Abstract
Socially responsible firms are believed to behave in a responsible manner to restrict earnings management and thus deliver more reliable and transparent financial information to investors. We test this hypothesis by predicting a higher quality of financial reporting for socially responsible firms in the Korean market. The entire sample analysis provides evidence for the hypothesis in the use of discretionary accruals as proxy variables for the quality of financial reporting. However, our sub-sample analysis indicates that such weak support is driven by a group of environmentally sensitive firms and the affiliates of large family-owned conglomerates, or chaebol. Socially responsible firms are less likely to be involved with earnings management in the group of non-environmentally sensitive industries and non-chaebol affiliates. These firms provide a better quality of financial reporting in terms of both the use of discretionary accruals and real activity manipulations. In line with recent studies, our findings suggest that ethical concerns in producing high-quality financial reports rely significantly on firm characteristics.
Highlights
Corporate social responsibility (CSR) can be defined as a corporation’s management practices beyond the requirements of law
We adopt various proxy variables for earnings management related to the use of discretionary accruals and real activities manipulations. We examine how these measures of earnings management are related to the degree of a corporation’s socially responsible activity based on the environmental, social, and corporate governance (ESG) score published by the Korea Corporate Governance Service (KCGS)
A firm’s level of CSR activity is measured by the sum of the environmental, social, and corporate governance (ESG) score published by the Korea Corporate Governance Service (KCGS)
Summary
Corporate social responsibility (CSR) can be defined as a corporation’s management practices beyond the requirements of law. Extant studies on CSR [1,3] provide a theoretical background and empirical evidence of the better quality of financial reporting for socially responsible firms. Firms conducting business based on corporations and trust have incentives to commit to ethical behavior [4,5], which includes more transparent financial reporting [1,2,3]. This is because these firms can satisfy the ethical expectations of stakeholders in society by providing more reliable and transparent financial reporting
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