Accounting for Diversity: Studying the Effects of Community on CSR and Earnings Quality

Abstract

This doctoral thesis examines three interrelated topics. First, it reviews and analyzes the literature that examines the association between religion and Corporate Social Responsibility (CSR). Second, it empirically investigates the association between religious diversity and CSR. Finally, it empirically investigates the association between community diversity and earnings quality. Initially, this thesis has been motivated by the claims offered by social psychology theories, which provide evidence to suggest that religious communities play a crucial role in positively influencing individual values, economic decisions, business ethics decisions, and, particularly, firms’ decisions concerning CSR initiatives. Hence, in the first research paper of this thesis, the author reviews the literature on the association between religiosity and CSR. After analyzing the results of the first research paper, the author, in the second research paper, builds on previous empirical studies in the literature to empirically examine the influence of multiple religions living in the same region on CSR, an aspect that has not been examined in prior studies. In the third research paper, the author expands the forms of diversity to include race, religion, age, and gender diversity to examine its influence on firms’ ethical behavior, specifically, on earnings quality. The purpose of the first paper is to critically review and analyze relevant theoretical and empirical studies in the literature that examine the relationship between religious communities in which firms are headquartered and firms’ related categories of CSR. The analysis of such literature suggests that there is a lack of theoretical studies that investigate this relationship. Furthermore, there is a need for empirical studies that investigate the association between religious communities and firms’ policies toward financial, social, and environmental categories of CSR. To the best of my knowledge, this paper is the first study that reviews and analyzes this area of research. Therefore, it provides guidelines to reinforce our understanding of this relationship. It also serves as a base for current and future accounting research interested in investigating this relationship. The second paper utilizes institutional and stakeholder theories to empirically investigate the extent to which religiously diverse communities, in which firms are headquartered, are associated with firms’ CSR initiatives and, in particular, community initiatives. Using a sample of U.S. firms, and data from 2005 to 2015, the findings of this paper document a positive association between religious diversity and CSR initiatives. This paper adds a factor, religious diversity, which despite its importance, has not been considered in prior studies. Hence, this paper sheds more light on the understanding of the growing literature on the relationship between religious societies and CSR initiatives. The third paper examines whether community diversity (in terms of race, religion, gender, age) can appropriately restrain earnings management, thereby leading to better earnings quality. Drawing on institutional theory, this paper assesses whether firms with headquarters in counties with diverse communities generate earnings of high quality. Using a sample of U.S. firms, from 2000 to 2016, the results of this paper indicate that all dimensions of community diversity are negatively associated with earnings management, leading to higher earnings quality. Moreover, these dimensions complement each other, as the decrease in earnings management is higher when the four dimensions are considered concurrently. These results are robust to the use of various alternative earnings management measures and do not depend on the intensity of the most common category of the dimensions analyzed. This paper contributes to the literature by examinin