The Link between CSR and Earnings Management : A Quantitative Study in the Manufacturing Sector of the EU

Abstract: Purpose: The aim of this thesis is to examine the link between CSR and EM in the EU manufacturing sector. The former is measured by ESG scores whereas the latter is approximated by discretionary accruals. Moreover, the corporate governance theories of stakeholder and agency are used as starting points. Method: Accruals are calculated using the so-called Modified Jones model. A linear regression equation with five variables is used to calculate the effect of CSR scores on the levels EM. In order to capture the difference, if any, regarding the link between CSR and EM between companies with high CSR scores and those with lower scores, three models are developed – the top 30 percent (model 1), the bottom 70 percent (model 2) and all companies (model 3). Findings: The results indicate CSR scores negatively affect the levels of EM. The causation is statistically significant. Implication: The findings of this study imply CSR practices are not used to hide weaker earnings in the manufacturing sector of the EU. Value: The study contributes to the literature on the link between CSR and EM by focusing on a specific sector that is often scrutinized for its negative environmental footprint. The choice of using three models is also seen to be of additional value.