The Association Between Corporate Social Responsibility and Earnings Management: Studying the Moderating Effects of Country-Specific Formal and Informal Institutions

Abstract

This research studies the moderating effects of formal and informal institutional factors on the relationship between Corporate Social Responsibility (CSR) and earnings management (EM). Prior knowledge has provided mixed results when studying the effect of CSR on EM. In order to provide more in-depth insights in the relationship between CSR-EM, the moderating effects of investor protection (formal) and Hofstede’s culture dimensions (informal) are tested. By means of 4347 observations across 17 different countries over the period of 2010-2018, statistical analyses were performed. The results indicate that more power distance within a country leads to a more negative effect of CSR on EM and more individualism and less collectivism within a country leads to more positive effect of CSR on EM. The robustness tests indicate that both the main effect of CSR as well as the moderating effects of uncertainty avoidance differ for firms located in civil law countries compared to firms located in common law countries. This research provides insights for managers, by proving managers have to take the cultural standards of a country into account when they face a decision-making situation which concerns either CSR, EM or both of them.