Received: 29 January 2020 

|  Accepted: 4 February 2020

DOI: 10.1111/basr.12198

ORIGINAL ARTICLE

Earnings management: A new paradigm of

corporate social responsibility

Sadaf Ehsan1   | Mohammad Nurunnabi2,3   | Samya Tahir1  |

Maaida H. Hashmi1

1
Department of Management Sciences,
COMSATS University Islamabad, Lahore,
Pakistan
2
St Antony's College, University of Oxford,
Oxford, UK
3
Department of Accounting, Prince Sultan
University, Riyadh, Saudi Arabia
Correspondence
Mohammad Nurunnabi, St Antony's
College, University of Oxford, 62
Woodstock Road, Oxford OX2 6JF, UK.
Email: mnurunnabi@psu.edu.sa,
mohammad.nurunnabi@sant.ox.ac.uk
Abstract
The study adopted a systematic review approach to review
the existing studies on the relationship between corporate
social responsibility (CSR) and Earnings Management
(EM). The aim of this study is to determine whether CSR
is an effective tool to promote healthy relationships with
stakeholders or CSR is used as an effective strategy by
firm's mangers to hide out their involvement in (EM) prac-
tices. Results revealed that prior research on the CSR-EM
relationship is limited. The majority of the studies found
an inverse relationship between CSR and EM. Moreover,
mixed results were reported because of the lack of sufficient
theoretical support, inappropriate research designs, and var-
ying approaches to measure CSR and EM. This study also
synthesizes the various consistencies and inconsistencies
in the existing literature of CSR-EM and future research
agenda. Policymakers should reward organizations that pur-
sue CSR purely for social and environmental concerns and
at the same time they should be vigilant for those which use
CSR for shielding their EM practices.

KEYWORDS
corporate social responsibility, earnings' management, systematic review

© 2020 W. Michael Hoffman Center for Business Ethics at Bentley University. Published by Wiley Periodicals, Inc., 350 Main Street, Malden,
MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.

Bus Soc Rev. 2020;125:349–369.  wileyonlinelibrary.com/journal/basr  |  349

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350       EHSAN et al.

1  |   IN T RO D U C T ION
After the twentieth century's corporate scandals (Xerox, Enron, Toshiba, Satyam Computer Servives
etc.), accounting earnings have attracted the attention of researchers, regulators, investors, share-
holders, and other constituents of firms, making it one of the most frequently investigated areas of
firms' performance statistics. The information asymmetry between a firm's insiders and outsiders,
the imperfect system of auditing, and the varying nature of accounting principles in treating firms'
accruals allows managers to manage their reported earnings to gain personal benefits or signal pri-
vate information to stakeholders (Healy & Wahlen, 1999) and that is called Earnings management
(EM).1  However, EM can have severe consequences because these short-term tactics, undertaken to
achieve short-term benefits, are often harmful to firms' long-term sustainability. One of the far-reach-
ing consequences of EM is the loss of credibility of a firm's financial reports, resulting an increase
in the activism and vigilance of the firm's internal and external stakeholders and a decrease in their
support (Choi, Lee, & Park, 2013). A firm's transparency and accountability in disclosing financial
information are critical to its ability to gain the support of its stakeholders and to maintain long-term
relationships. From this perspective, accurate financial reporting is closely related to corporate social
responsibility (CSR), as CSR encourages the firm to integrate social, ethical, and moral consider-
ations into its goals and to make decisions that protect the interests of a wide range of stakeholders,
including employees, customers, suppliers, investors, communities, the environment, and regulators,
to foster long-term relationships (Koehn & Ueng, 2010). Thus, financial transparency and reliability
are increasingly considered to be key elements in a firm's CSR strategy because of their importance
for shareholders and other stakeholders, including at all levels of society.
Voluminous research on CSR has been produced to determine what encourages firms to engage
in social activities. Much of the debate has focused on investigating the relationship between CSR
and financial performance (FP) and has tended to show that CSR has a positive effect on firms' FP.
However, the mechanism through which a firm enhances its FP through CSR activities has not been
well explained (Doh, Bunyaratavej, & Hahn, 2009). Therefore, clarifying the larger issue in this debate
concerning how a firm integrates CSR into its overall strategy (Jawahar & McLaughlin, 2001; Koehn
& Ueng, 2010), such as how a firm's CSR is influenced or influenced by its earnings quality, can help
to determine whether CSR restricts EM or is used by managers as a strategic shield to hide their op-
portunistic behavior in manipulating accounting numbers (Gras-Gil, Manzano, & Fernández, 2016).
However, the literature that explores the social indulgence of corporations through the lens of EM is
underdeveloped. Although a few studies have attempted to explore the CSR-EM relationship, they
have produced mixed and contradictory findings that create problems in clarifying this relationship.
One school of thought supported the negative relationship between CSR and EM under the long-
term perspective which posits that firms that endorse CSR are less likely to use EM because they are
concerned not only about their short-term profits but also about their long-term sustainable perfor-
mance for which building good relationships with broader range of stakeholders are of great impor-
tance (Chih, Shen, & Kang, 2008; Cho & Chun, 2015; Choi et al., 2013; Gras-Gil et al., 2016; Kim,
Park, & Wier, 2012). Therefore, they tend to report high-quality financial information. There is also
an opposite school of thought, according to which CSR is positively related to EM under the manage-
rial opportunism hypothesis (Grougiou, Leventis, Dedoulis, & Owusu-Ansah, 2014; Prior, Surroca,
& Tribó, 2008). This view contends that firms' managers and executives use CSR to hide their EM
practices by encouraging admiration from stakeholders to mask their opportunistic behavior.
There are certain factors involved in these inconsistent findings. One of the important factors is the
lack of consensus among researchers on the direction of causation in this relationship. Only a few stud-
ies checked the directions of causation and observed this relationship in both directions and all of these
EHSAN et al.   
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produced mixed findings. For example, Calegari, Chotigeat, and Harjoto (2010) study results showed
that the direction of causation is unidirectional, moving from CSR to EM, while Grougiou et al. (2014)
also confirmed that this relationship is unidirectional but moving from EM to CSR, Toukabri, Jilani,
and Jemâa (2014) found no relationship between CSR and EM in any direction, and Martínez-Ferrero,
Gallego-Álvarez, and García-Sánchez (2015) demonstrated empirically that the relationship between
CSR and EM is bidirectional. In addition, omitting important moderating firm-, industry-, and coun-
try-specific factors that appear to be significant for this relationship also appears to have led to results
that are biased and inconclusive. For instance, in some cases, the operationalization of country-specific
variables significantly moderates the CSR-EM relationship and causes CSR to be closely related to ac-
crual EM (Chih et al., 2008), while in other cases, industry-specific and firm-specific factors were sig-
nificant in relating CSR to real EM. Apart from these factors, there are other factors involved in these
inconclusive findings like inappropriate research designs, miss-specified research models, undersized
cross-industry and cross-country samples, wide-ranging operationalization of CSR and EM variables,
the use of a single-dimension CSR measure, and unconventional measures of EM.
The above mentioned shortcomings in existing literture lead the CSR-EM relationship biased and
inconclusive, so there is a need to conduct a systematic review of the existing literature to get deeper
insight on the CSR EM relationship. The present study synthesizes the literature on CSR and EM
to determine which side of the CSR-EM debate is valid and to pinpoint the major consistencies and
inconsistencies in previous studies.
This study contributes to the existing literature on the CSR-EM relationship in several ways. First,
the first study provides a detailed review of previous studies on the relationship between CSR and
EM. Some earlier studies provide meta-analyses or systematic reviews of studies based on the CSR-FP
relationship (e.g., Javed, Rashid, & Hussain, 2016; Orlitzky, Schmidt, & Rynes, 2003), but none pro-
vides a systematic review of the CSR-EM relationship. Second, a detailed review of the literature
provides strong evidence that there is a significant and consistent relationship between CSR and earn-
ings quality or financial reporting, which suggests that CSR should be investigated from other aspects
of corporate behavior, such as EM. Third, potential missing moderating factors that might influence
this relationship have been identified, so their influence should be considered when the CSR-EM
relationship is examined. Fourth, the study highlights and synthesizes the various consistencies and
inconsistencies in the existing literature that can be helpful for future studies, while establishing re-
search designs and measurement of CSR and EM variables. Fifth, the study identifies the missing gap
of CSR-EM relationship and its various aspects for both developed and emerging economies.
The remainder of the article is organized as follows. The next section explains the two sides of the
CSR-EM relationship. The third section summarizes the methodology and provides a comprehensive
review of the existing literature on the CSR-EM relationship. The fourth section presents the findings
of the review, along with consistencies, inconsistencies, and shortcomings in the observed studies.
The fifth section concludes, highlights important research gaps and offers futures research. The last
section provides important implications for multiple stakeholders.

2  |  C S R A N D E M: T WO SID E S OF THE SAM E COIN

There are two perspectives of the relationship between CSR and EM: the long-term perspective and
managerial-opportunism perspective. The long-term perspective is derived from stakeholder and le-
gitimacy theory, which argues that socially responsible firms not only focus on maximizing their
short-term profits but also foster healthy, long-term relationships with their stakeholders in support of
long-term performance, and sustainable development. These firms understand that their stakeholders
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352       EHSAN et al.

control resources that are critical for the firm's survival and continued success. To maintain healthy
relationships with their stakeholders, these firms seek to be fair, trustworthy, and transparent in their
business activities, decisions, and financial disclosures. Firms that are committed to CSR for these
reasons believe that financial transparency and reliability are the fundamental parts of their CSR and
stakeholders and avoid amending their accounting numbers. Therefore, socially responsible firms are
less likely to be involved in EM, as they consider it as cheating their stakeholders in such a way that
can damage their social performance and financial performance in the end. Most studies have shown
a negative relationship between CSR and EM (Cho & Chun, 2015; Choi et al., 2013; Gras-Gil et al.,
2016). Research has found that socially responsible firms provide more valuable financial information
than other firms do, as socially responsible firms see fair and transparent financial reporting as part of
CSR and as enabling them to achieve sustainable competitive advantage. For instance, the disclosure
of CSR improves analysts' forecasting processes (Dhaliwal, Radhakrishnan, Tsang, & Yang, 2012),
increases investment because on confidence in reported earnings (Kim et al., 2012), gains access to
cheaper equity financing (El Ghoul, Guedhami, Kwok, & Mishra, 2011), and signifies higher value
and lower market and financial risk. Moreover, socially cautious conduct may assist firms in estab-
lishing community ties and status, which improves their ability to negotiate attractive contracts with
governments and suppliers, receive premium prices for their services and goods, and reduce their cost
of capital (Fombrun, Gardberg, & Sever, 2000). Thus, by undertaking CSR initiatives, firms can gen-
erate support from numerous stakeholder groups. The advantages of CSR initiatives are not limited
to gaining the support of shareholders and stakeholders but also include helping corporations to man-
age regulatory pressure and costs, to gain legitimacy from communities and regulators, and to access
endorsements from activist groups and affirmative coverage from the media (Prior et al., 2008). In
summary, honest financial reporting not only distinguishes between better-performing firms and poor
performers but also distinguishes socially responsible firms from socially irresponsible ones, eases
shareholders' financial decisions (Dechow & Skinner, 2000), and motivates the firms to disclose the
true picture of their financial numbers.
The other perspective of the CSR-EM relationship, the managerial-opportunism perspective, sug-
gests that managers use the CSR as a strategic shield to mask their opportunistic behavior. Firm's man-
agers and executives sometimes use discretion in working out financial earnings without infringing
on generally accepted accounting practices (GAAP) to achieve their personal goals, thereby causing
reported earnings to be either better or worse than the original figures (Cohen, Mashruwala, & Zach,
2010; Dechow, Kothari, & Watts, 1998). However, deliberate maneuvering of accounting numbers to
disguise the real picture of a firm's financial position and misguide stakeholders can result in destruc-
tive consequences for a firm's survival and performance (Zahra, Priem, & Rasheed, 2005), including
increased stakeholder activism and monitoring against the firm's EM activities, fired executives, and
a damaged reputation (Prior et al., 2008).
To circumvent such vigilance and activism, some managers abuse CSR to hide their involvement in
EM practices. In so doing, managers portray themselves and their firms as being socially responsible
to distract stakeholders' attention from the managers' EM practices and decrease the threat of scrutiny.
In particular, when a firm's managers and executives undertake EM they will get their incentive pay,
they will be more proactive with CSR efforts to boost the firm's social and market image. They engage
in social activities that not only influence the firm's reputation positively but also improve stakehold-
ers' satisfaction. Consequently, such socially responsible actions and behaviors help to build a strong
positive picture among stakeholders and society (Orlitzky et al., 2003) that secures them against neg-
ative consequences for their EM misdeeds (Gras-Gil et al., 2016).
EHSAN et al.   
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Specify Research Questions

Planning
Define Research Questions

Develop Review Protocol

Validate Review Protocol

Identify Relevant Studies

Conducting Selection of Primary Studies

Review
Quality Assessment of Studies

Extract Required Data

Synthesize of Data

Reporting
Reporting of Results

F I G U R E 1   Systematic review process. Source: Systematic review process adapted from (Brereton et al., 2007)
[Colour figure can be viewed at wileyonlinelibrary.com]

3  |  R E S EA RCH ME T H O D OLOGY

3.1  |  Systematic literature review

A systemic review of the literature is adopted as a research methodology to investigate CSR and EM
link. “A ‘systematic review’ refers to a literature review associated with a clearly formulated research
question that uses systematic explicit methods to identify, select, and critically appraise relevant re-
search from previously published studies related to the question at hand” (Ten Ham-Baloyi & Jordan,
2016, p. 121). Many studies recommend this method of investigating research questions in the field
of management, particularly in the case of emerging issues, because the method can satisfy the de-
mands of both practitioners and academicians (Javed et al., 2016). This study follows the Brereton,
Kitchenham, Budgen, Turner, and Khalil (2007) approach to the systematic review.

3.2  |  Research questions

1. What motivates firms' managers to engage in CSR: financial transparency to get their stake-
holders' support or masking of their opportunistic EM behavior?
2. What is the direction of causation in the CSR-EM relationship?
3. Does the approach to measuring CSR and EM (accrual-based or based on real activities) matters in
this relationship?
4. What are the important moderating factors that influence this relationship?
5. What are the other important concerns/Gaps in the existing literature on the CSR-EM relationship?
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354       EHSAN et al.

Initially Identified
Article (44)

Included with Final Possibly be Included Excluded with Final

Decision (19Ϳ (11) Decision (14)

These articles were

assessed further by

Included in Review Excluded for Review

(5) (6)

Finally, Selected
Studies for Review

F I G U R E 2   Selection process of selected studies. Source: Authors' own depiction

3.3  |  Identification of relevant studies

Google, Scholar, Science Direct, Springer Link, Wiley Online Library, SAGE Journals, JSTOR
Taylor & Francis, Emerald, and Palgrave Macmillan were searched to identify studies that have ad-
dressed the research questions. The resulting list of studies was then sorted based on those that fo-
cused on the CSR and EM relationship and on the journals in which they were published. List of main
journals was prepared which includes Academy of Management Journal, Corporate Governance: An
International Review Journal of Business Ethics, Journal of Accounting and Public Policy, Business
and Society Review, BRQ Business Research Quarterly, CSR, Global Business Review, Managerial
Auditing Journal, Journal of Cleaner Production, and Strategic Management Journal. Further, relevant
studies were selected from the available literature using the main keywords and terms derived from
the predefined research questions like CSR, corporate social performance, corporate philanthropy,
corporate citizenship, corporate social disclosure, earnings' management, earnings' quality, and earn-
ings' manipulation. Forty-one studies were identified that focused on the CSR and EM relationship.

3.4  |  Protocol for the review

Developing the protocol for the review provides details of planning the review, discussed, and as il-
lustrated in Figure 1.
EHSAN et al.   
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3.5  |  Selection of primary studies

After the relevant studies were identified, criteria were established to select primary studies that ad-
dressed the research questions. The authors set three criteria for retaining a primary study: it must
be an empirical, theoretical, meta-analysis, or literature review based on the relationship between
CSR and EM; the full text of the study must be available in English; and it must have been published
in a reputable, peer-reviewed journal. When these criteria were applied to each study, they were
categorized included, excluded, and possibly included. Next, the quality of the studies in the third
category was assessed by authors that decided whether to include them in or exclude them from the
final review. This process reduced the initial 41 studies to 24. The selection process is summarized
in Figure 2.

3.6  |  Quality assessment of studies

In the systematic review, it is important to assess the quality of the primary studies during the data
synthesis and extraction stage to support the fair process of inclusion and exclusion. No universally
accepted definition explains the particular criteria for study quality, but a study's quality is considered
to be good that reduces the extent of bias and increases the review's external and internal validity (Ten
Ham-Baloyi & Jordan, 2016). The present study assessed the quality of each study during the data
extraction process based on four questions. Is the study's purpose well explained? Is the study's re-
search approach properly defined and explained? Is the context of the research clear? Are the research
findings properly reported and discussed? With respect to these four filters of quality assessment, the
sample was reduced to 24 studies.

3.7  |  Data extraction and synthesis

For data extraction, a list of the important parameters from the selected studies was established. Then
a list of parameters was finalized based on studies in the sample, how the studies approached measur-
ing CSR, the type of the EM (accrual-based or based on real activities), moderating variables used in
the studies, and the most important findings of each study. After that data was extracted, these param-
eters were synthesized into a table. A list was established in which all information regarding the pre-
defined research questions and common parameters was summarized to draw solid inferences about
the research questions. A list of selected studies and their detailed parameters are shown in Table 1.

4  |  F IN D INGS A N D D IS C U S S ION

This section reports the main findings of the review regarding the relationship between CSR and EM
based on the research questions.

4.1  |  What motivates firms to be socially responsible?

Selected studies in the systematic review produced mixed evidence in answering what motivates firms
to be socially responsible from the perspective of EM. The studies' results were negative (Calegari
T A B L E 1   Primary selected studies for review
|

Study and
356      

Sl Year Country CSR Measures EM - Type Theory Moderator Main Findings

1 Patten and U.S. Chemical Corporate AEM Political cost High political High CED reduces EM especially in
Trompeter Industry Environmental 1. Earnings Quality theory visibility industries with high regulatory pressure
(2003) Disclosures (CED) and political pressure
(INDP) Jones (1991)
Cahan, Chavis, and Elmendorf
(1997)
2 Chih, Shen, Cross Country FTSE4Good Global AEM   Antidirector Results showed a negative relationship
and Kang Index ratings of CSR 1. Earnings smoothing rights between CSR and EM when Earnings
(2008) (INDP) 2. Earnings aggressiveness Legal smoothing and earnings losses and
3. Earnings losses and decreases Enforcement decreases avoidance were used as EM
avoidance GDP proxies and positive when earning
aggressiveness is used. Further, healthy
financial situation and strong legal
rights of countries negatively moderate
the CSR-EM relationship
3 Prior, Cross Country Sustainable Investment AEM Stakeholder Managerial Documented the positive relationship
Surroca, Research International 1. Earnings Quality agency Entrenchment between CSR and both kinds of EM,
and Tribó Company (SiRi) for theories that is, earning aggressiveness and
(2008) CSR ratings earning smoothing.
(DEP) Kothari, Leone, and Wasley, EM negatively affect the CSR and CFP
(2005) relationship
4 Laksmana United States KLD CSR Index AEM Instrumental   The earnings of BBC are more
and Yang 1. Earnings Persistence following stakeholder predictable, persistent and smooth
(2009) (Francis, LaFond, Olsson, & Theory and these findings confirmed them
Schipper, 2004) as good corporate citizens who
2. Earnings smoothness desired to fulfill their social contracts
3. Earnings Predictability with different stakeholders to have
4. Earnings Quality healthy relationships with them which
(INDP) following (Dechow & Dichev, confirmed the negative relationship
EHSAN et al.

2002) between CSR-EM

(Continues)
T A B L E 1   (Continued)

Study and
EHSAN et al.

Sl Year Country CSR Measures EM - Type Theory Moderator Main Findings

5 Calegari, United States CSR KLD Index AEM Principal-   Results confirmed that relationship
Chotigeat, 1. Discretionary accruals agent theory moves from CSR to EM
and Harjoto Bi-directional both following (Kothari et al., Firm's higher indulgence in CSR
(2010) DEP and INDP 2005) model and add growth activities has lower discretionary
opportunities in this model accruals due to the corporate culture
of CSR. CSR as a moderator increases
their earning's quality and leads to an
increase in the firm's value
6 Sun, United Kingdom CED AEM Signaling Board Size Results found no a significant
Salama, Content analysis 1. Discretionary accruals Agency and Audit relationship between CED and AEM.
Hussainey, following (Kothari et al., stakeholder- Committee However, board size positively
(DEP)
and 2005) model legitimacy influenced and audit committee
Habbash theories negatively influenced this relationship
(2010)
7 Gargouri, Canada Michael Jantzi AEM Stakeholder   Probit analysis results indicated the
Shabou, Research 1. Discretionary accruals agency positive and significant impact of
and Associates–– following (Dechow, Sloan, & theory combined CSP as well as individual
Francoeur Canadian Social Sweeney, 1995) model dimensions environment and employees
(2010) Investment Database on Earnings manipulation. (Positive
(MJRA-CSID) relationship)
(INDP)
8 Choi and Korea Ethical Commitment AEM     Corporations with high commitments of
Pae (2011) Index (ECI) 1. Discretionary accruals ethical conducts publish their earnings
(DEP) Following (Jones, 1991) model more transparently and forecast
(Dechow et al., 1995) (Kothari accurate future cash flow
et al., 2005) models
(Continues)
  
|   357
T A B L E 1   (Continued)
|
Study and
358      

Sl Year Country CSR Measures EM - Type Theory Moderator Main Findings

9 Heltzer United States CEP KLD Index AEM     The findings of this research exhibited
(2011) (INDP) 1. Discretionary accruals (Jones, the asymmetric relationship between
1991) model (Dechow et al., CER and EM as it varies across
1995) (Kothari et al., 2005) subsamples because results revealed
2. Earnings Smoothing that firms that care for protecting the
environment do not engage in less
or more EM; however, firms with
environmental concerns (negative EP)
are involved in doing EM.
10 Hong and United States CSR KLD Index Both AEM and REM Stakeholder   Socially responsible firms reported
Andersen (INDP) 1. Discretionary accruals Theory higher quality accruals and less engage
(2011) following (Jones, 1991) model in manipulating their real activities
2. (Roychowdhury, 2006) model
for REM
11 Yip, Staden, U.S. Oil and CSR Disclosure AEM Legitimacy High political The results of multivariate regression
and Cahan Gas Industry 1. Discretionary accruals visibility analysis showed an inverse relationship
(2011) and Food Content analysis of Following (Dechow et al., 1995) between CSR and EM in case of
Industry annual reports model oil and gas industry which received
high political visibility and pressure
(DEP)
especially after 1973 Arab oil crisis and
positive relationship in case of the food
industry which possesses low political
scrutiny
12 Kim, Park, United States KLD CSR Rating Both AEM and REM Integrative   Empirical results advocated that CSR
and Wier Agency 1. (Roychowdhury, 2006) for Social reduces Earnings manipulation in both
(2012) (INDP) REM Contract cases: discretionary accruals and real-
2. Discretionary accruals Theory activities EM
(Kothari et al., 2005)

(Continues)
EHSAN et al.
T A B L E 1   (Continued)

Study and
EHSAN et al.

Sl Year Country CSR Measures EM - Type Theory Moderator Main Findings

13 Pyo and Lee Korea Donations and AEM Stakeholder   Results indicated that the firms that
(2013) voluntary issuance of 1. Earnings Quality (Dechow et gave more donations they have less
CSR reports as al., 1995) (Kothari et al., 2005) discretionary accruals but engage in
(INDP) 2. Accounting Conservation higher accounting conservations
(Penman & Zhang, 2002)
14 Scholtens Asian Cross Asian Sustainability AEM Institutional Antidirector CSR-oriented Asian firms do not
and Kang Country Rating (ASR) report 1. Earnings smoothing Stakeholder rights appreciate earning management
(2013) 2009 2. Earnings Aggressiveness Theory especially in those countries having
(INDP) Legal a strong legal system and investor
Enforcement protection

GDP
Inflation
15 B. B. Choi Korea Korea Economic AEM Stakeholder Group affiliated Overall results revealed that the social
et al. Justice Institute 1. Earnings Quality Theory firms orientation of firms improved their
(2013) (KEJI) index for CSR (Dechow et al., 1995) (Kothari earning quality due to which long-term
(INDP) et al., 2005) Legitimacy Intuitional hypothesis is dominant over managerial
Theory opportunistic hypothesis. However,
Foreign
group affiliation and concentrated
Concentrated ownership positively moderates and
Ownership institutional ownership negatively
moderates this relationship. Moreover,
there is no moderating effect of foreign
ownership in CSR and EM association
16 Toukabri, United States CSD AEM Stakeholder   They did not find significant relationship
Jilani, and Content Analysis 1. Discretionary Accruals Instrumental between CSD and discretionary
Jemâa (Dechow & Dichev, 2002) Theory accruals in any direction
(Bidirectional)
(2014)
  
|

(Continues)
   359
T A B L E 1   (Continued)
|
Study and
360      

Sl Year Country CSR Measures EM - Type Theory Moderator Main Findings

17 Grougiou, U.S. CSR KLD Index AEM Social norms   Results confirmed that relationship
Leventis, 1. Discretionary Accruals theory moves from EM to CSR
Dedoulis, Banking (Bi-directional) Following (Beatty, Ke, & Stakeholder Results documented that the relationship
and Industry Petroni, 2002) (Cornett, between CSR and EM is positive in
Legitimacy
Owusu- McNutt, & Tehranian, 2009) nature and unidirectional. It moves
Ansah models from EM to CSR which means an
(2014) increase in EM practices increases the
firm's engagement in CSR
18 Gao and United States KLD CSR Rating AEM Market CSR CSR independently reduces earning
Zhang Agency 1. Earning Smoothing (Francis et efficiency smoothing and boost financial
(2015) (DEP) al., 2004) theory performance. However, the joint effect
2. Earnings informativeness of CSR and earning smoothing is
(Tucker & Zarowin, 2006) positive on earnings information. Thus,
it is evidenced that earning reported by
smoothers which are highly socially
responsible diverge less than their real
accounting information; therefore,
their mentioned earnings were valued
relevant for investors
19 Bozzolan, Cross Country Ethical Investment Both AEM and REM Stakeholder Legal Firms with a high level of CSR
Fabrizi, Research and 1. Discretionary Accruals Enforcement commitments are less involved in real
Mallin, and Information Service following (Dechow et al., than accrual earning management.
Michelon (EIRIS) 1995) model Furthermore, it is documented that
(2015) (INDP) 2. REM (Roychowdhury, 2006) in countries having strong legal
(D. A. Cohen, Dey, & Lys, enforcement bodies, the enticements to
2008) models use real EM instead of accrual EM are
appreciably lesser in corporations with
high commitment level of CSR
(Continues)
EHSAN et al.
T A B L E 1   (Continued)

Study and
EHSAN et al.

Sl Year Country CSR Measures EM - Type Theory Moderator Main Findings

20 Muttakin, Bangladesh Content analysis of AEM Stakeholder Industry context Executives in developing economies are
Khan, annual reports 1. Discretionary Accruals engaged in earnings manipulation when
and Azim (INDP) (Dechow et al., 1995) the CSR disclosures are high. However,
(2015) in the case of export-oriented industries
this relationship is negative
21 Cho and Korea Korea Economic REM Stakeholder CG Index CSR committed firms are less engage
Chun Justice Institute 1. (Roychowdhury, 2006) and agency in RAM and CG negatively and
(2015) (KEJI) index for CSR theory significantly moderate this relationship
(INDP)
22 Belgacem Tunisia CSD AEM Agency and   Mixed results
and Omri Content Analysis 1. Discretionary Accruals Legitimacy Positive with discretionary accruals
(2015) (INDP) 2. Quality of accruals Theory
Negative with discretionary accruals
3. Value Relevance
4. Earnings Conservation And no relationship between CSD and
value relevance and quality of accruals
measures of EM
23 Martínez- Cross country Ethical Investment AEM Institutional Institutional Results proved that there is a significant
Ferrero Research and 1. Discretionary Accruals Theory factors negative and bidirectional relationship
et al. Bidirectional Information Service Following (Dechow et al., Investor between CSR and AEM. Moreover,
(2015) (EIRIS) 1995) models protection this negative relationship is more
persistent in those countries that have
strong institutional laws and investor
protection right
24 Gras-Gil, Spain Korea Economic AEM Stakeholder   The empirical evidence supported the
Manzano, Justice Institute 1. Discretionary Accruals Theory long-term perspective hypothesis and
and (KEJI) index for CSR Following (Dechow et al., argued that firm's intention to provide
Fernández 1995) models the high-quality earnings information
(2016) and performing CSR activities share the
  
|

same aim of satisfying the needs of all

the stakeholders and therefore, they are
   361

closely connected to each other

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362       EHSAN et al.

et al., 2010; Cho & Chun, 2015; Gras-Gil et al., 2016; Hong & Andersen, 2011; Laksmana & Yang,
2009; Patten & Trompeter, 2003) and positive (Muttakin, Khan, & Azim, 2015; Prior et al., 2008), and
some found no relationship between CSR and EM at all (Toukabri et al., 2014). Many of the studies
(46%) found an inverse relationship between CSR and EM and supported the long-term perspective of
the CSR-EM relationship, 17% found a positive relationship and supported the managerial-opportun-
ism perspective, 33% found mixed evidence, and 4% found no relationship between CSR and EM. A
negative relationship was observed most frequently in advanced economies (more than 90%) because
of their strong legal frameworks and established institutional contexts.

4.2  |  Direction of causation in the CSR-EM relationship

Only four studies checked the direction of causation in the EM-CSR relationship in both directions,
but they produced mixed results. Calegari et al. (2010) results showed that the direction of causation
is unidirectional, moving from CSR to EM, while Grougiou et al. (2014) showed that the relationship
is unidirectional, moving from EM to CSR. Toukabri et al. (2014) found no relationship between CSR
and EM in any direction, and Martínez-Ferrero et al. (2015) showed empirically that the relationship
between CSR and EM is bidirectional. Fifteen studies checked this relationship in single direction,
from CSR to EM (Belgacem & Omri, 2015; Bozzolan, Fabrizi, Mallin, & Michelon, 2015; Choi et al.,
2013), and five studies observed this relationship from EM to CSR (Gao & Zhang, 2015; Prior et al.,
2008; Yip, Van Staden, & Cahan, 2011). No study in the sample checked the direction of causation
between real earnings management (REM) and any measure of CSR.

4.3  |  Measuring approaches/strategies of CSR and EM

According to Orlitzky et al. (2003), “how CSR is measured” is an important factor in CSR studies.
CSR is a meta-construct and the literature measures it in a number of ways. Therefore, how each con-
struct of CSR is operationalized can lead to different results.
The review findings identified three approaches to measure CSR; disclosure method, the use of
reputational indices/ratings, and a single dimension of CSR, such as donations. As most of the studies
were conducted in the developed world, where firms' CSR data are available and there are established
social indices published by social rating agencies. Therefore, the use of social indices to measure CSR
was prominent, with more than 70% of the studies using various kinds of social indices issued by
various social rating agencies. Commonly used social indices include the FTSE4Good Global Index
(Chih et al., 2008), the Kinder, Lydenberg, Domini (KLD) index (Calegari et al., 2010; Heltzer, 2011;
Laksmana & Yang, 2009), the Sustainable Investment Research International Company (SiRi) index
(Prior et al., 2008), the Michael Jantzi Research Associates—Canadian Social Investment database
(MJRA-CSID) (Gargouri, Shabou, & Francoeur, 2010), the Ethical Commitment index (ECI) (Choi
& Pae, 2011), and the Korea Economic Justice Institute (KEJI) index (Cho & Chun, 2015; Choi et al.,
2013). The disclosure method is another commonly found approach to CSR measurement, as 26% of
the studies used it. In the disclosure method, content analysis of firms' annual or CSR reports, web
sites, mail and letters to shareholders, and newspaper articles is employed to measure CSR based on
the information disclosed about the firm's CSR. All the studies that were performed in the context of
developing economies used the content analysis approach to measure (for example Belgacem & Omri,
2015; Muttakin et al., 2015). A single CSR dimension (i.e., donation, environment) was used by 4%
of the studies as a measure of CSR (Pyo & Lee, 2013).
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With respect to EM, the literature review revealed two broad approaches to measure EM: accrual
and real EM. REM is defined as “departures from normal operational practices, motivated by manag-
ers' desire to mislead at least some stakeholders into believing certain financial reporting goals have
been met in the normal course of operations refers to the companies modifications in the business
actions that they take and thus affect their true economic reality” (Roychowdhury, 2006, p. 337).
Accrual EM (AEM) is another approach to measure EM, in which managers exercise a certain degree
of discretion over their firms' accrued earnings without violating GAAP to show either an increase or a
decrease in the accounting figures (Dechow & Skinner, 2000). The review showed that more than 83%
of the studies used AEM (like Calegari et al., 2010; Gras-Gil et al., 2016; Laksmana & Yang, 2009),
while only 13% considered both REM and AEM (Bozzolan et al., 2015; Hong & Andersen, 2011; Kim
et al., 2012). The use of REM was limited to four of the studies in the sample (i.e., Bozzolan et al.,
2015; Cho & Chun, 2015; Hong & Andersen, 2011; Kim et al., 2012).
Further, findings regarding the approaches to measuring CSR and EM variables supported (Orlitzky
et al., 2003) the argument that the operationalization of each construct of CSR and EM produces in-
consistent results. Therefore, inconsistent findings are found with respect to different measures of
AEM and CSR. A negative relationship between CSR and AEM was found across all measures of
CSR, including reputational indices (Gao & Zhang, 2015; Laksmana & Yang, 2009), CSR disclo-
sures (Patten & Trompeter, 2003), and donations (Pyo & Lee, 2013). Similarly, a positive relationship
between CSR and AEM was demonstrated across two measures of CSR: reputational indices (Prior
et al., 2008) and CSR disclosures (Muttakin et al., 2015). One major consistency was the negative re-
lationship between CSR and REM found in all studies that investigated the relationship between CSR
and REM. However, all of these studies used reputational indices/rankings to measure CSR. No study
investigated REM with any measure of CSR in the context of developing countries.

4.4  |  Moderating factors in the relationship between CSR and EM

As a firm's social behavior in reporting transparent information is increasingly demanded by various

stakeholders, CSR-EM link is gaining the attention of scholars. However, this relationship has not
been found the same under all conditions, so researchers have begun to investigate the factors at vari-
ous levels of country, industry, and firm levels that influence firms to maintain social integrity, while
disclosing financial information. Fifty-four percent (11) of the studies in this review used moderating
factors that can influence this relationship across all levels.

4.4.1  | Industry-specific

Four studies (Bozzolan et al., 2015; Chih et al., 2008; Martínez-Ferrero et al., 2015; Scholtens &
Kang, 2013) used country-specific factors like legal enforcement, investor protection, antidirector
rights, GDP, and inflation and concluded that they significantly moderate CSR-EM relationship.
These studies had the view that countries that are characterized by effective legal-institutional en-
forcement have stronger investor rights, which force firms to be transparent in reporting their earnings
so they do not suffer severe negative consequences (Haw, Hu, Hwang, & Wu, 2004). GDP and infla-
tion rates represent a country's financial situation and firms that belong to financially rich countries
engage less often in EM practices.
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364       EHSAN et al.

4.4.2  | Country-specific

The relationship between CSR and EM has also been observed to vary across industries because of
the contextual differences and incongruent demands of stakeholders in each industry. For instance,
Muttakin et al. (2015) observed that firms' CSR practices in the export-oriented industry are influ-
enced by international buyers, so they face high stakeholder pressure to be transparent. For this rea-
son, the interaction effect of the export-oriented industry is significant and negative in the CSR-EM
relationship. Yip et al. (2011) and Patten and Trompeter (2003) analyzed the political cost hypothesis
in the CSR-EM relationship and found that the inverse relationship between them is more robust in
industries that are under high political and regulatory pressure.

4.4.3  | Firm-specific

The firm-specific moderating effects that the studies in this review have explored consist only of the
attributes of corporate governance mechanisms, such as board size, external audit by Big Five audit
firms, ownership concentration, foreign and institutional ownership, and the CG index as a whole.
Prior et al. (2008) investigated the role of managerial entrenchment in the CSR-EM relationship and
found a significant positive effect that pulls managers to use CSR as a strategic tactic against their
EM activities. Sun, Salama, Hussainey, and Habbash (2010) found that no significant CSR-EM rela-
tionship unless the interaction effects of board size and external audit quality is added to the model
when the relationship becomes significant. B. B. Choi et al. (2013) corroborated the positive influence
of ownership concentration in the CSR-EM relationship, the negative effect of institutional owners,
and no effect of foreign ownership in Korean firms. Similarly, Cho and Chun (2015) used the Korea
Corporate Governance Service (KCGS) index to find a moderating role of corporate governance (CG)
in the relationship between REM and CSR and found that effective CG does not allow managers to
use their discretions in reporting accounting numbers.

4.5  |  Theoretical and methodological and other important concerns

Theoretical foundations that support the CSR-EM association are narrow, as the majority of the exist-
ing studies have focused on only three theories: stakeholder theory, agency theory, and legitimacy
theory. Little theoretical support is available with respect to the institutional perspective and even less
is available to support the signaling theory and the market efficiency theory.
As for methodological concerns, almost all of the studies in the sample were based on empirical
research and their research models focused on the use of secondary data. Although the literature
considers perceptual measures of CSR to be important to the ability to gain insights into firms' social
behavior, no study has used perceptual measures to investigate the CSR-EM relationship. Much of the
existing studies' focus has been on using social databases like KLD. The use of a single dimension of
CSR (Heltzer, 2011; Pyo & Lee, 2013) is also a concern, as it does not portray the intensive breadth
of the CSR concept. The studies that used only one dimension lack validity because their findings
are so difficult to generalize (Galant & Cadez, 2017; Rowley & Berman, 2000). Further, undersized
samples in studies like Patten and Trompeter (2003) have led to inconsistent results for the CSR-EM
relationship because their results cannot be compared with those of other studies (Elsayed & Paton,
2005; Orlitzky et al., 2003). Studies that have used cross-sectional samples, such as (Sun et al., 2010),
are also controversial, as they are not able to control the heterogeneity of firms in the sample, so these
samples hide firms' differences in an industry.
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5  |   CO NC LUSION , R E S E A RCH GAPS AND

FUT U R E R ES E A RCH

Despite the fact that CSR is one of the most extensively researched topics in the social research
stream; however, why companies involve in CSR activities and spend their capital on them is still
tenuous and questionable and this ambiguity might be due to the missing link of EM. Recognition
of the increasing importance of CSR, exposure to accounting scandals, and proof of management in-
volvement in these frauds have resulted in new insights into the debate about the relationship between
CSR and EM. These issues have fueled a debate concerning whether CSR is a tool that motivates
firms and their managers to maintain their social integrity when they report their financial information
in an effort to maintain trust in their relationships with their stakeholders (under the long-term per-
spective), or is a tool managers use to hide their involvement in EM practices (under the managerial-
opportunism perspective).
The present study adopted a systematic review approach to investigate the CSR-EM relationship
and showed that the literature's investigation of firms' engagement in CSR activities through the lens
of EM is under-developed. Although prior studies have shared valuable insights, the CSR-EM rela-
tionship needs additional empirical and theoretical investigation. Review outcomes revealed that the
negative relationship between CSR and EM under the long-term perspective hypothesis is dominant.
It highlighted the notion that organizations that are concerned about establishing healthy relationships
with their stakeholders and serving their interests instead of only those of shareholders develop their
moral and ethical values that advocate against EM practices. However, some studies demonstrated
a positive relationship between CSR and EM under the managerial-opportunism perspective (Chih
et al., 2008; Hong & Andersen, 2011; Prior et al., 2008), contending that firms use CSR to avoid the
negative consequences of scrutiny by stakeholders and regulatory bodies.
The aforementioned inconsistencies in the existing literature observed certain research gaps, which
opens avenues for further investigation.
The large majority of prior research has focused on advanced economies. Sixty-seven percent (16)
of the studies in the sample was performed purely in the context of developed economies, among
which (10) studies solely focused on the U.S. economy. Only two studies were based solely on de-
veloping economies (Bangladesh and Tunisia), and 25% used a cross-country sample. No studies in
the sample investigated the relationship between REM and CSR in the context of a developing econ-
omy. Developing economies are characterized by the weak institutional and legislative frameworks
regarding the rights and responsibilities of corporations and their stakeholders. Because of these weak
institutions, firms may be more likely to engage in CSR activities to hide EM, as (Muttakin et al.,
2015) demonstrated. Therefore, future studies should focus more on developing economies to justify
the varying results.
In the existing literature on EM, researchers have asserted that firms' managers switched their EM
practices from AEM to REM practices after the introduction of the Sarbanes-Oxley Act of 2002 (also
called the “Public Company Accounting Reform and Investor Protection Act” and the “Corporate and
Auditing Accountability, Responsibility, and Transparency Act”) in the United States. However, 20 of
the 24 studies in the sample followed AEM, while only four attempted to shed light on the CSR-EM
relationship with respect to REM. Future researchers should, therefore, focus more on REM because
its outcomes are more threating for the firm's sustainable development and long-term FP than AEM
is (Gunny, 2010).
An endogenous and bi-directional relationship between CSR and EM is another important issue
that should be addressed in future studies. As previous studies have directed that EM and CSR can be
determined endogenously by the overall firm's management policies or by several other factors that
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366       EHSAN et al.

are external (Prior et al., 2008). If earnings quality and CSR policies are determined side by side, then
the results can be biased and inefficient if the endogeneity issue is not addressed. To overcome this
problem, future studies should consider the linear simultaneous equations, Generalized Method of
Momentum (GMM), and Two-Stage Least Square (2SLS) approaches.
The present research also revealed the literature's neglect of moderating variables at the firm,
industry, and country levels and their effect on the CSR-EM association. At the firm level, although
several studies investigated the moderating effect of EM and CSR (Calegari et al., 2010; Gao &
Zhang, 2015; Prior et al., 2008) on firm value, none explored the effect of firm value (in terms of
its FP) on this relationship. However, the literature has established that financially sound firms have
more resources than other firms do, so they are more inclined to be involved in CSR practices and less
inclined to engage opportunistically in EM. Moreover, the literature has shown that stakeholders have
a strong influence on this relationship but have not yet integrated the interaction of various dimensions
of stakeholders in CSR-EM association into what is known about this relationship. In addition, the
moderating effects of many other firm-level attributes are still under-examined, including firm size,
degree of leverage, degree of risk, age, and life cycle, as well as managerial attributes and managers'
social orientations. At the industry level, future studies could explore the moderating effects of indus-
try growth, differentiation, and regulatory policies. At the country level, exploring the influence of
various economic cycles, such as boom and recession, could also be helpful.
Narrow theoretical support is available to support the CSR-EM relationship. Future researchers
should focus on following the integrative approach, which blends the streams of stakeholder, rela-
tional, managerial, and institutional theories. Furthermore, social networking theory, which delineates
the firms' social relations, interactions, and networks within the firm and outside the firm, can also be
a potential considerable approach to support the CSR and EM relationship.

6  |  P O LIC Y IMP L ICAT ION S

The findings of this review draw important implications for stakeholders like managers, research-
ers, investors, and policymakers. Policymaking authorities are recommended to reward organizations
that pursue CSR initiatives solely for the purpose of social development and at the same time to be
vigilant in looking for those organizations that implement CSR initiatives to hide their EM practices.
Managers can also use the inferences drawn from this research to execute and formulate the CSR
strategies that can assist them to achieve financial transparency when they release and disclose their
organizations' earnings information. Growth has been observed in investments in socially responsible
firms. However, the evidence about the positive relationship between CSR and EM gives new insights
into shareholders and investors, as it advises them to take caution in analyzing firms' CSR strategies
and activities when they make their financial and credit decisions.

ORCID
Sadaf Ehsan  https://orcid.org/0000-0002-1212-3900
Mohammad Nurunnabi  https://orcid.org/0000-0003-0848-3556

ENDNOTE
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alter financial reports to either mislead some stakeholders about the underlying economic performance of the company,
or to influence contractual outcomes that depend on reported accounting numbers” (Healy & Wahlen, 1999, p. 6).
EHSAN et al.   
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How to cite this article: Ehsan S, Nurunnabi M, Tahir S, Hashmi MH. Earnings management:
A new paradigm of corporate social responsibility. Bus Soc Rev. 2020;125:349–369.
https://doi.org/10.1111/basr.12198