The Association between Corporate Social Responsibility (CSR) and Earnings Quality – Evidence from European Blue Chips

Abstract

Based on the notion that the results of prior research are mixed, this study reinvestigates the association between corporate social responsibility and earnings quality. More precisely, we examine the association between corporate social responsibility and the degree of earnings management, the degree of accounting conservatism and the quality of accruals. We find that firms with high corporate social responsibility ratings are more likely to engage in earnings management, to report bad news less timely and to have lower quality accruals. In contrast to prior research, our sample is based on European firms applying IFRS. For this reason, we argue that there are country-specific characteristics which moderate the association between corporate social responsibility and earnings quality and provide additional analyses which support this notion. Our results indicate that the increasing trend to invest in and to report about corporate social responsibility is not necessarily accompanied by higher quality financial statements.