Takeaway: Socially responsible firms tend to be more prudent in accounting and operating decisions, providing more transparent financial information. This more careful approach to financial reporting serves the interests of all stakeholders and reflects the ethical concerns of managers in these companies. It also makes socially responsible firms more attractive to investors concerned with transparency in financial reporting.
Suggested audience: Chief financial officers, corporate citizenship managers, investors
This study examined whether socially responsible firms behave differently in making accounting and operating decisions and deliver more transparent and reliable financial information to investors. It suggests that CSR plays an important role in limiting the practice of earnings management (the use of accounting techniques to adjust earnings over fiscal years).
Researchers matched KLD data on firms’ social responsibility with the Compustat database of financial information for 23,391 firm-year observations from 1991 to 2009. The sample excludes financial institutions.
The researchers used three measures of earnings quality and management:
Discretionary accruals – Non-obligatory expenses, such as an anticipated bonus for management
Real activities manipulation – Management actions that deviate from normal business practices undertaken for purposes of meeting or beating certain earnings thresholds
Accounting and Auditing Enforcement Releases – SEC investigations of top executives for violations of generally accepted accounting principles (GAAP)
Researchers controlled for reputation concerns and financial performance as other motivations for more transparent and reliable financial information.
- Firms with more favorable CSR scores tend to be more careful in accounting and operating decisions, providing more transparent financial information.
- Firms with higher CSR concerns are associated with more aggressive financial reporting.
- Firms with more favorable CSR scores are less likely to:
- Manage earnings through discretionary accruals
- Manipulate real operating activities to meet earnings targets
- Be the subject of SEC investigations of top executives for GAAP violations
Key words: corporate social responsibility; transparency in financial reporting; earnings management; discretionary accruals; real activities manipulation
If citing, please refer to original article: “Is Earnings Quality Associated with Corporate Social Responsibility?” Vol. 87, No. 3, 2012, pp. 761–796, Yongtae Kim, Santa Clara University, Myung Seok Park and Benson Wier, Virginia Commonwealth University