Corporate Social Responsibility as a Strategic Shield Against Costs of Earnings Management Practices

Jennifer Martínez-Ferrero, Shantanu Banerjee, Isabel María García-Sánchez

Journal of Business Ethics · 2016 · Volume 133 · Issue 2

Abstract

We highlight how Corporate Social Responsibility (CSR) can be strategically used against the negative perception from earnings management (EM). Using international data, we analyse the effect of CSR and EM on the cost of capital and corporate reputation. Results confirm that CSR strategy is positively valued by investors and other stakeholders. Contrary to EM, CSR has a positive effect on corporate reputation and lowers the cost of capital. In addition, we also find that the favourable effect of CSR on cost of capital is consistently more intense in firms that show signs of EM indicating that the market does not identify when CSR practices are used as a strategy to mask EM. We also demonstrate how institutional factors influence the above relationship.

Keywords

Earnings management (EM), Corporate Social Responsibility (CSR), Cost of capital, Corporate reputation, Managerial discretion

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