The relationship between corporate social responsibility and earnings management: accounting for endogeneity

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This study examines the relationship between corporate social responsibility (CSR) and earnings management after controlling for endogeneity of CSR. Using a sample of non-financial firms listed on Korean Securities Market between 2002 and 2010, this study finds that ignoring endogeneity biases the estimated relation between CSR and earnings management. Specifically, the results show that the negative and significant relation between CSR commitment and discretionary accruals reported in the previous studies becomes insignificant. However, the negative and significant relation between CSR commitment and real activities manipulation remains significant even when the endogeneity of CSR commitment is taken into account. Therefore, this study provides evidence that proactive CSR engagement significantly affects firm’s practice of real activities manipulation, while it does not affect its practice of discretionary accruals. These results indicate that CSR commitment leads managers to be more responsible in management of operational activities than in accruals management.

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    • Figure 1. CSR budget trend of Korean companies
    • Figure 2. Endogeneity concerns in CSR engagement
    • Table 1. Sample distribution
    • Table 2. Descriptive statistics
    • Table 3. Correlation matrix
    • Table 4. OLS regression of earnings management on corporate social responsibility
    • Table 5. Heckman second stage regression of earnings management on corporate social responsibility
    • Table 6. Differencing regression of earnings management on corporate social responsibility
    • Table A1. Definitions of variables