in earnings management
This study focuses on the effect of corporate social responsibility on earnings management in the context of the Indonesian banking industry
Summary
There are two important regulations regarding corporate social responsibility in Indonesia, namely Law Nu.40/2007 on limited liability corporation and Law Nu.25/2007 on investment. The law requires firms to allocate a portion of their funds for corporate social responsibility; otherwise, they will be sanctioned by the government. This regulation implies that corporate social responsibility has cost implications for firms. Law Nu.25/2007 article 15 stipulates that firms engage in corporate social responsibility. Both Law Nu.40/2007 and Law Nu.25/2007 emphasize the importance of corporate social responsibility in Indonesia
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