Amsterdam Business School
The effect of CSR on the level of earnings management
Name: Debieka Jagesar
Student number: 10871101 Thesis supervisor: dr. A. Sikalidis
Date: 20 June, 2016
Word count: 10,425
MSc Accountancy & Control, specialization: Accountancy Faculty of Economics and Business, University of Amsterdam
Statement of Originality
This document is written by student Debieka Jagesar who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Contents
1.0 Introduction ... 5
2.0 Literature review and hypothesis development ... 7
2.1 What is earnings management ... 7
2.2 Earnings management motives ... 8
2.3 What is CSR ... 9
2.4 CSR motives ... 10
2.5 The relation between earnings management and CSR ... 10
2.6 Agency theory ... 11
2.7 Hypothesis ... 12
3.0 Data and method ... 14
3.1 Sample selection ... 14
3.2 Measurement of earnings management ... 14
3.2.1 Discretionary Accruals ... 15
3.2.2 Real activities manipulation ... 15
3.3 Regression models ... 17
3.3 Measurement of variables ... 18
4.0 Results ... 20
TABLE 1 Sample size per year ... 20
TABLE 2 Sample by industry... 20
TABLE 3 Descriptive statistics variables Part A: sample UK ... 21
TABLE 3 Descriptive statistics variables Part B: sample Germany ... 22
4.1 Correlations among CSR score, earnings management and variables ... 23
TABLE 4 Part A UK: Correlations among CSR score, earnings management and variables .. 24 TABLE 4 Part B Germany: Correlations among CSR score, earnings management and
4.2 Relation between CSR and Accrual-Based Earnings Management ... 26
TABEL 5 Part A UK: regression of Absolute discretional accruals on CSR ... 26
TABEL 5 Part B Germany: regression of Absolute discretional accruals on CSR ... 27
4.3 Relation between CSR and Real Activities Manipulation ... 28
TABLE 6 Regression of real activities manipulation on CSR ... 28
4.4 Scores related to earnings management ... 28
TABEL 7 AB_DAC association with scores ... 29
5.0 Conclusion and Discussion ... 30
Referencing and literature list ... 31
Appendix A: planning ... 34
1.0 Introduction
Nowadays, earnings management is a hot topic. Scandals like Enron, HealthSouth, Tygo and WorldCom appear to have shaken the confidence of investors. This caused a lot of public attention on the quality of financial reporting. The investors of firms use financial statements to make economic decisions and these scandals cost the investors lots of money due to the fact they can make the wrong decisions based on a not reliable financial report.
Recently companies are thinking more about corporate social responsibility (hereafter CSR), because issues such as global warming, emission trading systems and carbon taxes have pushed environmental issues into the mainstream. Conditions of employment and the treatment of employees have also focused attention on social issues. Increasing concern about the sustainability of the world’s resources has contributed to the rising importance of CSR (Yip, van Staden and Cahan, 2011).
The definition of CSR is introduced by Howard Bowen in 1953. ‘ Bowen said that firms needs to understand the objectives and values of our society’ (Fifka, 2009). CSR is related to ethical and moral issues concerning corporate decision-making and behavior and, as such, addresses complex issues like environmental protection, human resources management, health and safety at work, local community relations, and relationships with suppliers and customers (Castelo and Lima, 2006). Firms are not only aimed at making profits, but also want to take care of the people and planet, that’s is why I found this topic very interesting. It is very actual an increased number of firms incorporated CSR and integrated reporting in their annual report. Ten years ago companies were not aware of CSR and the companies also weren’t using integrated reporting. In 2010 integrated reporting was introduced by the International Integrated Reporting Committee. The effect of this is that in more financial annual reports there is also a chapter about social responsibility. This indicates that companies want to show to third parties that they are doing more than only making profit. Integrated reporting is not mandatory but investors expect it.
The research question will be: What is the effect of CSR firms on the level of earnings management in the United Kingdom and Germany?
CSR firms have a good reputation, so I want to research if these firms will prevent earnings management because of their good reputation. Will these firms behave different, for example in accounting and operational decisions?
years. The firms that are included in the database are registered on the S&P 500, Russell 1000, MMSCI Europe, FTSE 250, ASX 300, MSCI World and 250 MSCI emerging markets index. The CSR information is based on the standards defined by AA1000 Accountability principles. In my research I am going to delimit the European data to research the next countries; United Kingdom and Germany. With this database I will be looking at the CSR performance related to the level of earnings management with the discretionary accruals and real-earnings management.
The research question contributes to existing literature about earnings management and CSR. It has a general contribution that is useful in this study for investors, stakeholders and shareholder for making decisions. So there is no lack in prior literature, when it goes about the relationship between CSR and earnings management. Prior literature like Prior, Surroca and Tribó (2008) has also investigated this relationship. They used an international database from 2002 till 2004 with 593 firms and 26 nations. They used an international database provided by the Sustainable Investment Research International Company (SiRi). Also Kim, Park and Wier (2012) have studied the relationship between CSR and earnings management, only they focused more on the ethical concerns as alternative motivation for CSR that pushes corporate financial reporting and they used for the research the KLD data.
This research will contribute to prior literature by using CSR scores from the database ASSET4. With this research I will not use international data like Prior, Surroca & Tribó, (2008) and Kim et al. (2012), but I will use European data and 2 nations United Kingdom and Germany.
The paper is structured as follows: chapter two reviews related literature and develops the hypothesis. Chapter three consists of the research method and design. Chapter four looks into the results. Chapter five describes the conclusion and discussion.
2.0 Literature review and hypothesis development
2.1 What is earnings management
Earnings are the profits of a company. Investors, stakeholders and analysts look at earnings to determine the attractiveness of a particular stock. The most important item in financial statements are the earnings, they are also called the ‘‘bottom line’’ or ‘‘net income’’. Earnings should be reliable. Earnings management affects third parties but also a firm’s owners and it has an impact on other stakeholders. Earnings management practices damage the collective interests of stakeholders (Prior et al. 2008). Stakeholders are considered a group that “bear some form of risk as a result of having invested some form of capital, human or financial, something of value, in a firm” (Clarkson, 1994) . The definition of earnings management is that it misleads stakeholders as to the real value of firm’s assets, transactions, or financial position, which has serious consequences for stakeholders, creditors, employees, and society as a whole (Zahra, Priem and Rashed, 2005).
Watts and Zimmerman (1978) define earnings management, as managers exercising their discretion over the accounting numbers. The external financial reporting process that is made by managers, may be intended to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers (Healy and Wahlen, 1999).
A number of prior studies interpreted the meaning of earnings management differently. Schipper (1989) described earnings management as an action when managers manipulate financial reports in order to gain extra profit. Healy and Wahlen (1999) described earnings management as an action. Where the managers apply their self-assessment in communicating their financial information and in dealing with transactions to modify the financial report for the purposes of:
1) giving a wrong impression to stakeholders about the financial information; 2) influencing any contractual business that relies on the financial reporting.
Earnings management plays an important role in determining the financial information. The absence of earnings management in financial reporting can attract investors to invest and it creates a positive image in terms of the integrity and reliability of financial reporting which will leads at the end of the day to a more prosperous and robust economy in their annual report.
2.2 Earnings management motives
Prior studies have suggested that all practices of earnings management have motives leading to their actions. The three types of motivations that most frequently lead to earnings management are altruistic motivation, speculative motivation and pressure from affiliated parties.
Altruistic motivation concerns the interest of other parties. The manager engages in earnings management activities to improve the financial position of the company or the manager was under pressure. The motivations of the managers to manipulate earnings information are driven by the intention to enhance the confidence of stakeholders, to change income taxation and to avoid breaching the covenant in the debt contract. Debt covenants are used to avoid managers from undertaking investment and financing decisions, which can reduce the value of debt holder claims. Defond and Jiambalvo (1994) found that managers are expected to use accounting methods that intensify the figures for income in the financial reports in the year which the offense occurs. The manager is under the threat of rascal behavior by pressure from investors, behavior by employees, defection from partners, employees, illegitimacy from the community, legal action from regulators, boycotts from activists and exposure from the media. These threats may destroy the firm’s reputation capital (Fombrun, Gardberg and Barnett, 2000).
Speculative motivation concerns the interest of managers to obtain their own personal benefits or to meet internal target. In a firm there are financial goals established like internal earnings targets. With this target it will drive managers to increase sales efforts, control costs and use resources more efficiently. Consequently, of this target is that managers engage in earnings management in order to meet that targeted goal. Also a study by Holthausen, Larcker and Sloan (1995) mentioned that compensation/bonus plans might provide a strong motive for managers to engage in earnings management. A study by Healy and Wahlen (1999) suggested that compensation could influence certain managers in firms to manage earnings to increase their bonus rewards.
A study by Matsumoto (2002) has presented that firms will choose to manage earnings when their financial information is depending on the implied claims with their stakeholders in the case of pressure from affiliated parties. Li, Selover and Stein (2011) found that increases in earnings management are associated with firms owned by government. These firms are reporting to higher levels of government.
Financial reporting helps the better-performing firms to distinguish themselves from poor performers and facilitates stakeholders financial decision making (Healy and Wahlen, 1999). The external financial reporting process may be intended to either mislead some stakeholders about
the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers (Healy and Wahlen, 1999).
The theoretical value of a company’s stock is the present value, which plays a big role for future earnings. Companies with poor earnings prospects will typically have lower share prices than those with good prospects.
2.3 What is CSR
Former companies had one responsibility, which was making profits. These days’ the interest in CSR information has increased. Ten years ago companies were not aware of CSR and the companies also weren’t using integrated reporting. In 2010 integrated reporting was introduced by the International Integrated Reporting Committee. The effect of this is that in more financial annual reports a chapter about social responsibility is included.
CSR is related to ethical and moral issues concerning corporate decision-making and behavior and, as such, addresses complex issues like environmental protection, human resources management, health and safety at work, local community relations, and relationships with suppliers and customer (Castelo and Lima, 2006). The difference with CSR firms and non-CSR firms is that the CSR firms invest money in the company (e.g. employees development, health and safety at work, environment). CSR firm tend to make less opportunistic accounting decisions in their financial reporting in the aspect of possible benchmark incentives (Kim et al. 2012).
According to Carroll’s (1979) the explanation about the firms social responsibilities suggest that CSR firms should strive to make a profit follow the law, be ethical and to be a good corporate citizen by financially supporting routine social sources.
There is a growing interest in CSR, and reporting of social responsible performance became more widespread for investors, customers, and other stakeholders. CSR reports give more transparency because they communicate their CSR activities to the investors and other stakeholders. CSR is not mandatory but CSR supporters advise that firms to engage in CSR performance since it will benefit several stakeholders.
Following prior studies Waddock and Graves (1997) constructed a CSR Score. With the CSR score they measure the level of earnings management. We can separate CSR scores in five social rating dimensions like: environmental, community, diversity, employee relations and product.
2.4 CSR motives
Firms engage in socially responsible activities not only for the stakeholder satisfaction, but it also has a positive effect on corporate reputation. This may help for firms to establish community ties and build reputation capital (Prior et al. 2008). Therefore by resorting to CSR practice, the firm is able to gain support from its various stakeholder groups. CSR activities are a powerful tool for obtaining support from stakeholders. People are questioning the reason why firms are implementing socially friendly policies, since they are not sure whether it is to make a good impression on the stakeholders or whether the firm really wants to be active in CSR.
According to Gao and Zhang (2015) firms that are socially responsible behave different than non-CSR firms in their earnings management and financial reporting. Firms with higher social responsibility are more ethical in their reporting behaviors with less accounting manipulation. They expected that smoothed earnings from high-CSR firms deviate less than real “undistorted” earnings and thus their smoothed earnings are more value relevant and lead to a better valuation of the companies (Gao and Zhang, 2015).
With CSR activities the manager will reduce the likelihood of being fired due to pressure from discontented shareholders or other stakeholders whose interests have been damaged by the implementation of earnings management practices (Prior et al. 2008). The study of Bansal (2005) have shown that the media has been particularly influential in CSR. Because of the increased media attention raises the firm visibility, causing public coverage and scrutiny to be more severe.
2.5 The relation between earnings management and CSR
Prior academic studies have looked into the relation between CSR and earnings management. Trébucq and Russ (2005) did not find a significant association between CSR and earnings management using a net CSR score, even though they observe a negative relation in other specifications. Their evidence is also inconsistent across different CSR dimensions. But they provide a result in which both total strengths and concerns are negatively correlated with accrual-based earnings management.
On the other hand Kim et al. (2012) show a positive relation between CSR and earnings quality. Kim et al. (2012) used the KLD database for the study. They found that corporate socially responsible firms are less likely to manipulate their earnings numbers (discretionary accruals, real activities manipulation) and to be part of SEC investigations. Their finding shows that CSR firms behave ethical, trustworthy and honest so these firms are less likely to engage in aggressive earnings management through discretionary accruals or real activities manipulation (Kim et al. 2012). They find a negative relation between CSR and earnings management the
evidence is that CSR firms are more careful in financial reporting to attend the interest of all stakeholders. Important is financial transparency issues as ethics and reputation affecting the corporate financial reporting in positive way.
According to Chih, Shen and Kang (2008) firms with good CSR do not undertake earnings management, which is a definitive sign of a negative relation between the two, because firms are socially responsible and does not hide unfavorable earnings realization and, therefore conduct no earnings management.
If managers engage in CSR practices based on opportunistic incentives, then they are likely to mislead stakeholders as to the value of the firm and financial performance. If these incentives succeed, then we would observe a positive relation between CSR and earnings management.
According to Martínez-Ferrero, Garcia-Sanchez and Cuadrado-Ballesteros (2015) firms that deliver high quality financial information incline to be more conservative in their accounting and less tend to carry out unethical practices such as earnings management so they are more socially responsible.
There are different ethical theories that explain that a firm must act social responsible as an ethical duty (Jones 1995; Phillips et al. 2003). Ethical theories goes about doing the right thing, not only make profit but, also doing something for the society, environment and invest in the people. Although the academic literature consists of many articles about CSR and earnings management topics, only a few academic papers tried to discover the relationship between CSR and earnings management.
2.6 Agency theory
Studies that have examined the relation between CSR and earnings management used an agency theoretic framework (Jensen and Meckling, 1976). The agency theory describes that the manager has a different interest than the third parties. Stakeholders have to make decisions based on the annual report, so this must be reliable. The stakeholders could be protected, when the financial numbers provide a true view of the real economic situation of the company. The relationship between earnings management and agency theory had been established by a study from (Davidson, Jiraporn, Kim and Nemec, 2004). Earnings management is reflected as agency cost because managers look after their own interests when they are releasing financial reports which is not congruence and gives an inaccurate picture of the firm. Managers have an incentive to be honest, trustworthy and ethical for the best interest for the company and for the stakeholders.
2.7 Hypothesis
Based on the above-mentioned literature and theories I want to make hypothesis to test the relation between CSR firms and earnings management. Most of the literature/theories are more in a way that CSR firms provide a positive signal regarding the reputation of the firm. So it looks like CSR firms want to prevent earnings management. I have set up the following hypothesis;
Hypothesis 1: Firms with high CSR score are negatively related to earnings management.
For hypothesis 1 I will be measuring the level of the CSR performance on the level of earnings management. I will be testing this hypothesis by regressing earnings management on CSR and look for the effect of the level of earnings management. For this research I have used the CSR score from ASSET4 which consists of the equal-weighted rating of how a firms financial and health is. This equal-weighted rating is based on the information of economic, environmental, social and corporate governance pillars. Firms performance rely on these scores, because it reflects to the outside world how it stands with the firm. When a firm has a high score, than the firm is very healthy a firm that care for the planet and the people and not only making profit. I am assuming that firms that have a high CSR score are less inclined to manage earnings. Because firms with a high CSR score have an ethical behavior, so managing earnings does not belong to ethical behavior.
Beside the CSR score I will be also measuring the social score, environmental score, corporate governance score and Community/Business Ethics Compliance score on the level of earnings management.
Hypothesis 2: Firms with high social score are negatively related to earnings management
For hypothesis 2 I will be measuring the level of the social performance on the level of earnings management. I will be testing this hypothesis by regressing earnings management on social score and look for the effect of the level of earnings management. The social score is drawn by the firms capacity to generate loyalty and trust with its employees, customers, clients and society. Which is done by the use of the best practice. For this research I have used the social score from ASSET4 which consists of the next classes; customer / product responsibility, society / community, society / human rights, workforce / diversity opportunity, workforce / employment quality, workforce / health & safety, workforce / training and development . The social score is
drawn by the firms capacity to generate loyalty and trust with its employees, customers, clients and society. The social performance is a reflection of the firm’s reputation. I am assuming that firms that have a high social score are less inclined to manage earnings. Because firms with a high social score have an ethical behavior for caring for the employees, so managing earnings management does not belong to that ethical behavior.
Hypothesis 3: Firms with high environmental score are negatively related to earnings management
For hypothesis 3 I will be measuring the level of the environmental performance on the level of earnings management. I will be testing this hypothesis by regressing earnings management on environmental performance and look for the effect of the level of earnings management. The environmental performance looks how a company uses the best practice. Like being environmentally friendly.
Hypothesis 4: Firms with high corporate governance score are negatively related to earnings management
For hypothesis 4 I will be measuring the level of the corporate governance performance on the level of earnings management. I will be testing this hypothesis by regressing earnings management on corporate governance score and look for the effect of the level of earnings management. The corporate governance score is drawn to guarantee that the board members and executives have the best interest with the shareholders. This will be captured by processes, systems, capacity and the use of best management practices. For this research I have used the corporate governance score from ASSET4 which of the next classes; Board of Directors/ Board Functions, Board of Directors/ Board Structure, Board of Directors/ Compensation Policy and Integration/ Vision and Strategy. I assume that governance score is negative because the board member will have the best interest with the shareholders.
Hypothesis 5: Firms with high community/business ethics compliance score are negatively related to earnings management
For hypothesis 5 I will be measuring the level of the community/business ethics compliance performance on the level of earnings management. I will be testing this hypothesis by regressing earnings management on community/business ethics compliance score and look for the effect of the level of earnings management. Establishment for ethics are very important for doing the right thing.
3.0 Data and method
3.1 Sample selection
In this research there will be use of a quantitative research. For the research I am going to use European data from the database ASSET4 Thomson Reuters to measure CSR performance organization with the level of Earnings Management. I choose this database, because it has dimensions of CSR score of public companies. ASSET4 data includes CSR information of 4000 firms with more than nine years. The firms that are included in the database are registered on the S&P 500, Russell 1000, MMSCI Europe, FTSE 250, ASX 300, MSCI World and 250 MSCI emerging markets index. The CSR information is based on the standards defined by AA1000 Accountability principles. I am going to delimit the European data to research the next countries United Kingdom (DataStream #LA4CTYGB) and Germany (DataStream #LA4CTYDE) for the period 2011-2014.
The ASSET4 consists for UK 313 companies and for Germany 88 companies. After deleting unavailable data (N/A) and firms that had a of lack data source I had left over 189 companies for UK and 57 companies for Germany. The sample for UK consists of 756 observations and for Germany consists of 228 observations (see table 1 chapter 4). All data is obtained from DataStream.
3.2 Measurement of earnings management
There are different studies that measure earnings management. Earnings management can be measured by different models. The different models are the Healy model (1985), DeAngelo model (1986), Jones model (1991) and Modified Jones model (1995). The Healy model (1985) calculates earnings management by comparing mean total accruals scaled by lagged total assets. Healy (1985) predicts the systematic earnings management occurs in every period, this is different with other studies. This method is equal to treating the set of observations for which earnings are predicted to be managed upwards as the estimation period and the set of observations for which earnings are predicted to be managed downwards as the event period (Dechow, 1995). Deangelo model (1986) and Healy model (1985) both use total accruals from the estimation period to proxy for expected nondiscretionary accruals.
The Jones Model and Modified Jones model are often used in empirical studies. For my research I will measure the level of earnings management with the Modified Jones model (1995), because these days it is a well-known model to detect earnings management. The difference with the Jones model (1991) is that in there assumption is that all the variances of revenues are non-discretionary. Though managers could use credit sales to manage earnings (Chen, 2012). According to Dechow et al. (1995) is the modified Jones model the best way to measure the
earnings management. In the modified model, non-discretionary accruals are estimated during the event period ( i.e., during periods in which earnings management is hypothesized) (Dechow et al. 1995).
3.2.1 Discretionary Accruals
For this research I used the models from the paper of (Kim et al. 2012). In this modified Jones model is the ROAt-1 included to avoid misspecification and thereby enhancing the reliability of inferences from discretionary accrual estimates. According Kim et al. (2012) the discretionary accruals will be measured with the following design:
Model 1: discretionary accruals
TA it /A it-1 = α0(1/A it-1) + α1(ΔREV it - ΔREC it)/ A it-1 + α2 PPE it/ A it-1 + α3 IBXI it-1
/ A t-1 +
ε
itWhere:
TA it = total accruals for a firm i at year t;
ΔREV it = the change in net revenues in year t from year t-1; ΔRECit = the change in net receivables;
PPEit = the gross property, plant and equipment;
IBXIi it-1 = the income before extraordinary items at year t-1; Ai t-1 = lagged total assets;
ε
= Error is the value that captures the level of discretionary accruals3.2.2 Real activities manipulation
Beside measuring discretionary accruals I also include in my research the measurement of real earnings management activities. Like sales manipulations are expected to lead to lower current period operating cash flows. For the real earnings management I used the Roychowdhury’s 2006 model to estimate the abnormal level of operating cash flows. Which is also used in the paper of (Kim et al. 2012).
Model 2: Abnormal Cash flow (AB_CFO)
CFOt/At-1 = α0 + α1(1/At-1) + β1(St/At-1)+ β2(ΔSt/At-1) +
ε
itWhere:
CFOt = cash flow from operations in year t;
S= Sales
ΔS = Salest – Sales t-1
Ai t-1 = Lagged total assets
For real earnings management there is also another measure namely abnormal production. Which is also mention in the paper of (Kim et al. 2012). The production cost are defined as the sum of cost of goods sold (COGS) and change of inventory during the year (Roychowdhury 2006; Kim et al 2012). This model express expenses as a linear function of simultaneous sales. With the following design are the normal production cost calculated.
Model 3: Abnormal production cost (AB_PROD)
PRODt/At-1 = α0 + α1(1/Ait-1) + β1(St/At-1)+ β2(ΔSt/At-1) + β3(ΔSt-1/At-1) + Ɛ it
Where:
PRODt = Cost of production. Calculated as the sum of COGS and difference in inventory
S= Sales
ΔS = Salest – Sales t-1 Ai t-1 = Lagged total assets
α = Firm specific parameters
Ɛ = Error is the value that captures the level of abnormal production costs
For real earnings management there is also another measure namely abnormal discretionary expenses of a company (AB_EXP). This model I have not included in my research because of lack of data from R&D cost, advertising cost and SG&A expenses in DataStream.
As last they used in the paper of Kim et al. (2012) the combined measures of real activities (COMBINED_RAM). The combined measures of real activities will be calculated as follow: COMBINED_RAM =AB_CFO – AB_PROD + AB_EXP
In my research I will calculated the COMBINED_RAM without AB_EXP because of the lack of the data from R&D cost, Advertising cost and SG&A expenses in DataStream. So it will be as followed:
Model 4: (COMBINED_RAM).
3.3 Regression models
To capture the relation between CSR performance and earnings management the regression model will be estimate as follow:
Model 1: discretionary accruals
ABS_DAC = α + αCOMBINED_RAM + βCSR SCORE + β FIRM SIZE + βADJROA+ βLEVERAGE + βBIG4
Model 4: real earnings management
COMBINED_RAM = α + αABS_DAC + βCSR SCORE + βFIRM SIZE + βADJROA+ βLEVERAGE + βBIG4
Explanation:
CSR SCORE: Is the Equal-Weighted CSR rating of the ASSET4 data consists of economic, environmental, social and governance score.
ABS_DAC: Absolute value of discretionary accruals, where discretionary accruals are calculated with the Modified Jones model adjusted for performance
COMBINED_RAM: Combined real activities measurement is usually calculated by abnormal operating cash flows - abnormal production + abnormal discretionary expenses. In this paper is the Combined_ram calculated without the abnormal discretionary expenses because of a lack of data.
FIRM SIZE: Firm size is calculated by the logarithm of total assets
ADJROA: Adjusted Return on assets is calculated by income before extraordinary items divided by lagged total assets
LEVERAGE: Leverage is calculated by long term debt/total assets
BIG4: Dummy variable: Audit done by big4 firm (PWC, Deloitte, KPMG and EY) = 1, otherwise = 0
3.3 Measurement of variables
In appendix B is the real explanation of the variable according to ASSET4
Dependent variable Measurement
Earnings management - Discretionary accruals
- Real Activities Manipulation
Independent variable Measurement
- CSR score The Equal-Weighted rating of how a company's financial and extra-financial health can be equally weighted based on the information from ASSET4.
- Social score Measure the social performance based on company's capacity to generate trust and loyalty with its workforce for the customers and society.
- Environmental score Measure the environmental performance based om the impact of company's living and non-living natural systems, including the air, land and water, as well as complete ecosystems.
- Corporate Governance
score Measure the Corporate governance score based on the companies system and processes. It replicates a company's capacity, through its use of best management practices.
- CSR Sustainability
reporting Dummy variable: Does the company publish a separate sustainability or publish a section in its annual report on sustainability = 1, otherwise = 0 - Community/Business
Ethics Compliance score Measure the Community/ Business Ethics Compliance score based on real or estimated penalties, fines from lost court cases. Or settlements or cases not yet settled regarding controversies linked to business ethics in general, political contributions or bribery and corruption, price-fixing or ant-competitive behavior.
- Employment
Quality/Policy score Score of the employment Quality and policy - Human Rights/Policy
score Score of the human rights and policy - Product
Innovation/Policy score Score of the product innovation and policy - Training and
development /Policy
score Score of the training and development and policy
Control variable Measurement
- Firm size Logarithm of total assets
- Adjusted ROA Income before extraordinary items / lagged total assets - Leverage Long term debt/total assets
Control variables
I include different control variables which could affect the CSR performance and financial reporting behavior, to avoid the problem of correlated omitted variables.
Firm size: The firm size is measured by logarithm of the total assets (#WC02999).
Different studies explain the size of the firm can have a significant variation in earnings management (Roychowdhury, 2006). According to Richardson, Tuna and Wu (2002) will larger firms manage to manipulate earning because of the more capital market pressure and have better incentives. Also prior studies (Waddock and Graves, 1997; McWilliams and Siegel 2000; Prior et al. 2008) show that the firm size is associated with CSR performance. When the firm size is bigger it will contribute more to the society, that is why it is included in the proxy.
Adjusted ROA: the adjusted return on assets (ROA) is calculated- by income before extraordinary items (#WC01151)/ lagged total assets. This variable is included by the research because the return on assets reflects on the firm performance which could be a reason to manipulate their earnings. On the other hand the better the firm’s financial results, there will be capable to engage in corporate social activities, so the better financial performance will positively affect firms CSR performance.
Leverage: I used the leverage variable in DataStream (#WC08230) and it can also be calculated by long term debt/total assets. The leverage measure the firm’s financial structure. Previous study finds that high leverage firms incline to manage earnings aggressively to avoid violating debt covenants Press and Weintrop (1990). On the other hand Dechow and Skinner (2000) suggest the opposite that high leverage involve less earnings management. Also Park and Shin (2004) suggest that leverage is negative and significant related to earnings management.
Auditor: the auditor is a dummy variable. When the audit is done by a BIG4 firm (PWC, Deloitte, KMPG and EY) than the value is equal to 1. When the audit is done by non-BIG4 firm than the value is equal to 0. Quality of the audit for annual report plays a big report, for providing reliable information for investors, stakeholders and shareholders to make good decisions.
4.0 Results
In this chapter are the results of the research about the relationship between CSR performance of companies and the level of earnings management. This data is collected from DataStream ASSET4. Table 1 shows the sample distribution per year. The ASSET4 consists for UK 313 companies and for Germany 88 companies. After deleting unavailable data (N/A) and firms that had a of lack data source I had left over 189 companies for UK and 57 companies for Germany. UK has the largest sample size with n 756 and Germany with n 228. With a total observations of 984.
TABLE 1 Sample size per year
Country Obs % 2011 2012 2013 2014
UK 756 77% 189 189 189 189
Germany 228 23% 57 57 57 57
Total 984 100% 246 246 246 246
Table 2 shows the sample distribution per industry. Industry classification ‘other industries’ presents the largest sample (87%), followed by ‘Other Financial’ (5%), ‘Utility’ (4%) and ‘Transportation’ (3%).
TABLE 2 Sample by industry Industry
DataStream Industry classification
(WC06010) Obs. # firms-year % of obs.
01 Other Industrial 856 87%
02 Utility 44 4%
03 Transportation 32 3%
06 Other Financial 52 5%
Table 3 (part A) shows the descriptive statistics of the sample of UK. All continuous variables are winsorized at the top and bottom 1 percent of their distribution. In table 3 part A shows a mean value of 0.0568 for the absolute value of discretionary accruals (ABS_DAC). The mean value of the discretionary accruals (DAC) is -0.0326. The mean value of the Abnormal Operating Cash flow (AB_CFO) is 0.0981. The mean value of the abnormal production cost (AB_PROD) is -0.27638. The mean value of the combined real activities manipulation (COMBINED_RAM) is 0.3719. The mean value of the CSR score is 73.94, social score is 67.84, environmental score is 66.07 and Corporate Governance Score is 80.44. For the control variables almost 98% of the sample firms are audited by BIG4 firms like PWC, Deloitte, KPMG and EY. About 88% of the firms are also CSR reporting. The mean value of the adjusted return on assets (ADJROA) is 0.0586.
TABLE 3 Descriptive statistics variables Part A: sample UK
Variable Obs. Mean Dev. Std. Min Max 25% Median 75%
ABS_DAC 756 0.0568 0.0494 0.0000315 0.2497 0.0224 0.0426 0.0763 DAC 756 -0.0326 0.0678 -0.2497 0.1914 -0.0659 -0.0319 -0.0013 POS_DAC 184 0.0496 0.0488 0.0000315 0.1914 0.0127 0.0340 0.0690 NEG_DAC 572 -0.0590 0.0494 -0.2497 -0.000037 -0.079 -0.046 -0.025 AB_CFO 756 0.0981 0.0786 -0.1594 0.5556 -0.0520 0.0865 0.1346 AB_PROD 756 -0.27638 0.2401 -1.60017 0.7687 -0.4028 -0.2460 -0.1224 COMBINED_RAM 756 0.3719 0.2714 -0.8827 1.636 0.1944 0.3435 0.5180 CSR score 756 73.94 21.71 4.67 96.65 62.21 81.89 91.46 social score 756 67.84 22.21 6.52 96.81 52.74 73.83 86.64 environ. Score 756 66.07 24.12 9.65 94.27 47.68 71.60 88.19 corpor. Score 756 80.44 14.25 3.67 96.95 74.63 84.3 90.58 community score 756 50.90 5.94 0 52.92 50.83 51.57 52.22 employment score 756 63.83 26.48 8.85 94.36 54.7 56.2 93.95
human rights score 756 65.54 30.43 14.15 90.33 52.33 88.3 88.74 product innov. score 756 56.76 34.09 19.89 89.57 20.88 88.15 89.13 training &dev. score 756 67.87 10.53 1.81 70.9 68.34 68.98 69.98
CSR reporting 756 0.8743 0.3317 0 1 1 1 1
Firm size 756 14.74 1.48 11 19 14 15 15.5
ADJROA 756 0.0586 0.0768 -0.627 0.56 0.0294 0.0559 0.0903
Leverage 756 0.6909 0.8275 0 0.6614 0.1733 0.4461 0.8336
Table 3 (part B) shows the descriptive statistics of the sample of Germany. All continuous variables are winsorized at the top and bottom 1 percent of their distribution In table 3 part B shows a mean value of 0.0461 for the absolute value of discretionary accruals (ABS_DAC). The mean value of the discretionary accruals (DAC) is -0.0349. The mean value of the Abnormal Operating Cash flow (AB_CFO) is 0.0818. The mean value of the abnormal production cost (AB_PROD) is -0.2010. The mean value of the combined real activities manipulation (COMBINED_RAM) is 0.2828. The mean value of the CSR score is 67.79, social score is 75.27, environmental score is 72.34 and Corporate Governance Score is 40.12. For the control variables almost 97% of the sample are audited by BIG4 firms like PWC, Deloitte, KPMG and EY. About 85% of the firms are also CSR reporting. The mean value of the adjusted return on assets (ADJROA) is 0.0448.
TABLE 3 Descriptive statistics variables Part B: sample Germany
Variable Obs Mean Dev. Std. Min Max 25% Median 75%
ABS_DAC 228 0.0461 0.0423 0.0001977 0.2380 0.01931 0.03680 0.0563 DAC 228 -0.0349 0.0520 -0.2380 0.1545 -0.0529 -0.0319 -0.0135 POS_DAC 35 0.0364 0.0430 0.0001977 0.1545 0.0084 0.0204 0.0495 NEG_DAC 193 -0.0479 0.0421 -0.2380 -0.0002876 -0.0583 -0.0379 -0.0205 CSR score 228 67.79 26.25 6.31 96.49 51.53 80.26 88.19 AB_CFO 228 0.0818 0.0624 -0.0618 0.4154 0.0472 0.0744 0.1068 AB_PROD 228 -0.2010 0.1962 -0.7555 1.0212 -0.3218 -0.1738 -0.0753 COMBINED_RAM 228 0.2828 0.2166 -0.9069 0.8466 0.1341 0.2702 0.4274 social score 228 75.27 22.94 11.01 97.25 61.49 86.41 93.12 environ. score 228 72.34 28.46 9.09 94.69 52.66 89.74 93.14 corpor. score 228 40.12 21.41 3.19 93.3 21.62 37.74 56.19 community score 228 50.76 3.49 25.59 52.92 50.83 51.57 52.22 employment score 228 71.53 31.49 8.85 94.36 54.7 93.5 94.34
human rights score 228 69.41 30.48 14.15 90.33 52.33 88.5 88.74 product innov. score 228 68.54 31.30 19.89 89.57 21.33 88.75 89.13 training &dev. score 228 69.55 0.9764 68.34 70.9 68.66 69.48 70.44
CSR reporting 228 0.8465 0.36123 0 1 1 1 1
Firm size 228 16.13 1.50 13 20 15 16 17
ADJROA 228 0.0448 0.0644 -0.1982 0.6667 0.0161 0.0392 0.0675
Leverage 228 0.6628 0.5846 0 0.4629 0.3069 0.5697 0.8836
4.1 Correlations among CSR score, earnings management and variables
Table 4 part A UK shows the correlation among of the CSR score, earnings management and other variables. In table 4 part A I observe that the CSR score is significantly and negatively correlated to ABS_DAC. This indicates that firms with a higher CSR score, are less prone to adjust their earnings. I observe that the CSR score is significantly and positively correlated with the firm size, which is accordance with prior studies (Waddock and Graves, 1997; McWilliams and Siegel 2000; Prior et al. 2008). The corporate score, social score, environment score, employment score, human rights score, product innovation and CSR reporting are positively and significant correlated with the CSR score. The community score is significant and negatively correlated to the CSR score. For UK I observe that the CSR score is significant positive related with lagged financial performance ADJROA.
Table 4 part B Germany shows the correlation among of the CSR score, earnings management and other variables. In table 4 part B I observe that the CSR score is significantly and negatively correlated to ABS_DAC. This indicates that firms with a higher CSR score, are less prone to adjust their earnings. I observe that the CSR score is significantly and positively correlated with the firm size, which is accordance with prior studies (Waddock and Graves, 1997; McWilliams and Siegel 2000; Prior et al. 2008). The corporate score, social score, environment score, employment score, human rights score, product innovation and CSR reporting are UK and Germany positively and significant correlated with the CSR score. The community score is significant and negatively correlated to the CSR score. For UK I observe that the CSR score is significant negative related with lagged financial performance ADJROA so this score is different than UK.
TABLE 4 Part A UK: Correlations among CSR score, earnings management and variables
CSR score represents the equal-weighted rating of economic, environmental, social and governance pillars. ABS_DAC justified the absolute value of Modified Jones model adjusted for performance. The firm size is calculated through the logarithm of total assets. DAC represents the discretional accruals. BIG4 represents PWC, Deloitte, KMPG and EY and given dummy 1 when the audit is done by BIG4 firm and 0 when the audit is done by non-big4 firm. CSR reporting is given the dummy value 1 when firms are CSR reporting and 0 when firms don’t are CSR reporting. Indication of significance level is at 0.01 as ***, 0.05 as ** and 0.10 as *
CSR score ABS_DAC DAC Firm size ADJROA LEVERAGE
corpor. Score
environ.
score social score
commun. score employme nt score human rights score product innov. score training & dev. score big4
csr_r eport ing CSR score 1 ABS_DAC -0.1927*** 1 DAC 0.1204*** -0.4346*** 1 Firm size 0.5608*** -0.1241*** 0.0285 1 ADJROA 0.1337*** -0.2649*** 0.4299*** -0.0387 1 LEVERAGE 0.0522 -0.0984*** -0.0244 0.1725*** -0.1314*** 1 corpor. score 0.6645*** -0.1135*** 0.0641* 0.2836*** -0.0173 -0.0100 1 environ. score 0.8203*** -0.1802*** 0.1778*** 0.5023*** 0.0441 0.0487 0.4692 *** 1 social score 0.8505*** -0.1164*** 0.0136 0.5593*** 0.0623* 0.0840** 0.4438*** 0.6705*** 1 commun. score -0.1336*** 0.0454 -0.0026 -0.3266*** -0.0231 -0.0118 -0.0596 -0.1503*** -0.1241*** 1 employment scr. 0.4929*** -0.0407 -0.0205 0.4483*** 0.0162 0.1215*** 0.3105*** 0.4063*** 0.5495*** -0.1623*** 1 human rights scr. 0.5926*** -0.0854** -0.0534 0.4561*** 0.0182 -0.0805** 0.3522*** 0.4527*** 0.6325*** -0.1202*** 0.3358*** 1 product innov. scr. 0.4108*** -0.1764*** 0.2130*** 0.2617*** 0.0405 -0.0422 0.2619*** 0.5708*** 0.2346*** -0.1147*** 0.1594*** 0.1382*** 1 training & dev. scr. 0.2743*** -0.0262 0.0152 0.1769*** -0.0163 0.0453 0.2371*** 0.1412*** 0.2615*** -0.0247 0.1259*** 0.2476*** -0.0155 1 big4 0.0790** 0.0348 -0.0530 0.0794** -0.0386 0.0599* 0.0081 0.0425 0.1010*** -0.0243 0.0204 0.0301 0.0086 -0.0235 1 CSR reporting 0.5619*** -0.1262*** 0.1241*** 0.3050*** 0.0554 -0.0491 0.4542*** 0.5024*** 0.4646*** -0.0562 0.2015*** 0.4242*** 0.2340*** 0.2444*** -0.0280 1
TABLE 4 Part B Germany: Correlations among CSR score, earnings management and variables
CSR score represents the equal-weighted rating of economic, environmental, social and governance pillars. ABS_DAC represents the absolute value of Modified Jones model adjusted for performance. The firm size is calculated through the logarithm of total assets. DAC represents the discretional accruals. BIG4 represents PWC, Deloitte, KMPG and EY and given dummy 1 when the audit is done by BIG4 firm and 0 when the audit is done by non-big4 firm. CSR reporting is given the dummy value 1 when firms are CSR reporting and 0 when firms don’t are CSR reporting. Indication of significance level is at 0.01 as ***, 0.05 as ** and 0.10 as *
CSR score ABS_DAC DAC Firm size ADJROA LEVERAGE
corpor. score environ. score social score commun. score employme nt score human rights score product innov. score training & dev. score big4
csr_re portin g CSR score 1 ABS_DAC -0.2808*** 1 DAC 0.1186* -0.6118*** 1 Firm size 0.6033*** -0.1170* 0.0766 1 ADJROA -0.1580** 0.0080 0.3670*** -0.2188*** 1 LEVERAGE -0.1218* 0.4485*** -0.3949*** 0.1610** -0.1085 1 corpor. score 0.6316*** -0.2094*** 0.0809 0.3535*** -0.1165* -0.0225 1 environ. score 0.8805*** -0.2319*** 0.0871 0.5228*** -0.1657** -0.1805*** 0.3926 *** 1 social score 0.9286*** -0.2479*** 0.0580 0.5396*** -0.1911*** -0.1284* 0.4836*** 0.8348*** 1 commun. score -0.1486** 0.0204 0.0395 -0.3352*** 0.0199 -0.0181 -0.0904 -0.1621** -0.1672** 1 employment scr. 0.6790*** -0.1088 -0.0038 0.5267*** -0.1904*** -0.0318 0.3953*** 0.6151*** 0.6630*** -0.1854*** 1 human rights scr. 0.7550*** -0.3035*** 0.1886*** 0.5313*** -0.0160 -0.1039 0.4392*** 0.6789*** 0.7880*** -0.1951*** 0.5725*** 1 product innov. scr. 0.6483*** -0.2114*** 0.1856*** 0.3252*** 0.0677 -0.2618*** 0.2136*** 0.7903*** 0.6078*** -0.0791 0.3808*** 0.5649*** 1 training & dev. scr. 0.0082 -0.0304 0.0785 -0.0056 0.0663 -0.0296 0.0417 0.0039 0.0171 -0.0531 0.0053 0.0296 0.0165 1 big4 0.3652*** 0.0698 -0.0157 0.1913*** -0.0216 0.0045 0.0991 0.4165*** 0.4190*** -0.0617 0.1190* 0.3392*** 0.2925*** -0.0000 1 CSR reporting 0.5540*** 0.0190 -0.0132 0.3533*** 0.0191 0.1549** 0.2628*** 0.5878*** 0.5133*** -0.0377 0.2573*** 0.4348*** 0.5201*** -0.0061 0.4478*** 1
4.2 Relation between CSR and Accrual-Based Earnings Management
Tabel 5 part A shows the results of the regression analyses of discretionary accruals for UK. For this regression I have used the absolute value of discretionary accruals (AB_DAC) and also positive and negative discretionary accruals (POS_DAC and NEG_DAC). The result shows that there is a negative significant relation between CSR score and the level of earnings management, which is in consistent with hypothesis 1: Firms with a high CSR score are negatively related to earnings management (AB_DAC). The coefficient on the CSR score is negative and significant the P-value < 0.01. This shows that CSR firms manage their earnings less trough accruals. Which is also in accordance Kim et al. (2012) they found that CSR firm are less likely to manage earnings through discretionary accruals. For the positive accruals I don’t found a relation. I observe there is a positive significant relation between CSR score and NEG_DAC the P-value < 0.01. This shows that CSR firms also engage less in income-reducing earnings management. The COBINED_RAM is positive significant associated with AB_DAC this indicates that CSR firms who are engaging in earnings management activities will be less likely to operate the earning with real economic decisions. Further is the COBINED_RAM negative significant associated with POS_DAC and NEG_DAC. This shows that firms who are engaging in earnings management activities will be less likely to manipulates the earnings with real earnings management. For the AB_DAC I find that ADJROA and LEVERAGE are negatively associated with AB_DAC. This shows that firms with higher earnings performance could engage in discretional earnings management, this shows that bigger firms are less likely to engage in accrual-based earnings management. I find that firms size is negative associated with POS_DAC and NEG_DAC this indicates that older companies are less likely to engage in accrual-based earnings management. The ADJROA is positive associated with POS_DAC and NEG_DAC, this shows that firms with greater earnings performance more likely engage in discretional earnings management.
TABEL 5 Part A UK: regression of Absolute discretional accruals on CSR
AB_DAC POS_DAC NEG_DAC
Coefficient Coefficient Coefficient
CSR score -0.0003202*** 0.000115 0.0005044*** COMBINED_RAM 0.0214 *** -0.941231*** -0.0737076*** BIG4 0.0131 0.0147538 0.0028298 FIRM SIZE -0.0003951 -0.0059832** -0.003142** ADJROA -0.1921*** 0.3862586*** 0.3658997*** LEVERAGE -0.0000668*** -0.000216 0.0000463** N 756 184 572
Table 5 part B shows the results of the regression analyses of discretionary accruals for Germany. For this regression I have used the absolute value of discretionary accruals (AB_DAC) and also positive and negative discretionary accruals (POS_DAC and NEG_DAC). The result shows that there is a negative significant relation between CSR score and the level of earnings management, which is in consistent with hypothesis 1: Firms with a high CSR score are negatively related to earnings management (AB_DAC). The coefficient on the CSR score is negative and significant the P-value < 0.01. For the POS_DAC is the P-value = 0.027. This shows that CSR firms manage their earnings less trough accruals. Which is also in accordance Kim et al. (2012) they found that CSR firm are less likely to manage earnings through discretionary accruals. I observe there is a positive significant relation between CSR score and NEG_DAC the P-value = 0.016. This shows that CSR firms also engage less in income-reducing earnings management. The COBINED_RAM is positive significant associated with AB_DAC and POS_DAC this indicates that CSR firms who are engaging in earnings management activities will be less likely to operate the earning with real economic decisions. Further is the COBINED_RAM negative significant associated with NEG_DAC. This shows that firms who are engaging in earnings management activities will be less likely to manipulates the earnings with real earnings management. The leverage is positive associated with AB_DAC, this suggest that low leverage involve less earnings management.
TABEL 5 Part B Germany: regression of Absolute discretional accruals on CSR
AB_DAC POS_DAC NEG_DAC
Coefficient Coefficient Coefficient
CSR score -0.0004537*** -0.0008296** 0.0003109** COMBINED_RAM 0.040547 *** 0.0430088 -0.0485293*** BIG4 0.0425777*** 0 -0.0338693** FIRM SIZE -0.00022 0.0042406 0.000432 ADJROA -0.0473641 0.1239586* 0.2429439*** LEVERAGE 0.0003082*** 0.0001784 -0.0003263*** N 228 35 193 Adj R-squared 0.2975 0.4203 0.3826
4.3 Relation between CSR and Real Activities Manipulation
Table 6 shows the results of the regression analyses of real activities manipulation for both countries UK and Germany. The CSR score is for both countries positive and significant. This indicates that CSR firms engage in earnings management less by real operating activities. The firm size is for both countries negative significant with the COMBINED_RAM. This indicates that older firms are more likely to engage in real activities manipulations. Further the ADJROA is for both countries positive significant. This indicates that firms with better earnings performance are less likely to engage in real activities manipulation.
TABLE 6 Regression of real activities manipulation on CSR
4.4 Scores related to earnings management
In the previous chapter the first hypothesis was tested. Table 7 shows the relation between the various scores and AB_DAC for testing the other hypothesis.
Hypothesis 2: Firms with high social score are negatively related to earnings management
I predicted that the social score would be negatively related to earnings management, because of the ethical behavior for caring for the employees, so managing earnings does not belong to that ethical behavior. Social performance is a reflection of the firm’s reputation. What table 7 shows that in both countries UK and Germany that social score are negatively related to earnings management. UK Germany COMBINED_RAM COMBINED_RAM Coefficient Coefficient CSR score 0.0013222** 0.001698** AB_DAC 0.6000775 *** 1.159272*** BIG4 0.1119592* -0.1207773 FIRM SIZE -0.0494233*** -0.0388133*** ADJROA 1.166777*** 1.229435*** LEVERAGE -0.0002176* -0.0003112 N 756 228 Adj R-squared 0.1836 0.2337
Hypothesis 3: Firms with high environmental score are negatively related to earnings management
I predicted that the environmental score would be negatively related to earnings management, firms that are involved with environmental having an ethical behavior for caring for the universe, so managing earnings management does not belong to that ethical behavior. Environmental performance is a reflection of the firm’s reputation. What table 7 shows that in both countries UK and Germany that environmental score are negatively related to earnings management.
Hypothesis 4: Firms with high corporate governance score are negatively related to earnings management
I predicted that the corporate governance score would be negatively related to earnings management, because board member have the best interest with the shareholders. So less likely to manage earnings. What table 7 shows that in both countries UK and Germany that governance score are negatively related to earnings management.
Hypothesis 5: Firms with high community/business ethics compliance score are negatively related to earnings management
I predicted that the community/ business ethics compliance score would be negatively related to earnings management. Establishment for ethics are very important for doing the right thing. For both countries there is no associating between AB_DAC and community/business ethics score.
TABEL 7 AB_DAC association with scores
Absolute discretional accruals UK Germany
Hypothesis 2 social_score -0.1164*** -0.2479*** 0.0013 0.0002 Hypothesis 3 environmental_score -0.1802*** -0.2319*** 0.0000 0.0004 Hypothesis 4 corporatege governance_score -0.1135*** -0.2094*** 0.0018 0.0015 Hypothesis 5
community / business ethics score
0.0454 0.0204
5.0 Conclusion and Discussion
In this paper I have examined the relation between CSR scores and earnings management for the countries UK and Germany. The focus in this paper was investigating of CSR firms are less likely to manage earnings. CSR companies are firms that behave ethical, trustworthy and honest so these firms are less likely to engage in aggressive earnings management through discretionary accruals or real activities manipulation. Because of CSR firms having a reputation they will be less likely to engage in earnings management.
The findings show that firms with a high CSR performance are less likely to engage in earnings management. These findings count for discretionary accruals and real earnings management. Also the result of various scores of CSR firms are negatively related to engage in earnings management. Summarized the results are in line with the CSR activities to be honest, trustworthy and ethical. CSR firms have a reputation and will be less likely involved in earnings management. Also earnings management has as negative relations with the social score, environmental score, corporate governance score. There was nog link between earnings management and community / business ethics.
In this paper there are some limitations. First in the combined real earnings management was the abnormal expenses missing, so the COMBINED_RAM could be different when there was data available. Also is in this paper the earnings management proxies not included (i.e., income smoothing). The sample of Germany is smaller than UK, so the results for Germany could me more reliable when there would be a larger sample and it would then also better to compare with each other. Although of the limitations of this paper, this paper gives a good indication of the relation between CSR firms and earnings management.
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Appendix A: planning
In the table below is an indication of how I think that I will work during my thesis internship at Ernst and Young. In period 5 and 6 there is more time to work on the thesis because of only one course IFRS 2.
Period Week starting at (Monday)
Planned activity
4 1-2-2016 - Review paper C - Allocation of supervisor
8-2-2016 - Adjusting paper C - Prepare plan thesis
15-2-2016 - Reading theories 22-2-2016 - Adjusting theories
29-2-2016 - Reading literature/preparing 7-3-2016 - Reading literature/preparing
14-3-2016 - Learning for exams -> no thesis activities 21-3-2016 - Exams-> no thesis activities
5 28-3-2016 - Adjusting literature 4-4-2016 - Reading methodology 11-4-2016 - Adjusting methodology 18-4-2016 - prepare data 25-4-2016 - analysing data 2-5-2016 - testing data 9-5-2016 - data research
16-5-2016 - Learning for exams -> no thesis activities 23-5-2016 - Exams-> no thesis activities
6 30-5-2016
- Analysing - writing results - (re)writing introduction/ literature/ hypothesis/
methodogy/ references
6-6-2016 - (re)writing
- checking everything -finishing everything
13-6-2016 - Writing results/discussion 20-6-2016 - Deadline thesis 20 June 09.00
