The bidirectional relationship between corporate social responsibility and financial reporting quality: Does gender diversity matter? Evidence from US companies

• Published date: 01 April 2023
• Author: Mohamed Toukabri,Ines Kateb
• Date: 01 April 2023
• DOI: http://doi.org/10.1002/jcaf.22603

Received:  May  Revised:  October  Accepted:  October 

DOI: ./jcaf.

RESEARCH ARTICLE

The bidirectional relationship between corporate social

responsibility and financial reporting quality: Does gender

diversity matter? Evidence from US companies

Mohamed Toukabri1,2Ines Kateb3,4

Department of Business Administration,

College of Science and Arts in Dhahran

Al-Janoub, King Khalid University, Abha,

Kingdom Saudi Arabia

Department of Business, Faculty of

Economics and Management of Nabeul

(FSEGN), University of Carthage, Tunis,

Tunisia

Department of Accounting, Umm

Al-Qura University, Makkah Al

Mukkaramah, Kingdom Saudi Arabia

Department of Accounting, Higher

Institute of Accounting and Business

Administration (ISCAE), University of

Manouba, Manouba, Tunisia

Correspondence

Toukabri Mohamed, Department of

Business Administration, College of

Science and Arts in Dhahran

Al-Janoub, King Khalid University,

HX+Q, Abha – Kingdom Saudi

Arabia.

Email:

toukabrimohamed@gmail.com

Abstract

The aim of the paper is twofold. Firstly, to analyze the bidirectional effects

between Corporate Social Responsibility (CSR) and financial reporting qual-

ity proxied by earnings management (EM). Secondly, to investigate the moder-

ating role of board gender diversity, the gender of CEO and CFO on these two

phenomena. The study employs a Panel Data set of  listed US companies

for the period  to  ( observations). To verify a two-way relationship

between CSR and EM, we estimate a system of simultaneous equations using the

GMM estimator proposed by Arellano and Bond (). To analyze the moderat-

ing role of gender diversity, multiple regression analysis and several robustness

tests such as Propensity Score Matching and DID are adopted. Empirical results

confirm that US companies engaged in CSR activities are less motivated to

practice EM and more likely to produce high financial reporting quality. The

study confirms that Gender diversity increases board effectiveness by reducing

the level of earnings management, ensuring high quality of financial reporting,

and developing CSR activities. Findings are especially important for authori-

ties who intend to impose regulatory quotas for female board membership. The

policymakers should consider gender diversity in improving CSR practices for

society.

KEYWORDS

board gender diversity, corporate governance, corporate social responsibility, critical mass,

earnings management, female CEOs, female CFOs

1 INTRODUCTION

In recent years, corporate social responsibility (CSR) is

taking on ever greater importance in corporate strategy

and becoming more important for investors, customers,

and other stakeholders who demand greater transparency

about all aspects of the business. We observe that nearly

% of S&P  companies publishing an annual sus-

tainability report as a part of their CSR strategies. On

August , the Business Roundtable, composed of

 CEOs of America’s largest corporations, replaced a

-year-old policy statement, that defined a corporation’s

principal purpose as maximizing shareholder return,

with a new Statement declaring that “companies should

serve not only their shareholders but also deliver value

to their customers, invest in employees, deal fairly with

suppliers and support the communities in which they

operate”.

J Corp Account Finance. ;:–. ©  Wiley PeriodicalsLLC. 187wileyonlinelibrary.com/journal/jcaf

188 TOUKABRI  KATEB

Financial reporting is the main source of information

about companies. It assists users to make right deci-

sions leading to optimum allocation of resources. Earnings

and its components are the principal metric of finan-

cial performance. Consequently, the informative quality

of financial reporting will be increased if earnings man-

agement (EM) is limited. After the financial scandals over

the past decades of several large American companies

such as Enron and WorldCom, several studies attempt to

explore the relationship between CSR and EM, as a proxy

of financial reporting quality, using different theories and

approaches, nevertheless, there is no consensus in the pre-

vious literature on a clear and stable relationship between

CSR and EM.

Under agency theory, Martínez-Ferrero et al. ()

argue that CSR reporting allows managers to dissim-

ulate their opportunist behavior. The authors establish

a positive relation between CSR disclosures and earn-

ings management confirming that CSR reporting is just

a managerial tool of self-preservation and ends up hurt-

ing shareholders, employees, managers’ reputations, and

society at large (Chih et al., ; De Villiers et al., ;

Toukabri & Jilani, ; Walls & Hoffman, ). More-

over, political costs hypothesis supports that, managers

may be inclined to manage earnings to reduce sensitiv-

ity to political pressure (Watts and Zimmerman, )

and CSR reporting is considered as a company’s strategic

response to inconsistencies between financial and social

objectives (Sial et al., ). Otherwise, according to Stake-

holders and legitimacy theories, CSR reporting is expected

to be negatively related to manipulative financial report-

ing (Suyono & Farooque, ; Toukabri& Youssef, ).

Such theories, suggest that having good relationships with

various stakeholders is important to socially responsible

firms. Consequently, to preserve their long-term reputa-

tion, those firms are less incited to practice aggressive

earnings management (Kim et al., ;Mohmedetal.,

). Several research document mixed results regard-

ing the association between CSR and transparent financial

reporting. To the best of our knowledge, only one study

has attempted to verify a bidirectional effect between CSR

and EM realized by Martínez-Ferrero et al. () for a

sample of  international listed non-financial compa-

nies from  countries. The authors confirm the existence

of an inverse bidirectional relationship between CSR and

EM through discretionary accrual. We seek to bridge this

gap in the literatureby examining the two-way relationship

between CSR for large listed American companies.

As an internal governance mechanism, Arosa et al.

(), Madhani (), Toukabri and Youssef ()

demonstrate that board of directorsplays an important role

in the decision-making process and in directing the com-

pany’s attention toward CSR practices (Jamali et al., ;

Rao & Tilt, a). Certain boards of directors’ attributes

are associated with higher quality governance and higher

effectiveness in engaging in CSR practices (Muttakin et al.,

). Despite the importance of internal corporate gover-

nance mechanisms to mitigate managerial opportunistic

behavior,few studies examine the moderating role of these

mechanisms on the relationship between CSR and EM.

So, Buertley et al. (), Suyono and Al Farooque ()

include corporate governance variablessuch as managerial

ownership of equity and the size of the board of directors.

The authors confirm that board size moderates the relation

between CSR and EM. They suggest that a larger board

leads towards a more responsible managerial behavior

thus lowering EM.

After the promulgation of Norwegian law in ,

requiring public companies to have at least % female

representation on boards by , an increasing num-

ber of developed countries, such as France and Finland

have introduced gender-related governance codes. More-

over, gender diversity topic in corporate organizations

has attracted growing interest in academia. On November

, the SEC reported that .% of board members were

men, and only .% of council seats were held by women

and minorities. Consequently, % of the SEC’s investors

have demanded gender and cultural diversity disclosure

on the board. The SEC approved rules that advance this

disclosure and has changed Regulation S-K requiring com-

panies to disclose if, and how,the board considers diversity

in identifying director candidates. In , the Women on

Boards Act (SB ) was enacted to encourage fair gender

representation on Californian corporate boards. California

began as the first state in the nation to require all domes-

tic or foreign public corporations whose major executive

offices are in California to have at least one female director

on their board of directors. In , USA ranked  out of

 countries on the Global Gender Gap Index with  out

of  European Union (EU) member states.

Under the resource-based theory, Bear et al. (),

Gallego-Alvarez et al. (), Toukabri and Youssef ()

show that female directors represent a competitive advan-

tage that encourages boards to engage in social respon-

sibility activities. Recent research confirms that female

board members and managers are more willing to adopt

a stakeholders’ approach and CSR reporting than males

(Francoeur et al., ; Glass & Cook, ; Harjoto et al.,

). Based on upper echelons theory and due to human

characteristics related to the gender, female CFOs and

CEOs are more incited to satisfy other stakeholders’expec-

tations and less involved in creative accounting (Liu et al.,

). Huang and Kisgen () suggest that female CEOs

are more conservative and diligent in controlling manage-

rial practices than male executives. The authors find that

firms led by female CEOs have lower earnings volatility