Corporate Social Responsibility; Measurement, and its Nexus with Earning's Management and Corporate Governance

Abstract

Corporate Social Responsibility; Measurement, and its Nexus with Earning’s Management and Corporate Governance Corporate Social Responsibility (CSR) gained the tremendous popularity and considerable attention of the public, academicians, researchers, and policymakers during the last few decades. Firms involve in CSR activities to fulfil the expectations of stakeholders and in order to build healthy relationships with them. However, recent accounting scandals in giants of the business world like Enron, Xerox, and Toshiba etc. exposed the managerial discretion in reporting accounting numbers, which is termed as Earnings’ Management (EM). These scandals have asserted that firm’s insiders mislead the firm’s stakeholders through EM that raised serious questions about the firm’s CSR and CG because financial transparency is vital for firms’ socially responsible behavior and CG is accountable for the credibility of disclosed financial information. A significant part of current debate on CSR has typically focused on its relationship with the financial performance of firms while inadequate little literature is available on CSR and EM relationship. The present research investigates whether firms involvement in CSR is induced by the long-term perspective in order to satisfy their stakeholders or is it used as a strategic shield against managers’ opportunistic behavior such as EM practices (accrual and real) for the developing economy of Pakistan. In addition, it has also taken into consideration the individual impact of the four mechanisms of CG including board structure, audit structure, compensation structure and ownership structure as well as the composite effect of CG by establishing its index on CSR of the firm. Moreover, effective internal audit system in a firm plays an effective role in disseminating more information about CSR activities. A multi-method approach has been applied to measure CSR and established CSR disclosure index and CSR spending ratio. The empirical analysis is done through simultaneous equation system of Two-Stage Least Square (2SLS) method by using a panel data of 160 firms from 2008 to 2015. Overall results demonstrates the bidirectional and negative relationship among CSR and EM which is predominant and supports the long-term perspective. However, a positive relationship is also seen between accrual type of EM and CSR. With reference to CG and CSR relationship, findings reveal that large, diverse and more participative boards with less influence of the dual role of CEO reinforce the board effectiveness. This situation enables the corporate boards to direct the management effectively towards the implementation and execution of CSR activities and their disclosures. Compensation paid to CEO and executive’s personnel encourage them to act to the greatest advantage of not just shareholders but also stakeholders through increased participation in CSR activities and disclosing more information about them. Moreover, effective internal audit system in a firm plays an effective role in disseminating more information about CSR activities. The influence of external block holding, institutional, individual, associated companies, and insider ownership is very much positive on CSR disclosures of the firm. Contrary to this, ownership concentration, CEO and director's ownership discourage the firm’s involvement in CSR activities. Finally, effective CG prevents the managers from exercising their opportunistic behavior of managing firm’s earnings by exploiting firm’s CSR activities. The current study also propos some implications for diverse stakeholders.