Investigating the association between corporate social responsibility and earnings management within a European context

This study intends to investigate the association between corporate social responsibility (CSR) engagement and earnings quality for a sample of European firms. The present study examines whether firms use corporate social responsibility practices as a protection from the negative impact that engaging in earnings management (EM) might have upon a firm’s (and its management) reputation. The authors use panel-data methodology for a sample of 13.200 firm-year observations of non-financial European firms. Empirical findings provide evidence that there is a positive association between EM and corporate social responsibility. This result is robust even when alternative measures for accruals quality are used. This study enhances the literature on the explanation of the positive relationship between EM and corporate social responsibility engagement for European firms, identifying that firms employ CSR as a preventative measure to avoid the negative impact that might ensue when a firm is perceived to adopt EM policies. Key words: Earnings management, corporate social responsibility, discretionary accruals, earnings quality, European firms.