Earnings management: A new paradigm of corporate social responsibility

AuthorMaaida H. Hashmi,Sadaf Ehsan,Mohammad Nurunnabi,Samya Tahir
Date01 September 2020
Published date01 September 2020
Bus Soc Rev. 2020;125:349–369.
Received: 29 January 2020
Accepted: 4 February 2020
DOI: 10.1111/basr.12198
Earnings management: A new paradigm of
corporate social responsibility
Maaida H.Hashmi1
© 2020 W. Michael Hoffman Center for Business Ethics at Bentley University. Published by Wiley Periodicals, Inc., 350 Main Street, Malden,
MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.
1Department of Management Sciences,
COMSATS University Islamabad, Lahore,
2St Antony's College, University of Oxford,
Oxford, UK
3Department of Accounting, Prince Sultan
University, Riyadh, Saudi Arabia
Mohammad Nurunnabi, St Antony's
College, University of Oxford, 62
Woodstock Road, Oxford OX2 6JF, UK.
Email: mnurunnabi@psu.edu.sa,
The study adopted a systematic review approach to review
the existing studies on the relationship between corporate
social responsibility (CSR) and Earnings Management
(EM). The aim of this study is to determine whether CSR
is an effective tool to promote healthy relationships with
stakeholders or CSR is used as an effective strategy by
firm's mangers to hide out their involvement in (EM) prac-
tices. Results revealed that prior research on the CSR-EM
relationship is limited. The majority of the studies found
an inverse relationship between CSR and EM. Moreover,
mixed results were reported because of the lack of sufficient
theoretical support, inappropriate research designs, and var-
ying approaches to measure CSR and EM. This study also
synthesizes the various consistencies and inconsistencies
in the existing literature of CSR-EM and future research
agenda. Policymakers should reward organizations that pur-
sue CSR purely for social and environmental concerns and
at the same time they should be vigilant for those which use
CSR for shielding their EM practices.
corporate social responsibility, earnings' management, systematic review
After the twentieth century's corporate scandals(Xerox, Enron, Toshiba, Satyam Computer Servives
etc.), accounting earnings have attracted the attention of researchers, regulators, investors, share-
holders, and other constituents of firms, making it one of the most frequently investigated areas of
firms' performance statistics. The information asymmetry between a firm's insiders and outsiders,
the imperfect system of auditing, and the varying nature of accounting principles in treating firms'
accruals allows managers to manage their reported earnings to gain personal benefits or signal pri-
vate information to stakeholders (Healy & Wahlen, 1999) and that is called Earnings management
However, EM can have severe consequences because these short-term tactics, undertaken to
achieve short-term benefits, are often harmful to firms' long-term sustainability. One of the far-reach-
ing consequences of EM is the loss of credibility of a firm's financial reports, resulting an increase
in the activism and vigilance of the firm's internal and external stakeholders and a decrease in their
support (Choi, Lee, & Park, 2013). A firm's transparency and accountability in disclosing financial
information are critical to its ability to gain the support of its stakeholders and to maintain long-term
relationships. From this perspective, accurate financial reporting is closely related to corporate social
responsibility (CSR), as CSR encourages the firm to integrate social, ethical, and moral consider-
ations into its goals and to make decisions that protect the interests of a wide range of stakeholders,
including employees, customers, suppliers, investors, communities, the environment, and regulators,
to foster long-term relationships (Koehn & Ueng, 2010). Thus, financial transparency and reliability
are increasingly considered to be key elements in a firm's CSR strategy because of their importance
for shareholders and other stakeholders, including at all levels of society.
Voluminous research on CSR has been produced to determine what encourages firms to engage
in social activities. Much of the debate has focused on investigating the relationship between CSR
and financial performance (FP) and has tended to show that CSR has a positive effect on firms' FP.
However, the mechanism through which a firm enhances its FP through CSR activities has not been
well explained (Doh, Bunyaratavej, & Hahn, 2009). Therefore, clarifying the larger issue in this debate
concerning how a firm integrates CSR into its overall strategy (Jawahar & McLaughlin, 2001; Koehn
& Ueng, 2010), such as how a firm's CSR is influenced or influenced by its earnings quality, can help
to determine whether CSR restricts EM or is used by managers as a strategic shield to hide their op-
portunistic behavior in manipulating accounting numbers (Gras-Gil, Manzano, & Fernández, 2016).
However, the literature that explores the social indulgence of corporations through the lens of EM is
underdeveloped. Although a few studies have attempted to explore the CSR-EM relationship, they
have produced mixed and contradictory findings that create problems in clarifying this relationship.
One school of thought supported the negative relationship between CSR and EM under the long-
term perspective which posits that firms that endorse CSR are less likely to use EM because they are
concerned not only about their short-term profits but also about their long-term sustainable perfor-
mance for which building good relationships with broader range of stakeholders are of great impor-
tance (Chih, Shen, & Kang, 2008; Cho & Chun, 2015; Choi et al., 2013; Gras-Gil et al., 2016; Kim,
Park, & Wier, 2012). Therefore, they tend to report high-quality financial information. There is also
an opposite school of thought, according to which CSR is positively related to EM under the manage-
rial opportunism hypothesis (Grougiou, Leventis, Dedoulis, & Owusu-Ansah, 2014; Prior, Surroca,
& Tribó, 2008). This view contends that firms' managers and executives use CSR to hide their EM
practices by encouraging admiration from stakeholders to mask their opportunistic behavior.
There are certain factors involved in these inconsistent findings. One of the important factors is the
lack of consensus among researchers on the direction of causation in this relationship. Only a few stud-
ies checked the directions of causation and observed this relationship in both directions and all of these

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