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

L. Emily Hickman, Subramanian Rama Iyer and Nemiraja Jadiyappa

Emerging Markets Review, 2021, vol. 46, issue C

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.

Keywords: Corporate social responsibility (CSR); Accruals manipulation; Real earnings management; Indian companies act 2013 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1566014120300972
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:46:y:2021:i:c:s1566014120300972

DOI: 10.1016/j.ememar.2020.100750

Access Statistics for this article

Emerging Markets Review is currently edited by Jonathan A. Batten

More articles in Emerging Markets Review from Elsevier
Bibliographic data for series maintained by Catherine Liu ().