Corporate social responsibility, financial leverage, and earnings management: Evidence from an emerging market

Abstract

This study investigates the interplay between corporate social responsibility (CSR) and firm leverage as determinants of earnings management in Saudi Arabia, a context shaped by Islamic principles and evolving corporate governance norms. Using a dataset for Saudi listed firms between 2017 and 2022, this study finds that although CSR engagement is associated with higher earnings management, suggesting strategic, rather than purely ethical motivations, low leverage is linked to lower earnings manipulation, highlighting the mitigating role of financial pressure. The interaction between CSR and leverage is negatively correlated with earnings management, indicating that these factors jointly strengthen ethical and religious imperatives in shaping financial behavior. The findings contribute to the literature by providing empirical evidence on the dual impact of CSR and leverage on earnings management. It reveals that cultural frameworks can function as informal regulatory mechanisms, reducing earnings manipulation. This research has implications for policy makers and investors seeking to align corporate governance with ethical and religious principles, emphasizing the need to consider the interplay of CSR and leverage in promoting financial reporting quality.