Investigating the Relationship Between Corporate Social Responsibility and Earnings Management: Evidence from Pakistan

Abstract

Based on stakeholder theory and the earnings management framework, we assume a positive connection between corporate social responsibility and earnings management. We argue that earnings management damages interests of the stakeholder. Hence, managers who influence and manipulate earnings can deal with stakeholder activism and vigilance by resorting to corporate social responsibility (CSR) practices. Furthermore, CSR is a powerful tool that can be used to gain support from stakeholders and, therefore, provides an opportunity for entrenchment to those managers that manipulate earnings, so as to increase significantly their chances of getting rewards, bonuses and good reputation. We demonstrate empirically our theoretical argument by making use of a database comprising 79 non-financial firms of Pakistan for the period 2009-2018. The results of the regression analysis indicate the existence of significant and positive relationship between corporate social responsibility and Earnings management, while control variables i.e. size and return on assets have significant and positive relationship with CSR and leverage has significant and negative impact on CSR.