The Influence of Corporate Social Responsibility and Board Characteristics on Earnings Management

Abstract

This paper examines whether firms that act socially responsible and have favourable board characteristics engage in a more transparent financial reporting. In particular, the first question is whether firms with high corporate social responsibility (CSR) engagement exhibit less earnings management than their socially less responsible counterparts. Simultaneously, the second question deals with the level of support of favourable Corporate Governance (CG), leading to a superior transparent financial reporting. The study therefore examines whether firms with high engagement in CSR and high independence in board and selected committees engage in even lower earnings management. The results show that CSR firms engage in lower (1) accrual-based earnings management and (2) real activities based earnings management. Additionally, these firms exhibit lower earnings management, when (1) nomination committee and (2) overall board have higher degrees of independent members. These coherences are non-linear. Most important, there is a interaction level effect between the favourable board independence characteristics and CSR, leading to a superior transparency in financial reporting. However, high-incentive situations are detected in which the magnitude of earnings management is high for all firms. The results are robust to (1) using various models and estimators to compute accrual-based and real activities earnings management, (2) using mean-centered or standardised proxies, (3) using alternative measures for CSR performance respectively grouping and (4) applying additional performance control.