(The relationship between Earnings Management and Corporate Social Responsibility (Evidence from US listed companies

Abstract

The aim of the current study is to investigate the relationship between earnings management (EM) and corporate social responsibility (CSR) in the context of the USA for the firms listed in the Standard & Poor’s (S&P) 500 index for the period 2009-2019, as outcomes from the previous studies demonstrate that the relationships between EM are mixed and inconclusive. The current study has used the modified Jones model as the discretionary accrual model to estimate EM, and to assess the performance of the CSR; this study has used the Thomson Reuter Eikon’s ESG score. Additionally, this study includes five control variables to assess the correlation between EM and CSR. The final sample for this study contains 1,000 firms with 1,000 firm-year observations for the period of 2009-2019.

The data analysis has demonstrated that the average EM of the firms included in the current study’s sample is 0.23, with the lowest and the highest values of EM for the sample firms at 0.10 and 0.37, respectively. Therefore, it can be concluded that the firms in the S&P 500 constituent have lower levels of EM, which suggest that the firms have higher levels of earnings quality. The lower level of prevailing EM among the firms in the USA can be attributed to the firms’ characteristics and country’s rules and regulations. Additionally, this study has found that there exists a negative relationship between CSR and EM. Thus, this study concludes that CSR activities might be used as an organisational mechanism that can result in more effective employment of firm’s resources, which can eventually affect EM practices negatively. The findings of the study have academic, managerial, and policy implications.