How does corporate social responsibility decrease serious misstatement likelihood?
| DOI | http://doi.org/10.1002/jcaf.22480 |
| Author | Alex Young,Yongtao Hong |
| Published date | 01 January 2021 |
| Date | 01 January 2021 |
structure of the market. Firms with little available infor-
mation may experience higher costs of capital. The
impact of information in influencing the costs of capital
are indicated by several studies (Botosan, 1997;
Christensen, de la Rosa, & Feltham, 2010; Easley &
O'hara, 2004; Feltham, Robb, & Zhang, 2007; Huang
& Kang, 2018; Hughes, Liu, & Liu, 2007; Lambert,
Leuz, & Verrecchia, 2012; Perera & Nimal, 2017). For
instance, the rational expectations model explains the
relationship between private information and the costs of
capital. Besides, Ahn, Horenstein, and Wang (2018)
explain the effects of asymmetric information on the
asset equilibrium price.
Some researchers have shown the role of private
information in dictating the prices of assets. Bai, Bali,
and Wen (2019) for instance build on the classic analysis
of rational expectation to elucidate the role of asymmetric
information on asset value. They find that the presence
of agents in transactions affects the risk–return tradeoffs
thus affecting the portfolios held by the informed and
uninformed investors. Besides, Dow and Gorton (1995)
explains that informed investors may profit from their
information while the uninformed investors' loss due to
lack of information. The main set back of this setback is
that it does not consider the costs of capital in its
assumption.
Another set of literature considers the role of incom-
plete information and symmetric information. Particu-
larly, Amihud (2018) investigates the effects of capital
market equilibriums in situations where the agents lack
some information about certain assets in the market. In
this model, agents who have information on the existence
of certain assets may decide on the distribution of
returns. However, the information is incomplete because
not all agents have knowledge of such information. The
analysis by Amihud shows that the value of an organiza-
tion's assets may be lower due to the existence of incom-
plete information. However, in normal circumstances,
some investors may have more knowledge about returns
than others. Besides, all the investors know about the
existence of every asset in the market through the infor-
mation that may be asymmetric.
Lastly, information disclosure by a firm may affect
the costs of capital because disclosure of private informa-
tion turns it into public information (Deno, Loy, &
Homburg, 2019). The presence of public information
means that each investor has access to information
regarding investments. Since the process of producing
information is costly, individuals ought to spend consid-
erable resources to collect information. Public informa-
tion increases the value of assets and capital since the
information lowers the risks of uninformed investors to
hold assets (Gârleanu & Pedersen, 2018). Diamond and
Verrecchia (1991) state that disclosure of information can
either improve or worsen liquidity depending on the
decisions by holders of information. The accessibility of
public information affects the riskiness or profitability of
an investment. Other researchers such as Kandelousi,
Alifiah, and Karimiyan (2016) incorporate other impor-
tant elements of information sharing such as insiders and
strategic disclosure issues.
2.2 |Cost of capital
The cost of capital is the amount expected by investors
after they have offered the capital required by a business.
Mostly, the sources of capital in a firm comprises of
investors who purchase stocks and the bondholders who
offer loans to an organization (Hertig, 2019). Conse-
quently, companies are expected to make returns that
ensure that both investors and the debt holders get
expected returns on investments. The cost of capital may
entail the mechanical calculations by financial people,
which is then used by management to come up with a
hurdle or discount rate. Businesses have to exceed the
hurdle rate in justifying investments (Anderson, Byers, &
Groth, 2000).
Mostly, the costs of capital may be slightly under the
required rate of return (McNulty, Yeh, Schulze, &
Lubatkin, 2002). The costs of capital in a firm are used to
determine the soundness of an investment. Besides,
investors use the costs of capital to assess the riskiness of
an investment. Companies only choose to commit their
finances in projects whose return exceeds the costs of
capital. As such, managers should always look for invest-
ments that exceed the costs of capital in an individual
organization (Easley, O'Hara, & Yang, 2016). Conversely,
investors look at the beta or volatility of investments to
determine whether an investment is worthwhile. The
costs of capital determine the corporate strategies and the
ability of an organization to compete in the future. Busi-
nesses may use the costs of capital to make capital
budgeting decisions to offer a strategic advantage to a
firm in the short run.
Though investment opportunities' in organizations
differ, the techniques of evaluating the financial returns
are similar. However, the value of investments made an
organization depend on the profitability of the invest-
ment portfolio undertaken by a firm. The expectations
about an investment determine whether a company will
make positive or negative returns. The costs of capital
influence the hurdle rate and the capital structure in a
firm. Also, the costs of capital may determine the opera-
tions of a firm that in turn determine the profitability
(Scott & Pascoe, 1984). According to Kandelousi
TÜREGÜN 3
structure of the market. Firms with little available infor-
mation may experience higher costs of capital. The
impact of information in influencing the costs of capital
are indicated by several studies (Botosan, 1997;
Christensen, de la Rosa, & Feltham, 2010; Easley &
O'hara, 2004; Feltham, Robb, & Zhang, 2007; Huang
& Kang, 2018; Hughes, Liu, & Liu, 2007; Lambert,
Leuz, & Verrecchia, 2012; Perera & Nimal, 2017). For
instance, the rational expectations model explains the
relationship between private information and the costs of
capital. Besides, Ahn, Horenstein, and Wang (2018)
explain the effects of asymmetric information on the
asset equilibrium price.
Some researchers have shown the role of private
information in dictating the prices of assets. Bai, Bali,
and Wen (2019) for instance build on the classic analysis
of rational expectation to elucidate the role of asymmetric
information on asset value. They find that the presence
of agents in transactions affects the risk–return tradeoffs
thus affecting the portfolios held by the informed and
uninformed investors. Besides, Dow and Gorton (1995)
explains that informed investors may profit from their
information while the uninformed investors' loss due to
lack of information. The main set back of this setback is
that it does not consider the costs of capital in its
assumption.
Another set of literature considers the role of incom-
plete information and symmetric information. Particu-
larly, Amihud (2018) investigates the effects of capital
market equilibriums in situations where the agents lack
some information about certain assets in the market. In
this model, agents who have information on the existence
of certain assets may decide on the distribution of
returns. However, the information is incomplete because
not all agents have knowledge of such information. The
analysis by Amihud shows that the value of an organiza-
tion's assets may be lower due to the existence of incom-
plete information. However, in normal circumstances,
some investors may have more knowledge about returns
than others. Besides, all the investors know about the
existence of every asset in the market through the infor-
mation that may be asymmetric.
Lastly, information disclosure by a firm may affect
the costs of capital because disclosure of private informa-
tion turns it into public information (Deno, Loy, &
Homburg, 2019). The presence of public information
means that each investor has access to information
regarding investments. Since the process of producing
information is costly, individuals ought to spend consid-
erable resources to collect information. Public informa-
tion increases the value of assets and capital since the
information lowers the risks of uninformed investors to
hold assets (Gârleanu & Pedersen, 2018). Diamond and
Verrecchia (1991) state that disclosure of information can
either improve or worsen liquidity depending on the
decisions by holders of information. The accessibility of
public information affects the riskiness or profitability of
an investment. Other researchers such as Kandelousi,
Alifiah, and Karimiyan (2016) incorporate other impor-
tant elements of information sharing such as insiders and
strategic disclosure issues.
2.2 |Cost of capital
The cost of capital is the amount expected by investors
after they have offered the capital required by a business.
Mostly, the sources of capital in a firm comprises of
investors who purchase stocks and the bondholders who
offer loans to an organization (Hertig, 2019). Conse-
quently, companies are expected to make returns that
ensure that both investors and the debt holders get
expected returns on investments. The cost of capital may
entail the mechanical calculations by financial people,
which is then used by management to come up with a
hurdle or discount rate. Businesses have to exceed the
hurdle rate in justifying investments (Anderson, Byers, &
Groth, 2000).
Mostly, the costs of capital may be slightly under the
required rate of return (McNulty, Yeh, Schulze, &
Lubatkin, 2002). The costs of capital in a firm are used to
determine the soundness of an investment. Besides,
investors use the costs of capital to assess the riskiness of
an investment. Companies only choose to commit their
finances in projects whose return exceeds the costs of
capital. As such, managers should always look for invest-
ments that exceed the costs of capital in an individual
organization (Easley, O'Hara, & Yang, 2016). Conversely,
investors look at the beta or volatility of investments to
determine whether an investment is worthwhile. The
costs of capital determine the corporate strategies and the
ability of an organization to compete in the future. Busi-
nesses may use the costs of capital to make capital
budgeting decisions to offer a strategic advantage to a
firm in the short run.
Though investment opportunities' in organizations
differ, the techniques of evaluating the financial returns
are similar. However, the value of investments made an
organization depend on the profitability of the invest-
ment portfolio undertaken by a firm. The expectations
about an investment determine whether a company will
make positive or negative returns. The costs of capital
influence the hurdle rate and the capital structure in a
firm. Also, the costs of capital may determine the opera-
tions of a firm that in turn determine the profitability
(Scott & Pascoe, 1984). According to Kandelousi
TÜREGÜN 3
© 2020 Wiley Periodicals, Inc. wileyonlinelibrary.com/journal/jcaf J Corp Acct Fin. 2021;32:96–114.
96
BLIND PEER REVIEW
How does corporate social responsibility decrease serious
misstatement likelihood?
Yongtao Hong
1
| Alex Young
2
1
College of Business, North Dakota State
University, Fargo, North Dakota
2
Hofstra University, Hempstead,
New York
Correspondence
Yongtao Hong, College of Business, North
Dakota State University, Dept. 2410, PO
Box 6050, Fargo, ND 58108.
Email: yongtao.hong@ndsu.edu
Abstract
In this article, we offer two explanations for the observed negative association
between corporate social responsibility (CSR) performance and the likelihood
of serious misstatements being detected (PSMD). We find that CSR signifi-
cantly decreases the probability of engagement in a serious misstatement
(PE) in general, whereas it increases the detection probability (PD) only when
there are salient indicators of misstatement engagement. The asymmetrical
impact of CSR on the engagement probability and detection probability pro-
vides the first explanation for the lower PSMD in CSR firms. Second, we pro-
vide evidence that CSR indirectly affects PSMD by attenuating the materiality
and magnitude of misstatements. A path analysis suggests that the indirect
path accounts for 33.3% of the total impact of CSR on serious misstatement
likelihood. These findings advance our understanding of the mechanism
through which CSR reduces PSMD.
KEYWORDS
corporate social responsibility, detection likelihood, engagement probability, magnitude of
misstatements, materiality of misstatements, serious misstatement likelihood
1|INTRODUCTION
Kuang and Lee (2017) find that independent directors'
external social connectedness attenuates the likelihood of
fraud detection given the occurrence of fraud, but not the
likelihood of fraud commission. This finding echoes the call
by Dyck, Morse, and Zingales (2010) and Gow, Larcker,
and Reiss (2016) to distinguish between the probabilities of
commission and detection in serious misstatement
(accounting fraud or misstatements investigated by the
Securities and Exchange Commission [SEC]) studies. How-
ever, the distinction between these two types of probabilities
draws less attention in studies that examine the impact of
corporate social responsibility (CSR) on serious misstate-
ments. We fill this gap in the literature by studying how
CSR affects these two types of probabilities. Furthermore,
we investigate the indirect means through which CSR per-
formance decreases serious misstatement likelihood.
Even though recent studies in the misstatement liter-
ature show negative relations between CSR performance
and serious misstatements, the underlying mechanism is
still unclear (Kim, Park, & Wier, 2012; Wans, 2017). Dyck
et al. (2010) and Gow et al. (2016) point out that two
factors—the probability of engagement in misstating
financials (PE) and the probability of detection (PD)—
affect the probability of a serious misstatement being
detected (PSMD). Therefore, there are multiple ways that
CSR may affect these two factors, hence lowering serious
misstatement likelihood.
1
The first possible route is that CSR significantly
decreases PE while marginally increasing or even
decreasing PD. Two major CSR theories—stewardship
and stakeholder theories—emphasize management's
responsibilities to stakeholders rather than to share-
holders, because a firm's success depends on the support
from stakeholders, such as consumers, employees,
Received: 9 July 2020 Revised: 6 November 2020 Accepted: 11 November 2020
DOI: 10.1002/jcaf.22480
J Corp Acct Fin. 2020;1–19. wileyonlinelibrary.com/journal/jcaf © 2020 Wiley Periodicals LLC 1
HONG YOUNG 97
structure of the market. Firms with little available infor-
mation may experience higher costs of capital. The
impact of information in influencing the costs of capital
are indicated by several studies (Botosan, 1997;
Christensen, de la Rosa, & Feltham, 2010; Easley &
O'hara, 2004; Feltham, Robb, & Zhang, 2007; Huang
& Kang, 2018; Hughes, Liu, & Liu, 2007; Lambert,
Leuz, & Verrecchia, 2012; Perera & Nimal, 2017). For
instance, the rational expectations model explains the
relationship between private information and the costs of
capital. Besides, Ahn, Horenstein, and Wang (2018)
explain the effects of asymmetric information on the
asset equilibrium price.
Some researchers have shown the role of private
information in dictating the prices of assets. Bai, Bali,
and Wen (2019) for instance build on the classic analysis
of rational expectation to elucidate the role of asymmetric
information on asset value. They find that the presence
of agents in transactions affects the risk–return tradeoffs
thus affecting the portfolios held by the informed and
uninformed investors. Besides, Dow and Gorton (1995)
explains that informed investors may profit from their
information while the uninformed investors' loss due to
lack of information. The main set back of this setback is
that it does not consider the costs of capital in its
assumption.
Another set of literature considers the role of incom-
plete information and symmetric information. Particu-
larly, Amihud (2018) investigates the effects of capital
market equilibriums in situations where the agents lack
some information about certain assets in the market. In
this model, agents who have information on the existence
of certain assets may decide on the distribution of
returns. However, the information is incomplete because
not all agents have knowledge of such information. The
analysis by Amihud shows that the value of an organiza-
tion's assets may be lower due to the existence of incom-
plete information. However, in normal circumstances,
some investors may have more knowledge about returns
than others. Besides, all the investors know about the
existence of every asset in the market through the infor-
mation that may be asymmetric.
Lastly, information disclosure by a firm may affect
the costs of capital because disclosure of private informa-
tion turns it into public information (Deno, Loy, &
Homburg, 2019). The presence of public information
means that each investor has access to information
regarding investments. Since the process of producing
information is costly, individuals ought to spend consid-
erable resources to collect information. Public informa-
tion increases the value of assets and capital since the
information lowers the risks of uninformed investors to
hold assets (Gârleanu & Pedersen, 2018). Diamond and
Verrecchia (1991) state that disclosure of information can
either improve or worsen liquidity depending on the
decisions by holders of information. The accessibility of
public information affects the riskiness or profitability of
an investment. Other researchers such as Kandelousi,
Alifiah, and Karimiyan (2016) incorporate other impor-
tant elements of information sharing such as insiders and
strategic disclosure issues.
2.2 |Cost of capital
The cost of capital is the amount expected by investors
after they have offered the capital required by a business.
Mostly, the sources of capital in a firm comprises of
investors who purchase stocks and the bondholders who
offer loans to an organization (Hertig, 2019). Conse-
quently, companies are expected to make returns that
ensure that both investors and the debt holders get
expected returns on investments. The cost of capital may
entail the mechanical calculations by financial people,
which is then used by management to come up with a
hurdle or discount rate. Businesses have to exceed the
hurdle rate in justifying investments (Anderson, Byers, &
Groth, 2000).
Mostly, the costs of capital may be slightly under the
required rate of return (McNulty, Yeh, Schulze, &
Lubatkin, 2002). The costs of capital in a firm are used to
determine the soundness of an investment. Besides,
investors use the costs of capital to assess the riskiness of
an investment. Companies only choose to commit their
finances in projects whose return exceeds the costs of
capital. As such, managers should always look for invest-
ments that exceed the costs of capital in an individual
organization (Easley, O'Hara, & Yang, 2016). Conversely,
investors look at the beta or volatility of investments to
determine whether an investment is worthwhile. The
costs of capital determine the corporate strategies and the
ability of an organization to compete in the future. Busi-
nesses may use the costs of capital to make capital
budgeting decisions to offer a strategic advantage to a
firm in the short run.
Though investment opportunities' in organizations
differ, the techniques of evaluating the financial returns
are similar. However, the value of investments made an
organization depend on the profitability of the invest-
ment portfolio undertaken by a firm. The expectations
about an investment determine whether a company will
make positive or negative returns. The costs of capital
influence the hurdle rate and the capital structure in a
firm. Also, the costs of capital may determine the opera-
tions of a firm that in turn determine the profitability
(Scott & Pascoe, 1984). According to Kandelousi
TÜREGÜN 3
structure of the market. Firms with little available infor-
mation may experience higher costs of capital. The
impact of information in influencing the costs of capital
are indicated by several studies (Botosan, 1997;
Christensen, de la Rosa, & Feltham, 2010; Easley &
O'hara, 2004; Feltham, Robb, & Zhang, 2007; Huang
& Kang, 2018; Hughes, Liu, & Liu, 2007; Lambert,
Leuz, & Verrecchia, 2012; Perera & Nimal, 2017). For
instance, the rational expectations model explains the
relationship between private information and the costs of
capital. Besides, Ahn, Horenstein, and Wang (2018)
explain the effects of asymmetric information on the
asset equilibrium price.
Some researchers have shown the role of private
information in dictating the prices of assets. Bai, Bali,
and Wen (2019) for instance build on the classic analysis
of rational expectation to elucidate the role of asymmetric
information on asset value. They find that the presence
of agents in transactions affects the risk–return tradeoffs
thus affecting the portfolios held by the informed and
uninformed investors. Besides, Dow and Gorton (1995)
explains that informed investors may profit from their
information while the uninformed investors' loss due to
lack of information. The main set back of this setback is
that it does not consider the costs of capital in its
assumption.
Another set of literature considers the role of incom-
plete information and symmetric information. Particu-
larly, Amihud (2018) investigates the effects of capital
market equilibriums in situations where the agents lack
some information about certain assets in the market. In
this model, agents who have information on the existence
of certain assets may decide on the distribution of
returns. However, the information is incomplete because
not all agents have knowledge of such information. The
analysis by Amihud shows that the value of an organiza-
tion's assets may be lower due to the existence of incom-
plete information. However, in normal circumstances,
some investors may have more knowledge about returns
than others. Besides, all the investors know about the
existence of every asset in the market through the infor-
mation that may be asymmetric.
Lastly, information disclosure by a firm may affect
the costs of capital because disclosure of private informa-
tion turns it into public information (Deno, Loy, &
Homburg, 2019). The presence of public information
means that each investor has access to information
regarding investments. Since the process of producing
information is costly, individuals ought to spend consid-
erable resources to collect information. Public informa-
tion increases the value of assets and capital since the
information lowers the risks of uninformed investors to
hold assets (Gârleanu & Pedersen, 2018). Diamond and
Verrecchia (1991) state that disclosure of information can
either improve or worsen liquidity depending on the
decisions by holders of information. The accessibility of
public information affects the riskiness or profitability of
an investment. Other researchers such as Kandelousi,
Alifiah, and Karimiyan (2016) incorporate other impor-
tant elements of information sharing such as insiders and
strategic disclosure issues.
2.2 |Cost of capital
The cost of capital is the amount expected by investors
after they have offered the capital required by a business.
Mostly, the sources of capital in a firm comprises of
investors who purchase stocks and the bondholders who
offer loans to an organization (Hertig, 2019). Conse-
quently, companies are expected to make returns that
ensure that both investors and the debt holders get
expected returns on investments. The cost of capital may
entail the mechanical calculations by financial people,
which is then used by management to come up with a
hurdle or discount rate. Businesses have to exceed the
hurdle rate in justifying investments (Anderson, Byers, &
Groth, 2000).
Mostly, the costs of capital may be slightly under the
required rate of return (McNulty, Yeh, Schulze, &
Lubatkin, 2002). The costs of capital in a firm are used to
determine the soundness of an investment. Besides,
investors use the costs of capital to assess the riskiness of
an investment. Companies only choose to commit their
finances in projects whose return exceeds the costs of
capital. As such, managers should always look for invest-
ments that exceed the costs of capital in an individual
organization (Easley, O'Hara, & Yang, 2016). Conversely,
investors look at the beta or volatility of investments to
determine whether an investment is worthwhile. The
costs of capital determine the corporate strategies and the
ability of an organization to compete in the future. Busi-
nesses may use the costs of capital to make capital
budgeting decisions to offer a strategic advantage to a
firm in the short run.
Though investment opportunities' in organizations
differ, the techniques of evaluating the financial returns
are similar. However, the value of investments made an
organization depend on the profitability of the invest-
ment portfolio undertaken by a firm. The expectations
about an investment determine whether a company will
make positive or negative returns. The costs of capital
influence the hurdle rate and the capital structure in a
firm. Also, the costs of capital may determine the opera-
tions of a firm that in turn determine the profitability
(Scott & Pascoe, 1984). According to Kandelousi
TÜREGÜN 3
suppliers, and local communities (Crane, Matten, &
Spence, 2013). These two theories suggest that managers
in more socially responsible firms hold higher ethical and
moral beliefs and tend to adhere to a higher standard of
behavior; therefore, they are less likely to engage in seri-
ous misstatements, which are detrimental to stake-
holders' interests. While CSR may deter an overall
engagement by management, its impact on the detection
likelihood is limited. Palmrose, Richardson, and
Scholz (2004) identify three major misstatement detec-
tion forces—firms, auditors, and the SEC. It is rational to
expect that CSR only affects firm managers, not the
detection activities conducted by auditors or the SEC.
Furthermore, its impact on managers merely reflects in
their stronger willingness, but not their enhanced exper-
tise in detecting misstatements. Therefore, we posit that
CSR might increase PD only marginally. Then, why is
there a possibility that CSR could decrease PD? It is
attributable to the reputation effect of CSR. Tran and
O'Sullivan (2020) find that the SEC is less likely to inves-
tigate misstating firms due to their prestigious CSR repu-
tation. Lack of SEC investigation would result in a lower
likelihood that a misstatement—being detected by either
firms or auditors—is labeled as serious. If this reputation
effect plays a dominant role in detection, we would
expect to observe a lower PD in CSR firms.
On the other hand, moral licensing and agency theo-
ries suggest that high CSR firms may engage in more seri-
ous misstatements, but still have a lower PSMD if they
decrease PD significantly enough. These two theories
argue that managers take CSR initiatives to achieve
opportunistic goals, such as building their own socially
responsible reputation (Petrovits, 2006; Prior, Surroca, &
Tribó, 2008), or disguising destructive activities
(Bauer, 2014; Lin, Johnson, & Ma, 2016). Moreover, man-
agers may use CSR as a window-dressing instrument to
respond passively to external demand for more socially
responsible activities (Aerts et al., 2006). In any of these
cases, CSR is not reflecting managers' moral and ethical
beliefs. On the contrary, if CSR is a tool used to obtain
personal benefits, it is rational to expect that a firm's CSR
performance would be positively associated with PE. In
this case, managers have incentives to camouflage serious
misstatements, hence enhancing the difficulty in
detecting misstatements and lowering PD. The net effect
is a lower PSMD in high CSR performance firms.
In addition to the first two routes that directly affect
PE and PD, CSR may channel its impact through indirect
ways by constraining management from committing
material and large scale earnings-increasing misstate-
ments, because these types of misstatements are more
detrimental to investor welfare (Land, 2006; Palmrose
et al., 2004) and greatly challenge their moral beliefs.
This constraint lowers the likelihood that a misstatement
being detected is eventually classified into the serious cat-
egory due to the absence of SEC investigations.
Then, which one(s) of the above routes CSR takes to
attenuate PSMD is an empirical question. In order to
address this question, we examine a sample of misstate-
ments from 2000 to 2013 provided by the Audit Analytics
database. Our predictor variable of primary interest is
CSR performance. We measure CSR by following the
models in Kim et al. (2012) and Hong and Ander-
sen (2011). The measurement of dependent variables is
challenging because managers' engagement in serious
misstatements are only partially observable (Kuang &
Lee, 2017; Wang, Winton, & Yu, 2010). We use two of the
arguably best proxies —M-score developed in
Beneish (1999), F-score in Dechow, Ge, Larson, and
Sloan (2011)—as well as the intersection of these two
scores (FMDummy) to capture the engagement probabil-
ity. We develop three corresponding measures of PD by
setting the detection dummy to one, if a serious misstate-
ment has been detected in a misstatement-suspicious
firm-year that is red flagged by M-score, F-score, or FM
Dummy, and zero otherwise. Following the literature, we
use Big-R to capture the materiality of misstatements
(Burks, 2010; Plumlee & Yohn, 2008), and estimate the
restated income to gauge the magnitude of misstatement.
We expect that CSR has a greater impact on income-
decreasing restatements, since they are more concerning
to investors (Land, 2006; Palmrose et al., 2004).
Test results show that CSR is negatively and signifi-
cantly associated with all three measures of PE for the
full sample, but enhances PD only in a subsample where
there are salient indicators of PE, hence lending support
to stewardship and stakeholder theories that it is the
asymmetrical impact of CSR on PE and PD that results in
PSMD. Further tests reveal that CSR is negatively
associated with the materiality and magnitude of
misstatements, especially the magnitude of serious
income-increasing misstatements (income-decreasing
restatements). A two-stage linear regression model indi-
cates that the part of materiality and magnitude
decreased by CSR is significantly and negatively associ-
ated with PSMD. A path analysis shows that the indirect
effect through channels of materiality and magnitude
reduction contributes to 17.9 and 15.4% of CSR's total
effect on PSMD, respectively.
We conduct a number of robustness tests to address
endogeneity issues. Becker (1968) suggests that manage-
ment's decision to engage in serious misstatements may
intertwine with its evaluation of detection probability.
Furthermore, the survivorship bias and omitted variables
may result in biased coefficient estimates. We address the
above concerns by using bivariate probit models to test
2HONG AND YOUNG
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