Work

The effect of voluntary and mandatory corporate social responsibility on earnings management: Evidence from India and the 2% rule

Year: 2020

Type: article

Abstract: Utilizing the natural experiment presented by India's Companies Act of 2013, this paper investigates the relationship between corporate social responsibility (CSR) engagement and earnings management. India's Act includes provisions designed to improve governance and financial audits, as well as a unique mandate requiring firms that satisfy size or profitability criteria to spend a minimum of 2% of reported income on CSR initiatives. We examine the earnings management behavior of firms that voluntarily reported CSR expenditures prior to the Act's implementation as well as those firms that began to report CSR spending as a consequence of the mandate. Results indicate that firms which voluntarily reported CSR expenditures before the Act also engaged in more earnings management than other firms, consistent with CSR being used manipulatively in the pre-Act period. Once the Act was in effect, evidence indicates that on average firms engaged in less earnings management. However, the results suggest the CSR mandate did not have a significant marginal impact on earnings manipulations, implying that the observed decrease in earnings management in the post-Act period was primarily due to other provisions of the Act, such as those related to corporate governance.

Source: Emerging Markets Review

DOI: 10.1016/j.ememar.2020.100750

Authors: L. Emily Hickman, Subramanian Rama Iyer, Nemiraja Jadiyappa

Institutions: California Polytechnic State University, University of New Mexico, Indian Institute of Management Raipur

Language: English

Topic: Auditing, Earnings Management, Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDG: Peace, justice, and strong institutions

Open Access status: hybrid

Estimated APC paid: $1,650