Corporate Social Responsibility Reporting and Earnings Management: The Role of Political Costs

Abstract

Recently, Francis, Nanda and Olsson (2008) proposed that earnings quality influence firms’ disclosure decisions. We examine whether Corporate Social Responsibility (CSR) disclosure is related to earnings management and if the relationship is mitigated by political cost considerations or by the firm’s ethical predisposition. We argue that the relationship between CSR reporting and earnings management is context-specific and we consider one particular context, the political environment. We test our hypotheses by regressing earnings management on CSR disclosure while controlling for other factors that may affect the level of earnings management. We find a significant relationship between CSR reporting and earnings management, and more specifically, we find evidence of a negative (complementary) relationship in the oil and gas industry while we find evidence of a positive (substitutive) relationship in the food industry. The evidence supports the view that the relationship between CSR reporting and earnings management is affected by the political environment and not by ethical considerations.

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