Corporate social responsibility and
earnings management in the EU: a panel
data analysis approach
Panagiotis E. Dimitropoulos
Panagiotis E. Dimitropoulos
is based at the Department
of Sport Organization and
Management, University of
Peloponnese, Sparta,
Greece.
Received 21 April 2020
Revised 17 September 2020
Accepted 6 November 2020
PAGE 68 j SOCIAL RESPONSIBILITY JOURNAL j VOL. 18 NO. 1 2022, pp. 68-84, © Emerald Publishing Limited, ISSN 1747-1117
Abstract
Purpose – Over the past decades, corporate social responsibility (CSR) has been considered as a
significant corporate strategy and also has been documented as a main information dissemination
mechanism of corporations to shareholders, creditors and other external stakeholders. This fact makes
the CSR activities and CSR performance interconnected with the quality of firms’ financial reporting. The
purpose of this paper is to study the impact of CSR performance on the earnings management (EM)
behaviour using a sample from 24 European Union (EU) countries summing up to 121,154 firm-year
observations over the period 2003–2018.
Design/methodology/approach – The study uses a multi-country data set with various dimensions of
CSR performance including indexes regarding workforce, community relations, product responsibility
and human rights protection. The empirical analysis is conducted with panel data regressions.
Findings – Evidence supports the negative association between CSR and EM indicating that high CSR
performing firms are associated with less income smoothing and discretionary accruals, thus with higher
financial reporting quality.
Practical implications – Regulatory agencies in the EU could use the findings of the study for the
improvement of the accounting framework via enhancing the use and publications of social and
environmental responsibility information and reports.
Social implications – Also, the current paper could be of interest not only to academic researchers but
also to potential and existing investors in European corporations. The negative association between CSR
performance and EM could be used by investors in assessing the risk of firms and the quality and
reliability of their financial information.
Originality/value – This is the first study within the EU, which considers the multi-facet characteristics of
CSR on the quality of accounting earnings and offers useful policy implications for regulators and
investors.
Keywords European Union, Corporate social responsibility, Earnings management, Accruals,
Accounting quality
Paper type Research paper
Introduction
The value relevance of published accounting information is mainly determined by its
transparency, accuracy and overall quality, as the main scope of accounting information is
to inform users and stakeholders regarding the true economic condition of the firm
(Obigbemi et al., 2016). Improved accounting quality can have a significant impact on the
decision-making behaviour of stakeholders, the level of trust and efficiency of the capital
market and the proper allocation of scarce economic resources. In the literature,
accounting information quality is the degree of transparency and credibility of financial
information (Katmon and Farooque, 2017) and the degree to which financial reports meet
the disclosure requirements of accounting standards.
DOI 10.1108/SRJ-04-2020-0156
In prior literature, accounting information quality is measured through various proxies the
most popular being that of earnings management (EM) and specifically income smoothing
and the level of discretionary accounting accruals (Niu, 2006). EM commonly refers to
managerial activities aiming to influence positively their bottom-line earnings (net profits) so
as to avoid reporting small losses and even report small positive income (Dimitropoulos,
2011). This deliberate influence of the financial reporting process is exercised for self-
interest reasons such as receiving performance-associated compensation, avoiding debt
covenants or avoiding regulatory scrutiny (Xie et al., 2003; Choi et al., 2018). Managers
manipulate earnings primarily through accruals, thus accounting information quality can be
inversely represented by accruals level. The higher the accruals level, the higher is the EM
behaviour and the lower the accounting information quality (Healy and Wahlen, 1999; Hong
and Andersen, 2011; Walker, 2013).
The ability of firms to gain support from their stakeholders and even built long-term
relationships is dependent on their decision to report transparent and reliable financial
information. According to Ehsan et al. (2020), the disclosure of accurate and reliable
financial statements is closely associated with the corporate social responsibility (CSR)
behaviour of firms because as CSR behaviour is aiming to satisfy the needs and interests of
various stakeholders (employees, creditors, lenders, shareholders, etc.), financial
transparency and reliability are also crucial to stakeholders, as they can assist them to
reach into informed business decisions, which contributes to enhanced resource allocation
within the economy.
Under this framework, several research studies have considered the impact of CSR-related
activities and performance on the quality of financial information published by firms. One
strand of literature (agency theory perspective) argues that CSR is negatively associated
with EM because CSR mitigates the agency problems within firms by reducing the
managerial incentives to exercise accounting discretion over financial reports. Several
ethical, political and cross-disciplinary theories have been developed to explain that
association, arguing that firms engaging and investing resources on CSR activities tend to
be more ethical, honest and trustworthy on their daily operations. Consequently, high CSR
performing firms are more likely to restrain EM behaviour (Choi et al., 2018). The other
strand of the literature, documents that CSR and EM could be positively associated
because CSR could be used as a vehicle for window-dressing the true economic condition
of the firms (political cost hypothesis). If managers use CSR to mask their private benefits
and perquisites, they may be more incentivized to mislead shareholders and other
stakeholders with opportunistic financial reporting (EM) (Kim et al., 2012; Buertey et al.,
2019; Choi et al., 2018).
Empirical evidence so far has yielded conflicting evidence on the impact of CSR on
earnings manipulation. Prior et al. (2008), Buertey et al. (2019), Habbash and Haddad
(2019) provide evidence of a positive association between CSR and earnings manipulation
supporting the political cost hypothesis. On the contrary, Choi et al. (2018), Yoon et al.
(2019), Kim et al. (2019), Palacios-Manzano et al. (2019) and Kumala and Siregar (2020) all
point to a negative association between CSR and EM. The negative association is justified
by the fact that high CSR performance firms tend to be more profitable and this enhanced
profitability is the outcome of real activities and not earnings manipulation or income
smoothing.
The contradictory evidence in the literature are explained by the fact that CSR is a multi-
faceted variable, which incorporates several distinct categories of activities and
investments, where each one may have a different association with earnings manipulation.
Also, the conflicting evidence in the literature could be attributed to the fact that the motives
for income smoothing may differ between countries and business settings. According to
Ehsan et al. (2020), academic researchers have not yet reached into a consensus on the
direction of association between EM and CSR. Some other reasons for the inconsistency of

VOL. 18 NO. 1 2022 j SOCIAL RESPONSIBILITY JOURNAL j PAGE 69

 empirical results include the under-sized cross-industry and cross-country samples, the use
of a single dimension of CSR and the impact of endogeneity on the CSR and EM
association.
The scope of this paper is to shed further light on the impact of CSR performance and its
components on EM behaviour by incorporating a multi-country research setting (24 EU
countries) and considering various sub-categories of social performance, thus providing
more thorough evidence in the existing literature regarding the impact of CSR on the quality
of accounting numbers. Our study extends previous evidence by Habbash and Haddad
(2019) and Kumala and Siregar (2020) by analysing an extended multi-country and multi-
sector sample of firms in the EU instead of a single country setting. Also, we operationalize
multi-dimensional data on CSR (instead of a single dimension) including, community
relations, workforce efficiency, product responsibility activities, protection of human rights
and overall CSR strategic focus, thus allowing us to extract more important inferences on
the CSR and EM association. According to Ehsan et al. (2020), the studies that use a single
dimension of CSR lack validity and reliability because their results are not easily
generalizable. Additionally, we operationalize a panel data research framework, which
allows us to control for heterogeneity among years, countries and sectors. Simultaneously,
we control for the existence of endogeneity on the relation between the variables under
study. Consequently, our study tries to remedy most of the research discrepancies
mentioned in the literature, thus it can provide more salient and concrete inferences on the
impact of CSR on EM behaviour.
The study uses a sample of listed and unlisted firms summing up to 121,154 firm-year
observations, over the period 2003–2018. Empirical evidence supports the negative
association between CSR and EM indicating that high CSR performing firms are associated
with less income smoothing and less discretionary accruals (DACC), thus they are
characterized by higher financial reporting quality. The study offers useful policy
implications for financial reporting users and regulators. European firms have the feature
that operates within a unified financial reporting environment, as EU has passed accounting
regulations that harmonize rules and reporting practices in member states since 2005. The
incorporation of CSR reports on the classic financial reporting regulations can further
improve the financial reporting environment within the EU with a significant impact on
capital flows in the EU market and firms’ growth. In the following section, we provide the
theoretical background on the impact of CSR on earnings manipulation and the testable
hypothesis. Section 3 discusses the data selection procedure and the research design.
Section 4 provides the discussion of empirical results and Section 5 concludes the paper.

Literature review and hypotheses development

The association between CSR and income manipulation has been considered by many
researchers under different theoretical lenses. One such theory is the myopia avoidance
hypothesis, which according to Chih et al. (2008) states that a socially responsible firm will
not resort to income manipulation to mask its bad financial performance, so higher CSR
performance is associated with higher accounting quality via less earnings manipulation.
On the contrary, the predictable earnings theory and the multiple objectives theory are two
additional theories, grounded within the political cost hypothesis, predicting a positive
association between CSR and income manipulation (Buertey et al., 2019). In addition, the
predictable earnings hypothesis documents that firms, which are more devoted to CSR
activities and want to enhance the informational advantage of outside investors and
stakeholders relative to firm insiders, are more incentivized to use income smoothing
techniques, and thus, are more probable to resort to income manipulation to manage their
accounting numbers. The multiple objectives hypothesis mentions that within firms, which
try to accommodate various stakeholders’ interests (via CSR activities), managers are not
so accountable for the use of firm resources, relative to those firms that their managers are

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focused on short-term financial targets. Thus, CSR performing firms can choose EM
mechanisms to mask their sub-optimal allocation decisions (Yoon et al., 2019). Finally, the
institutional hypothesis argues that CSR performance is unrelated to earnings manipulation
because financial misbehaviour and even fraud are not the result of a decline in ethical
behaviour but of other institutional factors (Kim et al., 2019).
During the past decade, CSR activities and investments have experienced a significant
increase and even more firms are devoting human, capital and financial resources in
various social activities to gain legitimacy for their activities by society or even adhere with
the social concerns of their stakeholders. Social responsibility has been scrutinized
intensively by customers, investors, media and other stakeholders. This increased public
concern has become a significant driver of CSR performance and firms are more careful on
their implementation of corporate social behaviour. Empirical evidence by Yu (2008) and
Buertey et al. (2019) suggest that increased market coverage and monitoring serve as a
substitute governance mechanism contributing to reduce earnings manipulation. So
practically, high CSR performing firms are associated with higher quality of financial
information. Empirical evidence by Hong and Andersen (2011), Yoon et al. (2019), Kim et al.
(2019) and Palacios-Manzano et al. (2019) verify these arguments in various countries and
business sectors.
Furthermore, firms with enhanced social responsible behaviour are more probable to
experience a higher managerial-corporate interest alignment status, which, in turn, may
reduce managerial incentives for income manipulation. Also, highly CSR performing firms
tend to be long-term focused and less oriented towards short-term financial goals and so
disclose more non-financial voluntary information (Litt et al., 2014). So based on the above
findings, CSR performing firms are expected to be associated with higher financial
transparency, and thus, may have established a corporate reporting culture, which reduces
the incentives for earnings manipulation. Therefore, following the abovementioned
discussion, it is expected that increased CSR performance will be associated with higher
financial reporting quality (less EM). So the main research hypothesis is stated as follows:
H1. CSR performance will have a negative impact on EM.

Data selection procedure and research design

The current study uses a sample of non-financial corporations (both listed and unlisted)
from 24 EU-member countries over the period 2003–2018. All financial, governance and
social responsibility data have been extracted from the datastream database. The sample
collection procedure started by including all corporations that have been covered by the
Refinitiv environmental, social and governance (ESG) scores provided by datastream
during the sample period. This is a database that creates indexes about environmental,
governance and social responsibility activities of firms and rates them in an annual basis.
That database is been considered as one of the most reliable and trustworthy databases on
CSR, as it has been used by several studies on the field (Ioannou and Serafeim, 2012;
Chollet and Sandwidi, 2018; Tasnia et al., 2020; Chen and Yang, 2020). From a total of
656,734 firm-year observations, we excluded those firms without social score data for at
least five consecutive years to avoid bias in the empirical results and also to facilitate the
estimation of differenced variables. Furthermore, we excluded firms with incomplete
financial data on operating cash flows, revenues, accounts receivables, fixed assets and
those that do not close their fiscal year on December. Also, we excluded financial services
firms (banks and insurance companies) due to their different financial reporting
characteristics. In addition, we winsorized the upper and lower 1% of the data distribution to
mitigate the influence of significant outliers in the empirical analysis. After this procedure
was finalized, we ended up with a final sample of 121,154 firm-year observations. Table A1,
in the Appendix presents the sample selection process in more detail.

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 Tables A2 and A3 on the Appendix present the sample distribution per year, country and
sector. As we can see the social disclosure of EU firms has increased over the years with
2004 being the year with the most significant increase and afterwards, the coverage
remains stable with a few improvements. The countries with the higher coverage, and thus,
participation in the overall sample are Finland and The Netherlands with something more
than 12,000 observations while third follows Spain with 11,769 observations. The Balkan
countries have the smallest contribution in the overall sample (Romania, Greece, Bulgaria
and Hungary) along with the Baltic counties (Slovenia, Slovakia and Malta). This distribution
is quite logical, as most of those countries have entered the EU relatively recently and their
market economy is not well-developed compared to the other EU member countries, thus
CSR-related activities have not been fully aware by companies in those countries and they
have not incorporated CSR within their corporate strategy. Finally, the sectors with the
highest observations are those of industrial firms, consumer discretionary and materials,
while the less observations are observed within the energy and utilities sectors.
To examine the main research hypothesis, we measure the level of earnings manipulation
using two proxies, income smoothing and the level of DACC (Jones, 1991). Following
previous studies by Leuz et al. (2003), Barth et al. (2008) and Heltzer (2011), income
smoothing is estimated by the Spearman correlation between accruals and cash flows
between firms of high, medium and low CSR performance. CSR performance is the firm

Table 1 Descriptive statistics of the sample variables

Variables Mean SD Median Min Max

DACC 18.933 33.833 5.626 52.983 117.54

ABS_DACC 20.777 33.833 5.633 0.0001 117.54
CSR 61.077 19.931 63.237 5.244 98.077
STRAT 55.777 28.171 58.928 0.164 99.804
WORK 65.425 25.369 70.833 0.318 99.845
HUMAN 67.169 25.897 75.649 0.901 99.809
COMM 55.609 29.271 58.139 0.253 99.850
PROD 61.407 27.848 66.831 0.081 99.844
SIZE 20.496 2.848 20.349 2.302 30.311
LEV 4.627 4.319 0.602 0.682 25.691
MV_BV 55.688 43.913 5.820 22.166 256.91
ROA 21.281 48.257 0.027 27.861 174.17
R&D_EXP 0.018 0.017 0.016 0.025 0.082

Table 2 Pearson correlation coefficients of sample variables

Variables 1 2 3 4 5 6 7 8 9 10 11 12 13

1. DACC 1
2. ABS_DACC 0.92 1
3. CSR 0.01 0.01 1
4. STRAT 0.08 0.09 0.72 1
5. WORK 0.01 0.01 0.73 0.43 1
6. HUMAN 0.07 0.00 0.75 0.45 0.46 1
7. COMM 0.02 0.03 0.74 0.41 0.37 0.45 1
8. PROD 0.02 0.01 0.71 0.33 0.43 0.40 0.41 1
9. SIZE 0.13 0.15 0.00 0.03 0.06 0.04 0.04 0.02 1
10. LEV 0.02 0.02 0.00 0.00 0.01 0.00 0.00 0.00 0.05 1
11. MV_BV 0.00 0.00 0.02 0.01 0.00 0.02 0.02 0.04 0.02 0.00 1
12. ROA 0.72 0.78 0.01 0.01 0.01 0.01 0.03 0.02 0.13 0.07 0.00 1
13. R&D_EXP 0.03 0.01 0.02 0.02 0.02 0.01 0.03 0.00 0.03 0.02 0.00 0.06 1
Note: Correlation coefficients in bold indicate statistical significance at least at the 5% significance
level

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annual average of five social responsibility scores referring to CSR strategy score, work
force score, human rights score, community score and product responsibility score. All
social variables scores range between zero (0) and 100 so the higher the score the more
socially responsible and efficient is the firm. High CSR firms are those that their CSR score
is above the third quartile of the CSR score for each year, low CSR firms are those that their
CSR score is below the first quartile and firms with CSR scores between the first and third
quartiles are denoted as medium CSR performing firms. To capture any confounding
effects of factors that are not attributable to the financial reporting setting, we adopt the
methodology proposed by Barth et al. (2008) and compare the correlations of the accruals
and cash flows residuals (CF and ACC ), from the following regression models, instead of
comparing the correlations between accruals and cash flows directly. The relative models
have the following form:

CFOit ¼ a0 þ a1 SIZEit þ a2 MV BVit þ a3 LEVit þ a4 ROAit þ a5 DLISTit þ a6 R&Dit þ eit

(1)

ACCit ¼ a0 þ a1 SIZEit þ a2 MV BVit þ a3 LEVit þ a4 ROAit þ a5 DLISTit þ a6 R&Dit þ eit

(2)

where:
CFO is the annual operating cash flow divided by lagged total assets.
ACC is total accruals measured as the difference between net income and CF divided by
lagged total assets.
SIZE is the natural logarithm of end year total assets.
MV_BV is the ratio of market value to book value of equity.
LEV is the ratio of total liabilities to total assets.
ROA is the ratio of net income before taxes to total assets.
DLIST is a dummy receiving (1) for publicly listed firms and (0) otherwise.
R&D is the ratio of R&D expenses to revenues.
Barth et al. (2008) interpret a more negative correlation between accruals and cash flows
residuals as earning smoothing due to the fact that managers respond to poor cash flow
outcomes by increasing accruals (through the increase of net income, as accruals are the
difference between net income and operating cash flows). If this is true we predict that firms
with higher CSR performance will present a less negative correlation between accruals and
cash flow residuals compared with medium and low CSR firms, thus will be associated with
lower income smoothing.
The second measure of earnings manipulation is based on the modified Jones (1991)
model capturing the DACC of firms. The term “accruals” originates from the accrual basis of
accounting, which dictates that all expenses and revenues that have been incurred but not
yet paid or received must be reported within the financial statements and are estimated as
the difference between net income and operating cash flows (Dimitropoulos, 2011).
According to Jones (1991), the indication of earnings manipulation refers to the use of total
accruals in such a manner where private benefits can be extracted for corporate managers.
The Jones (1991) model distinguished total accruals between normal (or non-DACC) and
abnormal (DACC) based on their nature and origin. Normal accruals are the outcome of
adjustments to cash flows because of accounting rules and regulations. On the contrary,
DACC are those adjusted or manipulated by the managers according to disclosure
decisions made explicitly by them. Some classic examples of DACC used by managers to
manipulate their financial statements are the disclosure of increased depreciation and

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 amortization expenses prior to initial public offerings, increasing bad debt provisions and
disclosing increased provisions for deferred taxation (Dimitropoulos, 2011).
The most popular empirical model for estimating DACC is the modified Jones model,
which has been proved to be more efficient in detecting EM relative to other accrual
models in the literature (Dechow et al., 1996). For this reason, in this study, we
estimated the cross-sectional Jones (1991) model, as being modified by Dechow et al.
(1996) and Kothari et al. (2005), to extract the discretionary or abnormal accruals (Kim
et al., 2019; Yoon et al., 2019). This model estimates DACC as a function of the
difference between change in sales and change in accounts receivables, the level of
property, plant and equipment and the level of return on assets by estimating the
following cross-sectional ordinary least squares equation:

ACCit1 ¼a0 þ að1=TAt1 Þþ b ½DSALESi –DRECi =TAt1 þ g ðPPEi =TAt1 ÞþgROAi þei
(3)

where:
ACC is total accruals defined as the difference between net income and operating cash
flows divided by lagged total assets.
DSALES is the change in net sales deflated by lagged total assets (Salesit – Salesit-1).
DREC is the change in accounts receivables (RECit – RECit-1).
PPE is the level of property plant and equipment for each year deflated by lagged total
assets.
ROA is the return on assets estimated as net income over total assets.
TA is the firm’s total assets at the end of the fiscal year.
As Kothari et al. (2005) argue, the inclusion of a constant term in the Jones (1991) model
provides an additional control for heteroscedasticity, it mitigates any omitted size variable
problems and produces discretionary accrual measures that are more symmetric, making
the power of the test comparisons more clear and overcoming model misspecifications. The
DACC are defined as the residuals from the estimating Model (3). A higher value of DACC
indicates a greater level of manipulation in the financial statements, thus lower earnings
quality. To test our research hypotheses, we introduced the value of DACC as the
dependent variable and the average CSR and its components along with control variables
in the following models where i denotes the firm, t the year and e is the error term:

DACCit ¼ a0 þ a1 CSRit þ a2 SIZEit þ a3 LEVit þ a4 MV BVit þ a5 ROAit þ a6 R&D EXPit

þ Year F :E þ Industry F :E : þ Country F :E : þ eit
(4)

DACCit ¼ a0 þ a1 STRATit þ a2 SIZEit þ a3 LEVit þ a4 MV BVit þ a5 ROAit þ a6 R&D EXPit

þ Year F :E þ Industry F :E : þ Country F :E : þ eit
(4a)

DACCit ¼ a0 þ a1 WORKit þ a2 SIZEit þ a3 LEVit þ a4 MV BVit þ a5 ROAit þ a6 R&D EXPit

þ Year F :E þ Industry F :E : þ Country F :E : þ eit
(4b)

DACCit ¼ a0 þ a1 HUMANit þ a2 SIZEit þ a3 LEVit þ a4 MV BVit þ a5 ROAit þ a6 R&D EXPit

þ Year F :E þ Industry F :E : þ Country F :E : þ eit
(4c)

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 DACCit ¼ a0 þ a1 COMMit þ a2 SIZEit þ a3 LEVit þ a4 MV BVit þ a5 ROAit þ a6 R&D EXPit
þ Year F :E þ Industry F :E : þ Country F :E : þ uit
(4d)

DACCit ¼ a0 þ a1 PRODit þ a2 SIZEit þ a3 LEVit þ a4 MV BVit þ a5 ROAit þ a6 R&D EXPit

þ Year F :E þ Industry F :E : þ Country F :E : þ uit
(4e)

All models will be estimated with panel generalized least squares (GLS) random effects.
The panel random effect estimation method was chosen because of the fact that panel
analysis contains more information with more variability and less collinearity among the
variables, providing more efficient estimates and precise parameters of model estimation,
allowing us to detect many effects that are not detectable in the cross-sectional data
analysis. To choose the random effect estimation, we performed the Breusch-Pagan
Lagrange multiplier test for random effect, which tests the null hypothesis that the residuals
variance is equal to zero. The test produced a highly significant statistic (Chi2 3,255.88, p <
0.00001) leading us to reject the null hypothesis stating that the variance of residuals is
equal to zero, and thus, the random effects estimation was considered as the most
appropriate method for our case.
STRAT denotes each company’s CSR strategy score, which reflects the firm’s practices to
communicate the integration of socially responsible activities into its daily operations and
decision-making processes. WORK denotes the company’s workforce score estimated via
their efforts and effectiveness in job satisfaction, creating a healthy and safe working
environment, promoting diversity and equal opportunities for its employees. HUMAN
denotes the firms’ human rights score and indicates firms’ effectiveness in adhering to the
fundamental human rights conventions. COMM is the company’s community score
measuring the firm’s commitment to being a good citizen by protecting public health and
promoting business ethical behaviour. PROD is the firm’s product responsibility score
reflecting a firm’s ability to create quality products and services by protecting customers’
health, safety and private data privacy. Finally, CSR is the firms’ annual average of the
aforementioned five scores. All social responsibility scores range between zero (0) and 100
so the higher the score the more socially responsible and efficient the firm is. If our main H1
is valid we expect a negative a1 coefficient in Models (4 to 4e) suggesting that firms with
enhanced CSR performance are associated with lower values of DACC, thus higher
accounting quality (Yoon et al., 2019).
In addition, we included several control variables that have proved significant determinants
of EM in the literature. SIZE is measured as the natural logarithm of total assets at the end of
the fiscal year. Watts and Zimmerman (1990), Van Tendeloo and Vanstrelen (2005),
Dimitropoulos and Asteriou (2010) and Dimitropoulos (2011) argue that larger firms are
more likely to prefer downward EM because they are more prone to regulatory scrutiny. As
large firms are more profitable have less incentives to manipulate their accounting numbers.
On the contrary, large firms may resort to higher EM because of more instability of their
operations, thus are more motivated to smooth their earnings (Palacios-Manzano et al.,
2019). Therefore, due to the conflicting arguments in the literature, we cannot infer any sign
of association between the SIZE variable and the EM proxies.
Additionally, we control for the impact of firm leverage (LEV) measured as the ratio of total
debt to total assets. Van Tendeloo and Vanstrelen (2005) and Billings (1999) document that
high leveraged firms are more likely to engage in upward EM to avoid debt covenant
violations. Therefore, we believe that leverage will have a positive relation with EM. Also, we
control for firms’ growth prospects (MV_BV) measured as the ratio of market value of equity
to book value of equity. Lee et al. (2006) provide evidence that high growth firms are more
likely to manipulate earnings. Moreover, Abarbanell and Lehavy (2003) suggest that high
growth firms have stronger incentives to meet or beat analyst’s earnings forecasts resorting

VOL. 18 NO. 1 2022 j SOCIAL RESPONSIBILITY JOURNAL j PAGE 75

 to EM (Gaver and Gaver, 1993; Ittner et al., 2002; Cohen and Zarowin, 2010).
Consequently, we predict that firms with increased MV_BV will manipulate accounting
numbers more frequently and so the respective coefficient is expected to have a positive
sign.
ROA is a return on assets measured as the ratio of net income before taxes to total assets.
Dimitropoulos and Asteriou (2010), Palacios-Manzano et al. (2019), Yoon et al. (2019) and
Kim et al. (2019) document a negative association between profitability and EM suggesting
that firms with increased profits have less incentives to manipulate accounting numbers
through accruals. Consequently, we expect a negative coefficient on the ROA variable. The
last control variable is the R&D expenses to total revenue. Kim et al. (2012) argue that high
R&D intensity firms are more prone to manipulate their accounting numbers to sustain their
presence to the capital market or even gain access to various forms of financing so as to
continue expanding or sustaining their R&D projects. However, Yoon et al. (2019)
documented that high R&D intensity firms are associated with higher earnings quality in the
Korean market. So based on the above findings we expect a positive association between
R&D and EM.

Empirical results
Table 1, presents the descriptive statistics of the variables used in the regression models.
As we can see, unsigned DACC have a positive average (18.93) while the average absolute
value of DACC is positive (20.77) indicating that our sample firms use accrual EM in a
significant extent. These findings corroborate evidence provided by Kim et al. (2019) in the
Chinese market. Also, the mean CSR is 61.07 (with a standard deviation of 19.93 and
median of 63.23) indicating that the sample firms have a satisfactory social responsibility
performance score. The highest average score is that of human rights activities (67.16)
followed by workforce score (65.42) while the community responsibility score presents the
smallest value among all CSR measures with an average of 55.61. The sample firms are
highly profitable (mean ROA 21.28) and present significant growth opportunities (mean
MV_BV at 55.68). However, our sample firms are highly leveraged, as the average total debt
covers more than four times the sample firms’ total assets and spend also 2% of their
revenues in R&D investing activities. This number, however, is larger compared to R&D
expenses in the Korean market, which averages up to 0.7% (Yoon et al., 2019).
Table 2 presents the Pearson correlation coefficients between the sample variables. The
majority of the correlation coefficients are significant with economic meaning, and are
not very high indicating the absence of multicollinearity on the data. The variance
inflation factors estimation of the sample variables provided values that were far below
the threshold of 5 indicating no multicollinearity. As we can see, CSR is positively and
significantly associated with both EM measures, but the correlation is very small close
to 1%, so we can infer that it is rather minimal. However, DACC and ABS_DACC are
positively correlated with workforce score, community and product responsibility
scores, again with very small correlations ranging from 1% to 3%. Nevertheless, DACC
are negatively associated with human rights score and CSR strategy score. This
evidence suggests that different CSR variables create different EM motives on the
sample firms. This outcome justifies the use of decomposed CSR indicators instead of
using an aggregate measure of CSR. Additionally, SIZE is positively associated with
DACC and ABS_DACC indicating that larger firms manipulate their accounting
numbers through accruals. Also, highly leveraged and more profitable firms are
associated with higher EM. Moreover, R&D expenses are negatively associated with
DACC suggesting that innovative firms are associated with enhanced financial
reporting quality. Finally, growth opportunities did not provide any significant
correlation coefficients with the CSR variable and other controls.

PAGE 76 j SOCIAL RESPONSIBILITY JOURNAL j VOL. 18 NO. 1 2022

As an initial stage of our analysis, we compared earnings manipulation via income smoothing
between firms of high, medium and low CSR performance. Following previous studies by Leuz
et al. (2003), Barth et al. (2008) and Heltzer (2011) we estimated income smoothing via the
Spearman correlation between accruals and cash flows residuals from the estimation of
Models (1) and (2) (Barth et al., 2008). High CSR firms are those that their CSR score is above
the third quartile, low CSR firms are those that their CSR score is below the first quartile and
firms with CSR scores between the first and third quartiles are denoted as medium CSR
performing firms. A more negative correlation between accruals and cash flows is considered
as more earning smoothing so we expect that firms with high CSR performance will present a
less negative correlation between accruals and cash flow residuals compared with medium
and low CSR firms.
Results are presented in Table 3. As we can see, the Spearman rank correlation coefficient
increases in magnitude moving from the P1 portfolio of the high CSR performing firms
(0.649) to the P3 portfolio of low CSR performing firms (0.891). This result provides
support to H1 indicating that firms engaging in CSR activities are associated with higher
accounting quality through less income smoothing. Also, following Heltzer (2011) we proxy
for income smoothing by directly estimating the Spearman correlation between the change
in accruals and change in operating cash flows instead of the residuals from Models (1) and
(2). Again the results did not change relative to those presented in Table 3 and high CSR
firms had smaller negative cash flows – accruals correlation relative to low CSR firms.
Table 4 presents the regression results from the GLS random effect regression estimation of
Models (4 and 4a–4e) using the average CSR and its components as the main explanatory
variables. The Wald Chi-square values are highly significant and the R2s are very
satisfactory considering the size of the sample and other relative studies published in the
field. CSR produced a negative and significant coefficient (0.046) indicating that high CSR

Table 3 Income smoothing based on CSR ranked portfolios

Spearman correlation P1 – High CSR P2 – Medium CSR P3 – Low CSR

Coefficient 0.649*** 0.844*** 0.891***

p-value 0.001 0.001 0.001
Note: ***Indicate statistical significance at the 1% significance level

Table 4 Regression results of DACC on CSR score and its components

Variables Model (4) Model (4a) Model (4b) Model (4c) Model (4d) Model (4e)

Constant 16.98*** (4.25) 16.06*** (3.55) 19.58*** (4.64) 16.19*** (3.89) 15.53*** (4.59) 16.63*** (3.81)
CSR 0.046*** (2.79)
STRAT 0.005 (0.54)
WORK 0.047*** (3.30)
HUMAN 0.024** (2.08)
COMM 0.028*** (2.99)
PROD 0.018 (1.59)
SIZE 1.245*** (6.83) 1.110*** (5.61) 1.357*** (6.94) 1.187*** (6.33) 1.081*** (7.62) 1.171*** (5.98)
LEV 0.249 (0.28) 0.281 (0.29) 0.413 (0.45) 0.446 (0.48) 0.326 (0.41) 0.348 (0.36)
MV_BV 0.001* (1.92) 0.001* (1.70) 0.002*** (3.04) 0.004* (1.77) 0.002 (0.61) 0.001 (1.50)
ROA 0.549 (0.53) 0.281 (0.25) 0.865 (0.89) 0.301 (0.29) 0.892 (0.83) 0.138 (0.13)
R&D_EXP 0.485** (2.11) 0.442* (1.85) 0.502** (2.39) 0.477** (2.02) 0.647** (2.27) 0.430* (1.83)
R2-overall 0.728 0.657 0.735 0.721 0.775 0.686
Wald – x2 65.99*** 44.28*** 63.08*** 57.15*** 109.90*** 49.80***
p-value 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001
Notes: *, **, ***Indicate statistical significance at the 10%, 5% and 1% significance level, respectively, z-statistics in the parenthesis

VOL. 18 NO. 1 2022 j SOCIAL RESPONSIBILITY JOURNAL j PAGE 77

 performing firms are associated with lower DACC. Moreover, CSR components relating to
work force score (WORK), human rights score (HUMAN) and community score (COMM) all
produced negative and statistically significant coefficients supporting our arguments that
firms investing more on their employees and working environment, the protection of human
rights and on their relations with the local community, published higher quality financial
information by manipulating their earnings figures less. The finding verifies the negative
association between CSR and EM thus, we can accept H1.
Regression coefficients on CSR strategy score (STRAT) and product responsibility score
(PROD) were also negative but statistically insignificant within conventional levels, thus do
not seem to impact on accounting quality. This result is not unusual, as Hillman and Keim
(2001) argue that some types of corporate social activities are more important determinants
of corporate performance and reporting behaviour than others. The insignificance of these
two variables could be attributed to two reasons. The first originates from the study of
Michelon et al. (2013) arguing that companies that devote CSR resources on a strategic
way and focus on enhancing product quality and satisfying their customer base, they are
favored from their stakeholders. This fact leads to enhanced financial performance, which
tends to persist over time (Choi and Wang, 2009), thus contributing to lower motivation for
earnings manipulation. The second reason is related to lower information asymmetries of
CSR focused firms. According to Hickman (2020), firms, which devote significant resources
on CSR activities and customer satisfaction tend to keep their stakeholders well-informed,
contributing to lower information asymmetries between the firms’ management and their
owners. This reduced information asymmetries allows stakeholders to effectively monitor
managerial activities and impose more transparent reporting practices, thus reducing the
managerial motivation to manipulate accounting earnings. So the improved financial
performance from the one side and the lower information asymmetries from the other, could
reduce the motives for accruals manipulation, hence the insignificant impact of STRAT and
PROD on DACC.
Evidence in Table 4 corroborates arguments in the literature that high CSR performing firms
with enhanced monitoring by the markets, regulators, media and the society tend to report
higher quality accounting information. Our finding corroborates empirical evidence by Yu
(2008), Litt et al. (2014), Heltzer (2011), Yoon et al. (2019), Kim et al. (2019) and Palacios-
Manzano et al. (2019) suggesting that enhanced stakeholder-oriented management
(including social initiatives) serves as a substitute governance mechanism, which helps to
mitigate EM behaviour.
Regarding the rest of the control variables, larger firms proved to manipulate the earnings in
a higher extent (higher DACC), as SIZE produced a positive and highly significant
coefficient in all models estimation, suggesting that large firms may resort to higher EM
because of more instability of their operations, thus are more motivated to smooth their
earnings (Palacios-Manzano et al., 2019). MV_BV produced a negative and significant
coefficient in almost all models indicating that higher growth opportunities within a firm are
associated with less managerial discretion on reporting accounting earnings. This result
contradicts previous evidence in the literature that higher growth firms are more likely to
manipulate earnings (Lee et al., 2006). This result could be attributed to the fact that high
growth firms with enhanced market valuation tend to be more scrutinized by regulators and
investors and this may motivate them to sustain high quality financial reports, and thus,
exercise accrual earnings manipulation less often. Finally, the coefficient on R&D expenses
also provided a negative and significant coefficient verifying the findings by Yoon et al.
(2019) in the Korean market who documented that high R&D intensity firms were associated
with higher earnings quality.
To control for the robustness of the main empirical findings we conducted several sensitivity
tests for corroborating evidence presented in Table 4. At first, we replaced the signed
DACC with the absolute value of discretionary accruals (ABS_DACC) and re-estimated

PAGE 78 j SOCIAL RESPONSIBILITY JOURNAL j VOL. 18 NO. 1 2022

Models (4 to 4e). Results are presented in Table 5 and yield similar inferences compared to
Table 4. Specifically, the CSR coefficient is still negative and significant indicating that high
CSR performing firms report less ABS_DACC, thus H1 is again verified. In addition, Model
(4) was re-estimated by including all CSR components in the models simultaneously. The
results still provide additional support to H1.
Furthermore, we performed additional sensitivity testing by estimating the classic (not the
modified) Jones (1991) model and the Kasznik (1999) model for estimating DACC
(Palacios-Manzano et al., 2019). Evidence (untabulated) produced qualitatively similar
results with those in Tables 4 and 5. Also, following Heltzer (2011), we proxy for income
smoothing by directly estimating the Spearman correlation between the change in accruals
and change in operating cash flows instead of the residuals from Models (1) and (2). Again,
the results did not change relative to those presented in Table 3 and high CSR firms had a
smaller negative correlation relative to low CSR firms. Despite the fact that we control for
country differences by including country dummy variables, we are not certain whether the
overall finding (the negative impact of CSR on EM behaviour) is true for individual countries.
For this reason, Model (4) was re-estimated for each sample country. Untabulated results
indicated that CSR had a negative impact on EM for the majority of the sample countries (20
out of 24) so the main research hypothesis is again verified. Also, we re-estimated all
models by extracting a CSR factor from the five separate CSR measures, using principal
component analysis instead of using the simple average from these scores. Evidence still
remain robust relative to those in Table 4. Finally, we used an instrumental variables
approach (two-stage least squares estimation) to control for endogeneity as in Palacios-
Manzano et al. (2019). For this reason, we treated the CSR variable and its components as
endogenous and used a one and two year lags as instruments. Again the results were
consistent with those in Tables 4 and 5.

Conclusions
An extensive number of research studies have considered the impact of CSR activities and
performance on the quality of financial information published by firms and specifically the
level of managerial discretion on reporting accounting numbers. Empirical evidence
so far have provided contradictory evidence on the impact of CSR on EM with some
studies pointing to a positive association while others provide evidence of a negative
association (Prior et al., 2008; Buertey et al., 2019; Heltzer, 2011; Litt et al., 2014;

Table 5 Regression results of ABS_DACC on CSR score and its components

Variables Model (4) Model (4a) Model (4b) Model (4c) Model (4d) Model (4e)

Constant 13.00*** (3.30) 12.38*** (2.94) 14.34*** (3.48) 12.40*** (3.07) 12.82*** (4.03) 12.61*** (3.02)
CSR 0.028* (1.86)
STRAT 0.001 (0.07)
WORK 0.029** (2.32)
HUMAN 0.014 (1.42)
COMM 0.021** (2.43)
PROD 0.010 (1.04)
SIZE 1.060*** (5.87) 0.965*** (5.20) 1.117*** (5.80) 1.020*** (5.59) 0.991*** (7.24) 1.004*** (5.33)
LEV 1.033 (1.21) 0.994 (1.10) 1.424 (1.62) 0.972 (1.11) 0.898 (1.22) 0.991 (1.10)
MV_BV 0.001*** (2.78) 0.005** (2.53) 0.007*** (3.45) 0.006*** (2.67) 0.004* (1.70) 0.005** (2.49)
ROA 1.422 (1.54) 1.152 (1.20) 1.524* (1.71) 1.282 (1.39) 0.677 (0.73) 1.169 (1.26)
R&D_EXP 0.602*** (3.10) 0.578*** (2.91) 0.624*** (3.35) 0.596*** (3.04) 0.693*** (3.06) 0.569*** (2.91)
R2-overall 0.711 0.670 0.722 0.705 0.765 0.677
Wald – x2 51.32*** 41.97*** 51.06*** 47.20*** 85.60*** 43.53***
p-value 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001
Notes: *, **, ***Indicate statistical significance at the 10%, 5% and 1% significance level, respectively, z-statistics in the parenthesis

VOL. 18 NO. 1 2022 j SOCIAL RESPONSIBILITY JOURNAL j PAGE 79

 Yoon et al., 2019; Kim et al., 2019; Palacios-Manzano et al., 2019). The scope of this
paper was to provide more concrete evidence on the impact of CSR performance and
its components on the EM behaviour by using a multi-country research setting and
incorporating various sub-categories of social responsibility performance and EM
measures evidenced in the accounting literature, such as accrual earnings
manipulation and income smoothing. The current chapter provides more thorough
evidence in the existing literature regarding the impact of CSR on the quality of
accounting numbers. The empirical results verified evidence and arguments in the
literature that CSR performance improves the quality of published accounting
information by mitigating EM behaviour via accruals. This argument is corroborated
after performing several sensitivity tests relating to the estimation of DACC, the
functional form of the models and other robustness tests.
The results of this chapter have important implications for regulatory agencies in the EU. As the
majority of the European countries have adopted common accounting standards and financial
reporting rules, the improvement of the accounting framework (which is the ultimate goal of
supranational accounting regulatory bodies such as International Accounting Standards Board)
could be achieved via enhancing the use and publications of social and environmental
responsibility information and reports (Palacios-Manzano et al., 2019). Also, the current chapter
could be of interest not only to academic researchers but also to potential and existing investors
in European corporations. Academic researchers should keep in mind that CSR is a
multidimensional measure and different features of CSR could have a differential impact on
financial reporting quality. So researchers should incorporate distinct measures of CSR (instead
of aggregate measures) and control for endogeneity on empirical designs of CSR and
accounting quality to reach into more precise inferences. Also, the negative association between
CSR performance and EM could be used by investors in assessing the risk of firms and the
quality and reliability of financial information. Suto and Takehara (2018) provide evidence of a
lower systematic risk for firms engaging and reporting CSR activities and responsible
investments, as investors perceive such firms as less risky. The fact that CSR performance
impacts positively on the quality of accounting information provides additional assistance to
investors for making value relevant investment decisions.
Nevertheless, the study does not come without limitations. CSR is one dimension of corporate
sustainability. Environmental responsibility and governance efficiency are two additional
dimensions were future research can examine as determinants of financial reporting quality.
Also, this study is focused on EM behaviour as one feature of accounting quality. Additional
accounting quality metrics include accounting conservatism, earnings value relevance and
persistence. So future research can extend the findings of the current study by considering
other accounting quality characteristics and how CSR is associated to them. Despite the fact
that the current paper is using a multi-country sample, it includes only well-developed European
economies, so the findings of this study may be restricted on such economies. Future research
may resolve this issue by examining the impact of CSR on accounting quality within developing
economies. Finally, our sample considered listed and unlisted corporations, which have
dispersed ownership structures. Whether our findings hold for closely held firms of smaller size
(small-medium enterprises or family firms) remains an additional path for future research.

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Appendix

Table A1 Sample selection procedure

Description Observations

For our sample selection we focused on EU firms covered by the ESG Datastream database over the period 2003–2018 656,734
Firms with less than five years of consecutive ESG data (not continuous evaluation and coverage) 305,447
Firms with incomplete financial and governance data 124,355
Available observations with complete ESG and financial data 226,952
Firms, which do not close their fiscal year on December 103,375
Winsorized the upper and down 1% of the data distribution 2,423
Final sample 121,154
Observations from unlisted firms 100,701
Observations from firms listed on their national stock exchanges 20,453

Table A2 Sample distribution per year and country

Firms 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total

Austria 227 454 455 457 457 446 445 445 446 435 435 451 454 469 462 460 6,998
Bulgaria 13 166 160 161 158 163 160 162 159 160 155 163 165 158 147 144 2,394
Belgium 155 492 488 495 499 499 494 504 507 497 488 493 488 482 484 487 7,552
Cyprus 25 89 86 82 86 90 78 75 69 75 79 86 78 83 93 81 1,255
CHECH Rep 82 149 141 133 122 117 119 135 136 146 150 148 143 140 140 128 2,129
Denmark 45 154 155 162 167 150 151 153 154 156 152 155 154 156 155 146 2,365
Finland 138 786 797 776 768 792 801 788 799 799 811 823 811 805 806 787 12,087
France 90 502 516 495 490 498 499 485 489 500 489 496 492 486 490 492 7,509
Germany 111 407 407 415 421 428 426 393 394 379 372 365 356 353 345 324 5,896
Greece 81 180 182 176 183 181 181 176 177 190 197 189 182 188 194 184 2,841
Hungary 46 152 166 157 166 170 164 163 163 175 176 160 150 147 137 134 2,426
Ireland 229 543 558 571 574 556 593 603 600 599 565 559 562 558 581 552 8,803
Italy 81 471 458 466 474 479 491 473 480 476 478 477 485 471 479 459 7,198
Luxemburg 139 331 326 330 333 342 347 365 343 337 336 330 338 344 349 335 5,225
Malta 7 31 32 30 28 28 18 23 25 22 20 23 31 33 35 25 411
The Netherlands 230 814 804 805 811 807 815 835 824 830 826 833 809 816 787 744 12,390
Poland 12 161 181 186 187 190 184 200 215 194 190 155 142 142 145 148 2,632
Portugal 188 480 474 460 452 459 454 455 453 452 451 458 451 478 471 449 7,085
Romania 0 6 2 2 3 1 1 4 5 3 5 5 5 4 4 3 53
Slovakia 29 78 75 72 70 71 65 68 66 66 68 69 70 72 68 39 1,046
Slovenia 0 2 2 1 4 1 0 1 2 0 1 3 1 2 0 4 24
Spain 373 789 792 780 770 756 726 730 746 744 752 751 745 762 774 779 11,769
Sweden 52 401 387 383 380 372 372 371 369 372 373 382 386 398 392 396 5,786
UK 114 323 343 346 343 349 345 351 350 348 334 324 357 349 349 355 5,280
Total 2,467 7,961 7,987 7,941 7,946 7,945 7,929 7,958 7,971 7,955 7,903 7,898 7,855 7,896 7,887 7,655 121,154

VOL. 18 NO. 1 2022 j SOCIAL RESPONSIBILITY JOURNAL j PAGE 83

 Table A3 Sample distribution per year and sector
Sectors 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total

Communication services 429 745 728 731 726 727 737 738 745 724 739 728 730 733 725 732 11,417
Consumer discretionary 419 926 920 913 896 925 908 901 876 882 910 903 898 910 907 880 13,974
Consumer staples 373 678 684 670 664 684 682 681 701 684 679 691 680 691 682 695 10,619
Energy 326 603 584 598 594 575 593 591 598 614 579 587 577 582 594 586 9,181
Health care 378 721 725 745 748 735 726 721 731 758 723 717 695 719 723 728 11,293
Industrials 560 1,364 1,352 1,340 1,358 1,336 1,351 1,358 1,332 1,343 1,342 1,350 1,324 1,322 1,333 1,303 20,668
Information technology 367 805 789 810 802 818 793 809 803 787 792 801 812 804 795 778 12,365
Materials 402 889 872 858 876 858 864 870 899 913 887 911 887 890 908 868 13,652
Real estate 368 631 626 633 631 633 606 624 621 630 625 638 651 624 633 602 9,776
Utilities 395 502 509 487 469 558 521 489 509 547 563 562 541 574 550 433 8,209
Total 4,017 7,864 7,789 7,785 7,764 7,849 7,781 7,782 7,815 7,882 7,839 7,888 7,795 7,849 7,850 7,605 121,154

Table A4 Variables definitions

Variables Definition

CFO The annual operating cash flow divided by lagged total assets
ACC Total accruals measured as the difference between net income and CF divided by lagged total assets
SIZE The natural logarithm of end year total assets
MV_BV The ratio of market value to book value of equity
LEV The ratio of end year total liabilities to end year total assets
ROA The ratio of net income before taxes to total assets
DLIST A dummy receiving (1) for publicly listed firms and (0) otherwise
R&D The ratio of R&D expenses to revenues
DSALES Is the change in net sales deflated by lagged total assets (Salesit – Salesit-1)
REC Is the ratio of account receivables to total assets
DREC Is the change in accounts receivables (RECit – RECit-1)
PPE The level of property plant and equipment for each year deflated by lagged total assets
TA Firm’s total assets at the end of the fiscal year
DACC Firm’s discretionary accruals based on the modified Jones (1991) model
CSR Firm’s annual overall average CSR score
STRAT Firm’s CSR strategy score
WORK Firm’s workforce score
HUMAN Firm’s human rights score
COMM Firm’s community score
PROD Firm’s product responsibility score

Corresponding author
Panagiotis E. Dimitropoulos can be contacted at: dimitrop@uop.gr

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PAGE 84 j SOCIAL RESPONSIBILITY JOURNAL j VOL. 18 NO. 1 2022