Doing good with creative accounting? Linking corporate social responsibility to earnings management in market economy, country and business sector contexts

Abstract

The mandate of doing good with earnings management has been a subject of inconclusive findings from the past literature and leave issues on the benefits of socially responsible activities and financial reporting of the company. This study investigates the effects of corporate social responsibility (CSR) on accrual-based (AEM) and real-activities earnings management (REM). This study hypothesized that the trade-off exists between these two earnings management strategies, in light of increasing attention of CSR among Asian firms. In addition, this study examines whether the performance of firms in socially responsible activities exhibit different patterns of effect across the two measures of earnings management under the market economy, country, and business sector contexts. This study contemplates on 3906 firm-year observations from 2011 to 2017 of eleven countries in Asia. Our findings show that CSR conceals AEM while it constrains REM. These effects vary according to the market economy classifications, country, and business sector types. Each market, country and business sector has different standpoints in implementing CSR activities and earnings management relevant to the culture, macroeconomic considerations and demands from the stakeholders. Lastly, the discernment on the relevance of building corporate citizenship on financial reporting transparency is elaborated.