Journal of Financial Reporting and Accounting

Do dimensions of corporate social responsibility affect earnings management? Evidence from France
Anis Ben Amar, Salma Chakroun,
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 Do Dimensions of Corporate Social Responsibility Affect Earnings
Management? Evidence from France
Anis Ben Amar
Department of Accounting and Law
Graduate Business School of Sfax, University of Sfax
Airport Road km 4.5 – BP, n 1081–3018, Sfax, Tunisia
Email: anisbenamar44@yahoo.fr

Salma Chakroun
Ph. D student in Accounting
Faculty of Economics and Management, University of Sfax, Tunisia.
Email: salma.chakroun@yahoo.fr
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Abstract

Purpose

This paper examines the impact of Corporate Social Responsibility on earnings management

measured by discretionary accruals based on Dechow et al. (1995) model with CFO.

Design/methodology/approach

This study uses a sample of 119, French non-financial companies, listed on the CAC All

Tradable index for the 2010-2014 period. All used regressions for the analysis are estimated

based on panel data with random-effects.

Findings

Based on a panel data of 595 French firm-year observations during the period 2010–2014, we

find a negative impact of CSR on earnings management. We find, also, that some CSR

dimensions negatively impact earnings management.

Practical implications
These results suggest several implications for regulatory in France, as well as those in other

countries who try to implement CSR activities.

Originality/value

The originality of our work lies in the division of CSR into sub-dimensions defined by the

ISO 26000 standard. This division reduces the complexity of societal reality and obeys a

1
 coherent institutional logic. In addition, it enables the operationalization of CSR in a new way

so that we can determine the impact of CSR on earnings management.

Keywords

Corporate Social Responsibility, Earnings Management, Corporate Social Responsibility

Dimensions, Corporate governance

1. Introduction

The concept of earnings management has long attracted the attention of practitioners,
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researchers and regulators (Chen et al., 2010, Shu and Chiang, 2014, Wen Chi et al., 2015,

Gras-Gil et al., 2016). Indeed, as long as it does not constitute a fraud, managers can use

earnings management under generally accepted accounting principles (GAAP) in order to

adjust results to their own benefit (Dechow et Skinner, 2000). Accordingly, however, the

financial situation does not provide an accurate reflection of the actual situation of the

company. Healy and Wahlen (1999, p. 368) define earnings management as occurring “when

managers use judgment in financial reporting and in structuring transactions to alter financial

reports either to mislead some stakeholders about the underlying economic performance of

the company or to influence contractual outcomes that depend on reported accounting

numbers.” We can distinguish between two perspectives of earnings management: the

opportunistic perspective and the signaling or informational perspective. According to the

opportunistic perspective, the manager uses discretionary accounting with the aim of

maximizing his wealth at the expense of the company's stakeholders (Schipper, 1989).

Previous research suggests that managers resort to opportunistic earnings management for

various reasons. For example, Defond and Jiambalvo (1994) argued that managers run

earnings in order not to violate debt covenants. Healy (1985) proved that managers use

earnings management to maximize their bonus compensation. On the other hand, the

2
 informational or signaling perspective assumes that managers run earnings to signal the

company's future prospects (Gul et al., 2003). For instance, firms can use discretionary

accruals to signal their private information rather than using them opportunistically

(Subramanyam, 1996).

Financial scandals have shaken up the globe standing as a reminder of the opportunities

available for managers to publish accounting figures that do not translate reliable information.

For example, some research has studied the impact of certain governance mechanisms on the

level of earnings management. Corporate governance covers all mechanisms that mitigate
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agency costs. It increases control over managerial decisions, limits opportunistic behavior,

and improves the quality of information published by companies.

In addition, several international, European and French organizations have taken the initiative

to produce standards, codes of conduct and reference texts in order to guide companies in a

societal approach. ISO 26000 "Guidelines for Social Responsibility" is part of these initiatives

and defines a set of principles to be taken into account for a company to be socially

responsible.

Corporate Social Responsibility (CSR) is manifested in the ethical and moral guidelines of a

body of rules encouraging companies to take societal concerns into account. These guidelines

are organizational governance, human rights, labor practices, environment, fair operating

practice, consumer issues and community involvement. Indeed, according to Freeman (1984),

the responsibility of the company must be extended to take the interests of the different

stakeholders into consideration. This awareness allows the company to reduce business risks,

avoid bad governance, save energy, have a good reputation, promote the company’s brand

image, gain customer loyalty, and set up new development projects. It is clear that the

commitment to CSR contributes to the obtention of long-term economic and social benefits.

3
 Once the principles of social responsibility in the corporate culture have been established, a

central problem has been structured around the impact of the CSR on earnings management.

A close review of the literature shows that empirical tests did not yield similar results

(Mart´ınez-Ferrero et al., 2015) with regard to whether commitment to CSR has a positive or

negative impact on earnings management. Thus, we believe, as Kim et al., 2012; Grougiou et

al., 2014, that further research on the impact of CSR on earnings management is warranted,

especially in new institutional contexts, namely that of France. In fact, as a code-law country,

France has a stakeholder corporate-governance model where ownership is highly-

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concentrated, firms are family-controlled, investors are weakly-protected, and banks act as the

main capital providers (La Porta et al., 2000; Othman and Zeghal, 2006). Besides, ample

evidence is provided in the literature that, on average, the extent of earnings management in

code-law countries is higher than in common-law countries (Leuz et al., 2003).

In France, the 2011 law on new economic regulations has enormously contributed to the

integration of sustainable development dimensions within organizations. For each of the listed

companies, this law stipulates that their annual reports contain environmental and social

information added to the financial information requirements (Ducassay and Jeannicot, 2008).

This law has, therefore, made it possible to incorporate the notion of CSR into the French

regulatory system. Through AFNOR (French Association for Standardization), this country

participated in the development of the international standard ISO 26000 in 2009. This

standard defines a set of guidelines on social responsibility and can be used by any type of

organization. Given the importance of French regulation in the area of CSR and the increasing

number of companies committed to publishing extra-financial information in their annual

reports, we expect that CSR initiatives can influence the accounting quality by reducing

earnings management.

4
 Based on a panel data of 595 French firm-year observations during the period 2010-2014, we

find a negative impact of CSR on earnings management. We find, also, that some CSR

dimensions negatively impact earnings management.

Our research contributes to the literature in the following ways. First, there is ample evidence

that testifies to the increasing importance of CSR reporting among large firms worldwide as

well as its social significance. Consequently, it is crucially important to grasp the link

between these disclosures and earnings quality. More particularly, we need to develop a pro-

CSR attitude and appreciate the contributions of the ISO 26000 standard. This standard differs
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from the other standards because it is considered as an international consensus on the

definition of CSR and on the various themes it recommends to take into account. It is,

therefore, necessary that companies wishing to pursue a societal approach would understand

the implications of the ISO 26000 guidelines and appropriate all the concepts contained

therein. The societal approach allows companies to pursue their objectives by adopting a

socially-committed behavior. We then expect that companies will reduce their profitability

management and promote a good representation of economic and financial reality. Second, as

already indicated, previous research from the areas of corporate social responsibility and

earnings management is inconclusive (Gras-Gil et al., 2016). Thus, we extend the literature on

the impact of CSR on earnings management by showing that socially responsible companies

tend not to engage in earnings management. Indeed, the more socially-committed the firm, the

more transparent its management. Hence, CSR reduces the incentive to utilize earnings

management. In fact, although most of CSR research highlights opportunistic incentives, our

findings corroborate signaling incentives in the French context. Finally, to the best of our

knowledge, no previous study has studied the impact of seven societal dimensions on earnings

management. Part of their conclusion, Nekhili et al. (2017) pointed out that researchers should

examine the various dimensions of CSR disclosure separately and consider the value

5
 relevance of its different constituents. In fact, the division of CSR into sub-dimensions

defined by the ISO 26000 standards reduces the complexity of societal reality and obeys a

coherent institutional logic. In addition, it enables the operationalization of CSR in a new way

so that we can determine the impact of CSR on earnings management.

Our paper is outlined as follows. Section 2 reviews the literature and puts forward the

research hypotheses. Section 3 introduces the selected sample of companies and the research

methodology. Section 4 presents the main results following the estimation of our regression

model. Finally, Section 5 provides concluding remarks and highlights potential directions for
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future research.

2. Literature review and hypotheses development

2.1. Literature review

Over the last few decades, the concept of CSR has raised growing interest in the social,

political and economic lives (Allouche and Laroche, 2005, Harjoto and Jo, 2007, Gond and

Igalens, 2012). In this respect, many international organizations have taken the initiative to

produce standards, codes of conduct, and reference texts in order to guide companies in light

of a societal approach. Chief among these initiatives is ISO 26000 (produced by the

International Organization for Standardization) which lays down "guidelines for corporate

social responsibility". Unlike other standards, ISO 26000 has reached an international

consensus on the definition of CSR and the various principles it recommends, namely

organizational governance, human rights, labor practices, environment, fair operating

practice, consumer issues and community involvement. Therefore, for companies wishing to

pursue a societal approach, it is particularly important to understand the implications of the

ISO 26000 guidelines and to appropriate all its concepts.

According to ISO 26000, CSR is defined as "the responsibility of an organization for the

impacts of its decisions and activities on society and the environment, resulting in transparent

6
 and ethical behavior which contributes to sustainable development, including the health and

well-being of society; which complies with applicable laws and is consistent with

international standards; which takes into account stakeholder expectations and is integrated

throughout the organization and implemented in its relationships "(ISO 26000, 2010).

Based on the idea that the company is required to manage all its relations with its

stakeholders, CSR is related to certain important notions such as financial performance

(Orlitzky et al., 2011; Wang et al., 2015; Wang et al., 2017) and earnings management (Chih

et al., 2008, Kim et al., 2012; Grougiou et al., 2014, Mart´ınez-Ferrero et al., 2015; Gras-Gil
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et al., 2016, Cho and Chun, 2016).

As already indicated, our research is concerned with the impact of CSR on earnings

management. Several theories explain the relationship between CSR and earnings

management. With reference to the Stakeholder Theory, CSR has a positive impact on

earnings management. In fact, this theory attempts to formulate a new conception of the firm

integrating its environment in order to go beyond the traditional economic and shareholder

vision of the company (Gond and Igalens, 2012). It seeks to legitimize the interests of

stakeholders other than shareholders and provides a theoretical framework that recognizes the

company's responsibilities towards its stakeholders (Donaldson and Preston, 1995). In this

context, CSR allows a better relationship management with the company’s economic partners

(Gray et al., 1995). Operating under varying pressures, stakeholders have conflicting interests

that cause high information asymmetry which incites managers to run earnings in a way that

meet stakeholder expectations. Likewise, Jensen (2001) and Leuz et al. (2003) argued that

CSR intensifies agency problems, which gives managers more impetus to use earnings

management with the aim of hiding their rent-seeking activities from outsiders. In fact, these

activities are the result of multiple managerial objectives. Chih et al. (2008) defined this idea

as the multiple objectives hypothesis. The positive impact of earnings management on CSR

7
 was empirically corroborated by Prior et al. (2008) who used a sample of 593 firms from 26

countries from 2002 to 2004. They documented the damaging effect of earnings management

on stakeholders’ collective interests. Hence, managers who run earnings resort to CSR

practices in order to cope with stakeholder activism and vigilance.

Within the framework of the Signaling Theory, there is a negative association between CSR

and earnings management. According to this theory, the disclosure of societal information is a

signal for investors and financial markets that managers are able to control the company's

social risks, commit to social responsibility and, therefore, have an improved financial
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performance (Sun et al., 2010). This social responsibility disclosure reduces the information

asymmetry between the company's economic partners (Grougiou et al., 2014). The Signaling

Theory assumes a negative relationship between CSR and earnings management because the

latter takes place in a context of high information asymmetry. The more the company is

engaged in CSR practices, the less it uses earnings management. In the same vein, socially-

committed companies aim to foster future relationships with stakeholders. Chih et al. (2008)

described this behavior as the myopia avoidance hypothesis. Empirically, this relationship is

supported by evidence obtained by several studies. Using multinational data, Chih et al.

(2008) studied the same relationship for the period between 1993 and 2002. By contrast, they

found that CSR negatively influences earnings management. This result is consistent with that

found by Kim et al. (2012) in their study within an American context and from 1991 to 2009.

Gras-Gil et al. (2016) have examined the relationship between CSR and earnings

management. They conducted an empirical study dealing with a sample of the 100 most

reputable Spanish companies for the period from 2005 to 2012. The results relative to the

estimation of the empirical model show a negative impact of CSR practices on earnings

management. Using a sample of 1432 firm-year observations of Korean-listed firms during

2005–2010, Cho and Chun (2016) found that socially responsible firms are significantly and

8
 negatively associated with real earnings management within the stakeholder perspective.

Similarly, Mart´ınez-Ferrero et al. (2015) tested the same hypothesis on a sample of 1960

international listed non-financial companies from 26 countries for the period 2002 to 2010

and concluded that CSR practices have a negative effect on earnings management.

2.2. Hypotheses development

As highlighted in the literature, such as Breton and Schatt (2003), the United States and most

of the European countries, particularly France, are different in terms of the ownership

structure of firms. While the latter is relatively dispersed in the United States, this is not the
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case in France. In other terms, concentrated ownership reduces the traditional owner–manager

conflicts. Thus, societal information is not used solely by shareholders. Indeed, other partners

base their choices on this information. In such an institutional context where companies

typically have a controlling shareholder (Breton and Schatt, 2003; La Porta et al., 2000,

Othman and Zeghal, 2006), it is likely that managers of socially responsible firms publish

more transparent and reliable financial statements to meet stakeholder expectations and stake

their reputation (Kim et al., 2012; Choi et al., 2013). They are less likely to manage earnings

because they do not seek to conceal adverse earnings (Chih et al., 2008). This idea is

premised on the myopia avoidance hypothesis (Chih et al., 2008).

In line with previous research (Chih et al., 2008; Mart´ınez-Ferrero et al., 2015; Gras-Gil et

al., 2016; Cho and Chun, 2016), we expect that socially responsible firms have low incentive

to manage earnings. The discussion above leads us to formulate the following hypothesis:

The main hypothesis 1: Corporate social responsibility has a negative impact on Earnings

Management.

Since CSR is a multidimensional concept, we formulate sub-hypotheses related to each of the

societal dimensions defined by ISO 26000.

9
 2.2.1. Corporate Governance and Earnings Management

Corporate Governance is the set of supervisory organs and decision-making rules that enable

the owners and stakeholders of the company to ensure that their interests are respected.

According to Charreaux (1997), "the system of Corporate Governance covers all the

organizational mechanisms that have the effect of delimiting the powers and influencing the

decisions of managers". Several authors link Corporate Governance with earnings

management. Generally, the governance mechanisms involved in controlling earnings

management relate to the ownership structure, the composition of the directory board, and the
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monitoring of external managers. According to Warfield et al. (1995) and Beasley et al.

(2000), corporate governance improves the quality of financial reporting while mitigating the

amount of discretionary accruals. According to Fama (1980) and Eng and Mak (2003), the

oversight exercised by the directory board negatively influences the discretionary managerial

powers. In addition, in the presence of earnings management practices, good governance by

the directory board influences the quality of earnings accounting (Erickson and Wang, 1999).

In a Canadian context, Cormier et al. (2013) find a negative relationship between board size

and discretionary accruals. Based on a sample of 379 listed firms over 7 years in Taiwan, Chi

et al. (2015) reached the conclusion that board independence contributes to the reduction of

earnings management.

In light of the above-mentioned studies, we formulate the following sub-hypothesis:

Sub-hypothesis 1-1: Good Corporate Governance has a negative impact on Earnings

Management.

2.2.2. Human Rights and Earnings Management

Human rights are based on the principle of respect for the individual. Their fundamental

premise is that a person is a moral and rational being who deserves to be treated with dignity.

This issue has gained increasing importance and has become one of the major challenges
10
 facing the global community. Respect for the dignity of each individual and the creation of an

environment in which human rights can flourish are not only ethical requirements but also

essential conditions for political stability and socio-economic development. Respecting

human rights has become an unavoidable obligation for companies. This is reflected in the

introduction of many increasingly demanding international regulations. In fact, over the last

few years, companies have manifested growing recognition of the necessity to respect human

rights. In this context, ISO 26000 places a strong emphasis on human rights in its CSR

guidelines. Respecting human rights becomes, therefore, decisive for the image and reputation
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of companies to the point that their impact on earnings management is inescapable. Indeed,

the managers of companies with a good image and reputation have no interest in earnings

management. Therefore, a second sub-hypothesis is developed as follows:

Sub-hypothesis 1-2: Respect for human rights has a negative impact on Earnings
Management.

2.2.3. Labor relations and conditions and Earnings management

The company should establish good labor relations and provide its staff with good working

conditions in order to create value and flourish (Kahn and Juster, 2002). In this regard, the

company is required to maintain a balanced employer-employee relationship based on the

respect of rights and fulfillment of duties. In particular, the presence of employees on

company boards allows for effective managerial control. Indeed, employee representation

provides credible information at the highest levels of the company. As a result, the

supervisory board can handle investments more effectively (Fauver and Fuerest, 2006). Thus,

our third sub-hypothesis is constructed as follows:

Sub-hypothesis 1-3: Good labor relations and conditions have a negative impact on Earnings
Management.

2.2.4. Environment and Earnings Management

11
 In recent years, organizations around the world have progressively integrated environmental

issues into the managerial systems and decision-making processes. This has resulted in the

implementation of voluntary environmental management standards. Environmental

considerations directly affect the quality of life in communities to the extent that they become

a prerequisite for human survival and prosperity (Boiral, 2006). In this regard, the impact of

environmental performance on earnings management raises continuing controversy. For

example, companies suffering from an environmental crisis opt for a downward earnings

management strategy in order to minimize political costs and avoid their political visibility
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(Labelle and Thibault, 1998). These companies are placed under intense pressure from the

public in general and from environmental groups in particular. These companies are, thus,

increasing the likelihood of taxation at the cost of cleanup and prevention. Consequently, we

put forward the following sub-hypothesis:

Sub-hypothesis 1-4: Good environmental management has a positive impact on Earnings

Management.

2.2.5. Fairness of practices and earnings management

Fair practices are a fundamental aspect of CSR that allow for establishing and maintaining

legitimate relationships with stakeholders. As such, fairness stands for the application of

ethics in company transactions to ensure fairness, integrity and honesty (ISO 26000, 2010). A

company that undertakes to respect these different principles does not manage earnings and

does provide credible information to its stakeholders. Thus, our fifth sub-hypothesis is

developed as follows:

Sub-hypothesis 1-5: The fairness of business practices has a negative impact on Earnings
Management.

2.2.6. Consumers and Earnings Management

Meeting consumer expectations is a prerequisite for the sustainability of each company. The

latter is required to protect consumer health and safety, to establish fair practices, and to

12
 maintain consumer well-being (ISO 26000, 2010). In addition, consumers prefer to maintain

relationships with companies that opt out earnings management practices as they provide

credible, non-misleading information to consumers. Thus, protecting consumers against the

abuse of discretionary managers reduces earnings management. Hence, the following sub-

hypothesis:

Sub-hypothesis 1-6: Meeting consumer expectations has a negative impact on Earnings

Management.

2.2.7. Community involvement and Earnings Management

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According to ISO 26000, the company is part and parcel of the community. It should take into

account the rights of community members and recognize their cultural identity (ISO 26000,

2010). Generally, a company that is committed to developing the community and establishing

CSR principles has no incentive to manage earnings since it respects the rights of the various

economic partners and seeks to protect them. As a result, community involvement reduces the

discretionary behavior of managers. We, thus, propose the following sub-hypothesis:

Sub-hypothesis 1-7: The firm's community involvement has a negative impact on Earnings
Management.

3. Research Methodology

3.1. Research sample and data

Our initial sample consisted of 311 French companies belonging to the CAC-all-Tradable

index. Our empirical study will be limited to industrial firms that operate in factories

(secondary sector). The primary sectors (agriculture, mining, fishing and forestry) and tertiary

sectors (transport, commerce, services and administrations) are not taken into account.

Financial firms are excluded due to the specificity of their accounting methods (Prior et al.,

2008). Thus, our study sample groups together the industrial companies located in different

provinces of France. This choice is explained by the fact that the latter are part of a societal

approach and are required to publish societal information in their annual reports starting from

13
 the year 2001. Moreover, the emergence of the international standard ISO 26000 is a new

incentive for different companies to adopt a sustainable development approach. This is why

we are interested in studying industrial enterprises for the period from 2010, the date of the

appearance of this standard, until 2014, given the availability of the necessary information to

estimate our empirical models. The dual dimension of the panel data that is a decisive

advantage over other data types has prompted us to use this type of data. Indeed, this dual

dimension makes it possible to account simultaneously for the dynamics of behaviors and

their possible heterogeneity, which is not possible with time-series or cross-sectional data
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(Sevestre, 2002; Hsiao, 2005). As regards data collection, we have used the various financial

statements and the sustainable development reports for the period between 2010 and 2014.

Besides, we have excluded companies whose data is not available. Thus, our final sample

consists of 595 firm-year observations. Table 1 shows the sample selection procedure.

Table 1
Sample selection
Number of observations
French firms listed on the CAC All Tradable index 311
Firms belonging to the primary and tertiary sectors, including 29 financial firms 171
Observations with missing data -2

Total 119

3.2. Variable Construction

3.2.1. Dependent variable: Earnings management

We use the estimated discretionary accruals based on the modified Jones model

(Dechow et al., 1995) with cash flow from operation (CFO). In fact, like Larcker and

Richardson (2004), we add CFO to the model.

∆  ∆  

TA = α + α
 + α
 + α
 + ε
  

where TA is total accruals. A is total assets at the beginning of the year. ∆SALES is changes in

14
 sales. ∆REC is the change in net receivables. PPE represents the amount of property, plant and

equipment. #$% is cash flows from operations. The residual &'( from the regression is the

measure of discretionary accruals.

3.2.2. Independent variables: CSR and the different societal dimensions

The measurement of CSR as well as the different societal dimensions are based on a very

rigorous analytical framework that is the ISO 26000 standard. We start by constructing a scale

of measurement comprising the various items related to societal actions. Each item
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corresponds to a CSR dimension and each sub-item represents a societal action defined by the

ISO 26000 standard. Following Nekhili et al. (2017), we give the value "1" for the company

whose report attests to performing societal action. A note "0" is given in the opposite case.

Thus, the societal score corresponds to the ratio of the sum of the affirmative responses to the

number of sub-items concerned and is described as follows:

CSR = sum of the affirmative responses / number of sub-items

For a single societal dimension, the score is equal to the sum of the affirmative responses per

item divided by the number of sub-items per item and is described as follows:

Score dimension CSR = sum of the affirmative responses per item / number of sub-items
per item

Appendix A presents the CSR analysis grid (ISO 26000, 2010). The set of societal dimensions

corresponds to:

- CSRGOV : Corporate governance

- CSRHR : Human rights

- CSREC : Labor relations and conditions

15
 - CSRENV : Environment

- CSRPL : Fair practices

- CSRCUS : Consumer issues

- CSRENG : Community involvement

3.2.3. Control Variables

In addition to interest variable earnings management, a set of control variables may influence

earnings management. We, thus, add several variables in our models. Thus, we choose to

incorporate the size of the company, the level of debt, and the financial performance. Prior
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works have shown that these variables can have significant effects on earnings management.

There has been growing interest in the relationship between firm size and earnings

management. Some researchers have suggested that larger firms face increasing pressures on

the capital market. As a result, they tend to manage earnings upwards (Richardson et al.,

2002). By contrast, other researchers argue that large firms are often subject to further

scrutiny by external managers and, therefore, do not use earnings management (Lee and Choi,

2002). This divergence of viewpoints indicates that the impact of firm size on earnings

management is uncertain. In our study, we measure this variable through the natural logarithm

of the total assets. Similar to Hull and Rothenberg (2008), we measure the size of the

company ()*+, ) as the natural logarithm of total assets.

The debt level is the second control variable that we introduce in our models. It is a risk

indicator for the company and can have an influence on earnings management. Press and

Weintrop (1990) argue that high-debt firms tend to manage earnings aggressively in order to

avoid violating debt covenants. While Dechow and Skinner (2000) suggest that a high level of

debt can mitigate earnings management practices. To take into account the effect of debt level

on earnings management, we use the ratio of the book value of the debts to the total assets.

This measure has been used by most authors who incorporate the firm's debt as a control

16
 variable in their models (Nelling and Webb, 2009; Aras et al. 2010 and Flammer, 2013). In

this study, the level of debts (.,/0) is measured as: total debt/total assets.

The third control variable is the financial performance measured by the ROA. Prior works

(Dechow et al., 1995; Kasznik, 1999) document that earnings management, measured using

discretionary accruals, are positively related to return on assets. Thus, we use return on assets

(ROA), measured as income before extraordinary items divided by total assets.

3.3. Empirical models

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Within a multidimensional logic and in order to test the hypothesis of the impact of CSR on

earnings management, we estimate a panel-regression model where the discretionary accruals

estimated on the basis of the modified Jones model with cash flow from operation (CFO) are

used as a dependent variable. The estimated model is:

DAit = β0 + β1 CSRit + β2 SIZEit +β3 DEBT it +β4 ROAit+εit (1)

Where

CSR = corporate social responsibility measure.

SIZE = firm size, measured as the nature logarithm of total assets.
DEBT = debt ratio, measured as long-term debt divided by total assets.
ROA = return on assets, measured as income before extraordinary items divided by total
assets.

In addition, for the study of the one-dimensional influence of CSR on earnings management,

we estimate panel-regression models where discretionary accruals estimated based on the

modified Jones model with cash flow from operation (CFO) are used as a dependent variable.

We estimate 7 different econometric models which are as follows:

DA it = β0 + β1 CSRGOV it + β2 SIZE it +β3 DEBT it +β4 ROA it+ εit (1.1)

DA it = β0 + β1 CSRHR it + β2 SIZE it +β3 DEBTit + β4 ROA it+εit (1.2)
DA it = β0 + β1 CSREC it + β2 SIZE it +β3 DEBT it + β4 ROA it +εit (1.3)
DA it = β0 + β1 CSRENV it + β2 SIZE it +β3 DEBT it + β4 ROA it +εit (1.4)

17
 DA it = β0 + β1 CSRPL it + β2 SIZE it +β3 DEBT it + β4 ROA it +εit (1.5)
DA it = β0 + β1 CSRCUS it + β2 SIZE it +β3 DEBT it +β4 ROA it +εit (1.6)
DA it = β0 + β1 CSRENG it + β2 SIZE it +β3 DEBT it + β4 ROA it +εit (1.7)

Where

DA = earnings management, measured using discretionary accruals.

CSRGOV = the firm’s corporate governance.
CSRHR = the firm’s human rights measure.
CSREC = the firm’s labor relations and conditions measure.
CSRENV = the firm’s environment measure.
CSRPL = the firm’s fairness of practices measure.
CSRCUS = the firm’s meeting consumer expectations measure.
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CSRENG = the firm’s community involvement measure.

SIZE = firm size, measured as the nature logarithm of total assets.
DEBT = debt ratio, measured as long-term debt divided by total assets.
ROA = return on assets, measured as income before extraordinary items divided by total
assets.

4. Empirical findings

Descriptive statistics of the variables used in the study are presented in Table 2. Over the

five-year period from 2010 to 2014, the table shows the mean, median and the standard

deviations. The means (medians) of DA and CSR are -0.041 (-0.049) and 0.818 (0.863),

respectively. Moreover, results show that, on average, managers run earnings downward. This

comes in line with prior works (García Lara et al., 2005; Arnedo et al., 2007; Huguet and

Gandia, 2016) which showed that decreasing earnings management is omnipresent in private

firms. In fact, French firms use downward earnings management (conservative accounting) so

that they can maximize underpricing and compensate politically-motivated agency costs

between various partners.

18
 Table 2

Descriptive statistics.
Variable Mean Median Std. dev. N
DA -0,0418 -0.0499 0.0342 595
CSR 0.8186 0.863 0.1632 595
CSRGOV 0.9451 1 0.1320 595
CSRHR 0.6489 0.625 0.2682 595
CSREC 0.8847 1 0.2231 595
CSRENV 0.8239 1 0.2922 595
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CSRPL 0.7640 0.8 0.2311 595

CSRCUS 0.7995 0.857 0.2219 595
CSRSENG 0.8761 1 0.2149 595
SIZE 13.9541 13.963 2.6710 595
DEBT 0.2593 0.231 0.2593 595
ROA .0002 0.04 0.1584 595

The correlation matrix among the independent variables in our model is presented in Table 3.

The highest absolute correlation coefficient is 0.403, which reflects a significant positive

relation between (SIZE) and (CSRENG). The absolute values of all correlation coefficients

are all less than conventional thresholds (Kennedy, 2003). Therefore, the problem of

multicollinearity is absent. In addition, the Variance Inflation Factors (VIF) test and the

tolerance values indicate the absence of the multicollinearity problem. Indeed, as shown in

Table 4, the VIF value is inferior to 10 (Myers, 1990) and the tolerance values are superior to

0.10.

Table 3
Pearson correlations.
Variable CSR SIZE DEBT ROA CSRGOV CSRHR CSREC CSRENV CSRPL CSRCUS CSRENG
*** *** ***
CSR 1 0.385 -0.210 0.125 - - - - - - -
*** *** *** *** *** *** *** ***
SIZE 1 -0.148 0.373 0.283 -0.119 0.177 0.290 0.246 0.269 0.403***
DEBT 1 -0.123*** -0.154** -0.291*** -0.063 -0.262*** -0.122*** -0.129*** -0.245***
ROA 1 0.100** 0.092** -0.005 0.098** 0.013 0.127*** 0.184***
**
Sig at 5% level
***
Sig at 1% level

19
 Table 4
Collinearity Statistics

Tolerance VIF
CSR 0,826 1,211
SIZE 0,742 1,347
DEBT 0,945 1,059
ROA 0,854 1,17
CSRGOV 0,565 1,771
CSRHR 0,557 1,796
CSREC
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0,519 1,926
CSRENV 0,54 1,852
CSRPL 0,539 1,857
CSRCUS 0,446 2,241
CSRSENG 0,471 2,123

Since all used regressions are estimated based on panel data, we deploy the Hausman

specification test to choose between the fixed-effects and random-effects model. As indicated

in Tables 5 to 12, we have used the panel data regressions with random-effects for the

analysis and we have also tested the significance of the random effects using the Breusch-

Pagan test. The probability of the Breusch-Pagan test statistic shows that the random effects

are globally significant.

The results of Table 5 demonstrate that the estimated coefficient on (CSR) is negative (-0.024)

and is statistically significant (t-statistic = -2.3) at the 5% level. Thus, we argue that, in the

French context, CSR negatively influences earnings management. Our findings are in line

with the contributions of the Signaling Theory that assumes a negative association between

CSR and earnings management. Indeed, according to this theoretical framework, the

asymmetry of information is reduced given the publication of information with regard to the

responsible behavior of companies. This behavior, then, allows a change in downwards

earnings management. Furthermore, the observed result is in line with prior works such as

20
 those published by Chih et al. (2008) ; Kim et al. (2012) ; Mart´ınez-Ferrero et al. (2015);

Gras-Gil et al. (2016) ; Cho and Chun (2016). Therefore, we confirm our main hypothesis 1

that CSR has a negative impact on earnings management. Chih et al. (2008) defined this idea

as the myopia avoidance hypothesis by which socially-committed companies aim to foster

future relationships with stakeholders. Managers are less likely to manage earnings because

they do not seek to conceal adverse earnings. In fact, the introduction of social responsibility

policies makes it possible to improve the control of managers, particularly with regard to

accounting manipulation. Moreover, it is a powerful instrument used to guarantee a good

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representation of the financial situation of the company. CSR, then, guarantees that all

stakeholder interests are respected. We can draw the conclusion that the societal approach is

beneficial. French as well as other international companies are, therefore, called upon to be

socially responsible in order to avoid discretionary practices and not to harm the stakeholders.

In terms of the control variables, we find that Size and ROA have a significant negative

impact at the 1% threshold on earnings management. By contrast, this impact becomes

positive with debt level. Thus, our results confirm earlier findings. According to political

costs hypothesis, managers of the largest firms with higher annual profits will manage income

downwards (Zimmerman, 1983). In addition, DeFond and Jiambalvo (1994) and Sweeney

(1994) find that companies manipulate earnings upward to avoid debt covenants violation.

21
 Table 5
Regression (1) results
Variable DA
Coefficient t-Statistic
Intercept 0.005 0.42
**
CSR -0.024 -2.3
***
SIZE -0.002 -2.65
DEBT 0.011*** 3.43
***
ROA -0.031 -3.72

# of observations 595
Wald chi2(4) 53.59
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Prob > chi2 0.000

Hausman test 1.29
Prob > chi2 0.863
Breusch-Pagan test 378.44***
Adj. R2 11.93%
**
Significance at 5% level
***
Significance at 1% level

After assessing the impact of CSR on earnings management, we perform the same analysis

while studying the impacts of societal dimensions on the discretionary accruals

(regression (1.1) to regression (1.7)). The results are shown in Tables 6 to 12.

Table 6
Regression (1.1) results
Variable DA
Coefficient t-Statistic
**
Intercept 0.033 2.07
CSRGOV -0.052*** -3.55
SIZE -0.002*** -2.58
***
DEBT 0.011 3.43
ROA -0.029*** -3.49

# of observations 595
Wald chi2(4) 61.44
Prob > chi2 0.000
Hausman test 2.46
Prob > chi2 0.651
Breusch-Pagan test 381.02***
Adj. R2 12.70%
**
Significance at 5% level

22
 ***
Significance at 1% level

Table 7
Regression (1.2) results
Variable DA
Coefficient t-Statistic
Intercept -0.006 -0.56
CSRHR -0.008* -1.68
SIZE -0.002*** -2.94
DEBT 0.011*** 3.59
***
ROA -0.031 -3.70

# of observations 595
Wald chi2(4) 50.98
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Prob > chi2 0.000

Hausman test 2.24
Prob > chi2 0.692
Breusch-Pagan test 374.61***
2
Adj. R 11.52%
*
Significance at 10% level
***
Significance at 1% level

Table 8
Regression (1.3) results
Variable DA
Coefficient t-Statistic
Intercept -0.005 -0.49
CSREC -0.003 -0.54
***
SIZE -0.002 -3.25
DEBT 0.011*** 3.50
***
ROA -0.031 -3.60

# of observations 595
Wald chi2(4) 48.03
Prob > chi2 0.000
Hausman test 0.42
Prob > chi2 0.980
Breusch-Pagan test 387.62***
Adj. R2 10.48%
***
Significance at 1% level

23
 Table 9
Regression (1.4) results
Variable DA
Coefficient t-Statistic
Intercept 0.004 -0.36
CSRENV -0.008* -1.64
SIZE -0.002*** -2.98
DEBT 0.010*** 3.36
***
ROA -0.031 -3.68

# of observations 595
Wald chi2(4) 50.67
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Prob > chi2 0.000

Hausman test 0.85
Prob > chi2 0.931
Breusch-Pagan test 384.33***
Adj. R2 11.05%
*
Significance at 10% level
***
Significance at 1% level

Table 10
Regression (1.5) results
Variable DA
Coefficient t-Statistic
Intercept 0.002 -0.20
CSRPL -0.011 -1.56
***
SIZE -0.002 -3.04
DEBT 0.011*** 3.43
***
ROA -0.031 -3.71

# of observations 595
Wald chi2(4) 50.40
Prob > chi2 0.000
Hausman test 0.64
Prob > chi2 0.958
Breusch-Pagan test 384.29***
Adj. R2 11.10%
***Significance at 1% level

24
 Table 11
Regression (1.6) results
Variable DA
Coefficient t-Statistic
Intercept 0.002 0.22
CSRCUS -0.018** -2.17
SIZE -0.002*** -2.91
DEBT 0.011*** 3.49
***
ROA -0.030 -3.61

# of observations 595
Wald chi2(4) 52.88
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Prob > chi2 0.000

Hausman test 0.91
Prob > chi2 0.923
Breusch-Pagan test 383.19***
Adj. R2 11.57%
**Significance at 5% level
***Significance at 1% level

Table 12
Regression (1.7) results
Variable DA
Coefficient t-Statistic
Intercept 0.004 -0.35
CSRENG -0.006 -0.68
SIZE -0.002*** -3.04
DEBT 0.011*** 3.48
ROA -0.030*** -3.57

# of observations 595
Wald chi2(4) 48.22
Prob > chi2 0.000
Hausman test 0.65
Prob > chi2 0.957
Breusch-Pagan test 387.28***
2
Adj. R 10.52%
*Significance at 10% level
***Significance at 1% level

25
 We find out that the sub-hypotheses 1-1, 1-2, 1-4, and 1-6 are accepted while the all other

sub-hypotheses are rejected. The results reported in Table 6 highlight the negative impact of

corporate governance on earnings management. Indeed, the variable (CSRGOV) has a

significant coefficient at the threshold of 1%, of -0.052. In fact, governance mechanisms drive

companies to manage earnings downwards (Beasley et al., 2000, Eng and Mak, 2003,

Cormier et al., 2013). This result confirms that good corporate governance is able to reduce

the discretionary behavior of managers and, thus, assure more reliability of the financial

statements. This is guaranteed by the implementation of good corporate governance

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mechanisms such as ownership structure, board structure, or excessive executive

compensation. Moreover, the second societal dimension, which stands for human rights

respect (CSRHR), has a significant negative impact on earnings management (Table 7).

Indeed, it has a coefficient of -0.008 with significance at the threshold of 10%. We notice that

the initiatives taken by companies to preserve human rights serve to improve their image and

reputation. In addition, these initiatives encourage mangers to safeguard the interests of

different stakeholders. For this reason, they are called upon to reduce their managerial latitude

in favor of the introduction of good socially responsible practices. This is similar to the

impacts found with good environmental management (CSRENV) (Table 9) and the response to

consumer expectations (CSRCUS) (Table 11). Indeed, companies that have good

environmental management are immune from the costs of green activism and the public

concern with pollution control and prevention. Thus, they do not follow the logic of

decreasing earnings in order to reduce their political visibility. In addition, meeting consumer

expectations can alleviate the effects of earnings management practices. This confirms the

idea that they prefer to maintain relations with companies that provide reliable and faithful

information about their financial and economic situation. However, labor conditions and

relations (CSREC), fairness practices (CSRPL) and community involvement (CSRENG) have

26
 no significant impact on earnings management (Tables 8, 10 and 12). It is therefore

remarkable that, in the French context, these last societal dimensions have no significant

influence on the discretionary behavior of managers. Neither work conditions, nor fairness of

practices, nor even societal commitment influence the practices of earnings management. In

all likelihood, these important societal dimensions’ influence earnings management in other

study contexts differently. The effects of the control variables remain largely unchanged.

5. Conclusion

Extreme cases of accounting concealments have put the topic of accounting information
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transparency into limelight for regulators, practitioners, investors, and academics. Given these

accounting irregularities, some researchers examined the impact of CSR on earnings quality

measured by earnings management. If socially-responsible firms want to maintain financial

transparency, they should engage in less earnings management, implying a negative

relationship. This reflects the myopia avoidance hypothesis introduced by Chih et al. (2008).

On the other hand, if socially-responsible firms try to meet the demands of multiple

stakeholders, they resort to earnings management frequently. This refers to the multiple

objective hypothesis advanced by Chih et al. (2008).

In this paper, the analysis of the impact of CSR on earnings management is based on the ISO

26000 analytical framework which stipulates that the company must respect seven societal

dimensions. We find a negative impact of CSR on earnings management, suggesting that

firms with greater CSR conduct less earnings management. The observed result is in line with

prior works such as those published by Chih et al. (2008); Kim et al. (2012); Mart´ınez-

Ferrero et al. (2015); Gras-Gil et al. (2016) ; Cho and Chun (2016). Moreover, corporate

governance, respect for human rights, good environmental management, and meeting

consumer expectations all have significant negative impacts on earnings management. By

27
 contrast, labor relations and conditions, fairness of practices, and community involvement

have no influence on earnings management.

These results suggest several implications for regulatory, accountants, investors and

academics. First, it is worth noting that understanding the role of CSR in other institutional

contexts is important. Indeed, in these contexts where the implementation of rules is voluntary

or almost non-existent, it is less likely that CSR would play a significant role in controlling

the behavior of the manager and, consequently, influence earnings management. As a result,

by identifying an analysis grid with different CSR-related items and the ISO 26000 standard,
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which allows the company to reduce business risks, avoid bad governance, and boost investor

confidence, the results of our study could provide guidelines for accountants and regulators in

some countries. Second, the study of managers’ recourse to earnings management makes it

possible to inform regulators, investors and academics of the reliability of the financial

statements of the socially responsible companies. Finally, the findings are interesting for both

investors and accounting regulators when preparing new rules or changing the existing

regulations. Our results encourage regulators to lay down stronger investor protection rules

and mechanisms that reduce the incentive to use earnings management which impacts

earnings quality.

Our study has a number of limitations which, however, may inspire future research. First, we

cannot draw general conclusions since we have chosen an industry- and country- specific

sample. In addition, the choice of variables and their conceptualization may not always reflect

the studied case. Moreover, the measurements used can influence the results obtained. For a

better explanation of the societal reality, we can then consider other control variables such as

management quality, corporate culture, industry, research and development. Another

limitation of this study is that all econometric models were estimated using a static approach.

It is for this reason that we propose to follow a dynamic approach in future research that

28
 captures the financial influence of a societal approach and its evolution over time. Moreover,

the period of study is relatively short to capture all the behaviors and to draw generalist

conclusions. Future studies may be conducted over a longer period and in other contexts. A

careful examination of the pattern of causality between earnings management and CSR is

needed, also, for further research.

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29
 Appendix A: The corporate social responsibility analysis grid

Item (1): Corporate governance

- Sub-item (1) : Defining values consistent with the principles of sustainable

development;
- Sub-item (2) : Defining a strategic approach for the company;
- Sub-item (3) : Communication strategy and collaboration of enterprise deployment ;
- Sub-item (4) : Control of the entity’s activities through monitoring indicators
(environmental, social, economic, ….) ;
- Sub-item (5) : Setting up a business improvement process (action plan, management
review, bench marking ...);
- Sub-item (6) : The identification of stakeholders and taking their account in the
company’s decision process ;
- Sub-item (7) : The indication of the impact of actions and decisions of the company,
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transparently, to all stakeholders;

- Sub-item (8) : The necessity of the company to apply the regulations of the territories
in which it operates as well as the international reference texts.
Item (2) : Human rights

- Sub-item (1) : Due diligence ;

- Sub-item (2) : Human rights risk situations ;
- Sub-item (3) : Avoidance of complicity ;
- Sub-item (4) : Resolving grievances ;
- Sub-item (5) : Discrimination and vulnerable groups ;
- Sub-item (6) : Civil and political rights ;
- Sub-item (7) : Economic, social and cultural rights ;
- Sub-item (8) : Fundamental principles and rights at work.
Item (3) : Labour practices

- Sub-item (1) : Employment and employment relationships ;

- Sub-item (2) : Conditions of work and social protection ;
- Sub-item (3) : Social dialogue ;
- Sub-item (4) : Health and safety at work ;
- Sub-item (5) : Human development and training in workplace.
Item (4) : Environment

- Sub-item (1) : Prevention of pollution ;

- Sub-item (2) : Sustainable resource use ;
- Sub-item (3) : Climate change mitigation and adaptation ;
- Sub-item (4) : Protection of the environment , biodiversity and restoration of natural
habitats.
Item (5) : Fair operating practices

- Sub-item (1) : Anti-corruption ;

- Sub-item (2) : Responsible political involvement ;
- Sub-item (3) : Fair competition ;
- Sub-item (4) : Promoting social responsibility in the value chain ;
- Sub-item (5) : Respect for property rights.

30
 Item (6) : consumer issues

- Sub-item (1) : Fair marketing, fuctual and unbiased information and fair contractual
practices ;
- Sub-item (2) : Protecting consumers’health and safety ;
- Sub-item (3) : Sustainable consumption ;
- Sub-item (4) : Consumer service, support and complaint and dispute resolution ;
- Sub-item (5) : Consumer data protection and privacy ;
- Sub-item (6) : Access to essential services
- Sub-item (7) : Education and awareness.
Item (7) : Community involvement and development

- Sub-item (1) : Community involvement ;

- Sub-item (2) : Education and culture ;
- Sub-item (3) : Employment creation and skills development ;
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- Sub-item (4) : Technology development and access ;

- Sub-item (5) : Wealth and income creation ;
- Sub-item (6) : Health
- Sub-item (7) : Social investment.

31
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