The Relationship Between Corporate Social Responsibility and Earnings

Management: An Exploratory Study

Yongtao Hong and Margaret L. Andersen, Journal of Business Ethics
May 2011

Objective:
The purpose of this study is to explore the relationship between corporate social
responsibility and earnings management, which the authors link directly to accurate financial
reporting. Issues regarding community, corporate governance, diversity, products, employee
relations, the environment, and human rights were incorporated.

Methods:
The authors took information from the Kinder Lydenburg and Domini database, which
covers the 3,000 largest American publicly traded companies by market capitalization. They
narrowed the results to 8,078 observations from 1995-2005 and compared identified strengths to
identified concerns to determine the company’s level of corporate social responsibility. This was
then compared to the standard deviation of the company’s total current accruals, where a higher
standard deviation was defined as an indicator of earnings management.

Results:
 Firms that are more socially responsible have higher quality accruals and less activity-based
earnings management
 Both of these factors lead to higher quality financial reporting
 Results indicated that firms that created a more socially responsible environment may be
more successful in preventing earnings management

Conclusion:
With earnings management and financial reporting being hot topics in recent years, an
added effect of firms implementing additional social responsibility programs is the prevention of
earnings management. This will help companies present financial results more accurately and
attract investors more honestly.

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