CSR and Earnings management The link between CSR and company financial

performance has been intensely examined in prior studies and showed a positive
relationship between CSR and financial performance (Freeman 1984; Sen et al.
2006; Barney, 1991; Jones, 1995; Margolis and Walsh 2001). Good CSR image was
proved to be able to improve relationship between company and stakeholders
(Waddock and Graves, 1997a; Fombrun and Shanley; 1990). Better relationships
with firm stakeholders can enhance a firms sustainability and financial performance
(Legnick-Hall 1996; Whitehouse 2006). However, researches rarely discussed about
whether the financial performance was manipulated in order to gain better CSR
image, or vice versa. Attig et al.(2013) indicated that CSR investmentsparticularly
those that extend beyond compliance behavior to reflect what is desired by society
can lead to lower financing costs resulting from higher credit ratings. That is, the
control of CSR investments to fulfill the societys anticipation can get a better rating
from outsiders. Hoi, Wu and Zhang(2013) examined the empirical association
between CSR and tax avoidance and find that firms with excessive irresponsible CSR
activities have a higher likelihood of engaging in tax-sheltering activities and
greater discretionary/permanent book-tax differences. Their study result revealed
the relationship CSR and earnings management. Previous explorations of CSR were
often founded on the assumptions of Agency Theory. In other words, managers are
driven by self-interest, viewing CSR as simply a tool, and promoting CSR activity
only when it yields benefits (Dhaliwal, Tsang, & Yang, 2011; Friedman, 1970; Karnani
2010; Shank, Manullang, & Hill, 2005). For example, Kim and Venkatachalam (2011)
indicated that in the gambling and tobacco industries, corporations developed CSR
to improve their business reputations. Based on this self-interest perspective,
scholars discovered that corporations invested in CSR to camouflage earnings
managements, resulting in a negative relationship between CSR and the quality of
financial reports (Prior et al., 2008). However, certain scholars indicated that CSR
affected the quality of financial reports in various ways depending on proxy
variables (Chih, Shen, & Kang, 2008).