Corporate Social Responsibility (CSR) Disclosure and Earnings Management

Abstract: This study examines the relationship between CSR reporting and financial reporting. Specifically, we hypothesize that firms with extensive CSR disclosure have lower levels of earnings management (EM), and that such firms thereby provide more transparent financial reports compared to other firms. We argue that CSR disclosure is associated with ethical and cultural forces, that can constrain EM. We also argue that CSR disclosure is associated with an increase in external monitoring pressures and reputational considerations, which mitigates EM. We use discretionary accruals as a proxy for EM, and we measure CSR disclosure with two dummy variables and three variables derived from a content analysis. In our bivariate analyses, we find a negative and significant relationship between CSR disclosure and EM, across all our CSR variables. In our multivariate regression analysis, we find significant results for one CSR variable. Specifically, we find that firms that issue a separate CSR report are less likely to engage in accruals manipulation.