The Relationship between CSR Disclosure Quality and Accrual and Real Earnings Management: Large-Scale Evidence from India

Abstract

The aim of the current research is to investigate the association between the disclosure quality of corporate social responsibility (QCSRD) and both real earnings management (REM) and accruals earnings management (AEM) in Indian listed companies from 2007 to 2015. Prior research in this area has substantiated that disclosure of corporate social responsibility (CSRD) is related to earnings management (EM) (Yip et al., 2011; Muttakin et al., 2015). However, the empirical findings remain inconclusive with regard to whether commitment to CSRD has a negative or a positive impact on EM and vice versa. These puzzling results may be due to differences in their measurement of CSRD and EM. The methods of measuring CSRD that have been employed when examining the relationship with EM do not consider the QCSRD, which is important for distinguishing the information provided to users. Therefore, this research examined the association between QCSRD and EM in India. QCSRD is measured through a framework, which has been developed by this study, to capture three dimensions: the quantity of CSRD; the spread of CSRD and the usefulness of CSRD (characteristics of CSRD). It is also the first research to provide a broad examination of the influence of CSR reporting on both real and accrual earnings management. AEM is measured through the modified Jones model (1995), REM is estimated by employing Dechow et al.’s (1998) model. The study results indicate that the QCSRD is negatively and significantly associated with both AEM and REM. This is consistent with the moral perspective and assumes that companies with low levels of QCSRD engage more in real or accruals-based earnings management compared to those companies with a higher level of QCSRD. The study findings are also in line with signalling and agency theory suggesting that, by providing QCSRD, companies may mitigate information asymmetry and the problem of conflicting interests.