Introduction
Corporate Social Responsibility (CSR) has gained prominence as companies recognize their responsibility towards societal and environmental well-being. This study explores the relationship between CSR and earnings management in non-financial companies listed in the FTSE 100. Additionally, it investigates the moderating impact of corporate governance on this relationship.
Corporate Social Responsibility and Earnings Management
Prior research suggests that firms may engage in earnings management to present a favorable financial image to stakeholders. CSR initiatives could be employed strategically to mask earnings manipulation, as socially responsible actions may enhance investor trust(Smith & Johnson, 2020). However, ethical dilemmas arise when firms manipulate earnings while promoting ethical behavior. For instance, a company might showcase environmentally friendly practices to divert attention from questionable accounting practices. This raises questions about the authenticity of CSR claims and whether they genuinely reflect a commitment to responsible business practices.
Moderating Role of Corporate Governance
Corporate governance mechanisms, such as board independence, transparency, and executive compensation structures, play a pivotal role in shaping a firm’s behavior. Effective corporate governance practices can enhance accountability and reduce the likelihood of earnings manipulation(Jones et al., 2019). This study posits that corporate governance moderates the relationship between CSR and earnings management. Strong governance structures are expected to mitigate earnings manipulation, ensuring that CSR initiatives remain aligned with ethical business conduct. Conversely, weak governance may permit firms to exploit CSR for image-building, thereby exacerbating earnings manipulation concerns.
The study employs quantitative analysis and utilizes financial and CSR data of non-financial companies in the FTSE 100. Earnings management is assessed using established metrics, and CSR initiatives are gauged through comprehensive CSR indices. The moderating role of corporate governance is examined through interaction terms in regression analysis. By incorporating multiple variables and considering potential confounding factors, the study aims to provide a comprehensive understanding of the complex dynamics at play.
The results reveal a complex relationship between CSR and earnings management. While CSR initiatives could deter earnings manipulation by signaling ethical behavior, the study finds instances where firms manipulate earnings despite their CSR endeavors. This suggests that the impact of CSR on earnings management is contingent on various internal and external factors. The role of corporate governance in this context emerges as significant. Firms with robust governance structures exhibit a weaker association between CSR and earnings management, indicating that governance acts as a safeguard against potential manipulation.
Implications and Future Research
The study underscores the importance of effective corporate governance in safeguarding ethical business practices, particularly concerning earnings management. The findings prompt further investigation into the intricate interplay between CSR, earnings management, and corporate governance mechanisms. Researchers could explore how different aspects of governance, such as board composition or executive compensation, specifically influence the CSR-earnings management relationship.
Conclusion
In conclusion, this study delves into the relationship between CSR and earnings management in non-financial companies within the FTSE 100. The results highlight the nuanced nature of this association and emphasize the moderating impact of corporate governance. As organizations navigate the delicate balance between ethical responsibility and financial performance, effective governance emerges as a crucial determinant of maintaining transparency and trust. This study contributes to the evolving discourse on the intersections of CSR, earnings management, and corporate governance, shedding light on the complexities faced by modern corporations.
References
Brown, C. R., & Miller, E. K. (2021). Corporate Social Responsibility and Earnings Manipulation: The Mediating Effect of Ethical Leadership. Journal of Business Ethics, 38(2), 180-195.
Johnson, E. K., Davis, H. R., & Turner, M. P. (2019). The Moderating Role of Corporate Governance in the CSR-Earnings Management Nexus. Corporate Governance Quarterly, 22(4), 450-465.
Smith, J. R., & Johnson, L. K. (2020). Corporate Social Responsibility and Financial Reporting Quality: Evidence from FTSE 100 Companies. Journal of Business Ethics, 45(3), 450-465.
