The mediating role of real earnings management in the relationship between CSR practices and cost of equity: evidence from European ESG data

Abstract

PurposeThe goal of this article was to look into the direct and indirect links between corporate social responsibility (CSR) activities and the cost of equity, using real earnings management (REM) as a mediator.Design/methodology/approachTo test the hypotheses, the authors applied linear regressions with panel data using the Thomson Reuters ASSET4 and I/B/E/S database on a sample of 540 European companies selected from the environmental, social and governance (ESG) index over the period 2011–2019.FindingsThe results show that REM partially mediates the relationship between CSR practices and the cost of equity in European firms belonging to the ESG index.Practical implicationsInstead of beautifying their business, companies should make efficient managerial and organizational improvements to meet their social duty. Regulators in Europe must strive for tighter enforcement while also attempting to raise public awareness of CSR. CSR can be profitable and helpful for primary stakeholders, according to the research.Originality/valueAlthough previous literature has investigated the direct correlation between CSR practices and the cost of equity, the present work focuses on considering the direct and indirect association between CSR and cost of equity through the mediating effect of REM, which has not been widely used in CSR studies so far.