The Impact of CSR on Earnings Quality in UK listed firms

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Saudi Digital Library
Ethics and earnings quality and interrelated concepts due to the elevation of earnings quality based on the involvement of the business in ethical activities. It is also ethical for the business to present its financial performance without any fabrication that leads to high earnings quality. Ethical activities in the form of CSR can be an indicator of high earnings quality however, the same CSR can also be used as a tool for covering the unethical activities such as earnings management. The relationship between CSR and earnings quality considered in this research in respect of firms listed on FTSE350. CSR started as a discretionary initiative for organisations to differentiate their operations from competitors. However, gradually CSR developed as an obligatory activity that enhances the organisation legitimacy to operate. CSR has a relationship with earnings quality because CSR can act as an underlying factor for enhancing earnings quality. Earnings quality is a predictor of future earnings as if current earnings cannot be used as an indicator for future earnings then earnings quality can be considered as low. A business involved in CSR expected to have high earnings quality because the CSR itself can be a source of motivation for the management to report the earnings appropriately. In addition, maintaining high earnings quality is itself an aspect of CSR as it assists the market forces to improve the quality of their decisions. Discretionary accrual is a common method applied for earnings manipulation however, a CSR firm can avoid discretionary accrual to report the earnings appropriately. CSR relies on the economic development in a country, so the earnings quality in the market also relies on the economic development in the country. In the UK, CSR has come a long way in which there had been corporate scandals and other issues that lead to regulatory development and other aspects to strengthen the market pillars. Theoretically, CSR can be considered with respect to its association with stakeholder management and reputation management. Nonetheless, most organisation are aiming to pursue CSR for gaining financial objectives (Orlitzky et al., 2003). Therefore, if CSR is leading to the achievement of financial objectives along with stakeholder management then the organisation can potentially be motivated to achieve other financial objectives by managing earnings hence earnings quality can be low. Stakeholder management through CSR can be incomplete if the dimension of the stakeholder theory will not be taken into consideration. Stakeholder theory diminishes the difference between economic and social goals of an organisation hence with the aim of securing the corporation survival motive, the management can potentially incline to adopt approaches that can eventually decrease the earnings quality. It implies that the relevance of agency theory to CSR is not an indicator of ethical compliance by the organisation therefore, theoretically, CSR cannot be an absolute indicator of high earnings quality. The research has explored the deemed relationship between CSR and earnings quality by considering the firms listed on FTSE 350. Prior to this research, empirical evidence showed a relationship between CSR and factors like transparency, financial reporting and other factors. The data from 2007 to 2017 of 217 firms listed on FTSE 350 lead to findings for the research be considering earnings quality as the dependent variable and several independent variables. The LSDV regression and OLS regression revealed a slightly different outcome. In the case of LSDV regression, earnings quality has no relationship with earnings quality. The findings of LSDV regression is contrary to the research hypothesis where earnings quality was expected to be either positively or negatively related to CSR. However, SIZE of the firms has identified to be negati