Firms’ earnings smoothing, corporate social responsibility, and valuation

Lei Gao and Joseph H. Zhang

Journal of Corporate Finance, 2015, vol. 32, issue C, 108-127

Abstract: Earnings smoothing via accounting discretion could improve or garble actual earnings information. Although managers prefer a less volatile earnings path and perceive lower risk for earnings smoothness, prior studies show that there is no discernible relation between smoothness and firm valuation. Recent literature documents that socially responsible firms behave differently from other firms in their earnings management and financial reporting. We conjecture that the reported earnings of smoothers that are socially responsible deviate less from their permanent earnings, thus their reported earnings are more value relevant. Our empirical tests show income-smoothing firms with higher corporate social responsibility (CSR) experience higher contemporaneous earnings-return relationship, greater Tobin’s Q, and stronger current return-future earnings relationship. The results show that CSR is proved desirable as it adds a unique “quality dimension” to earnings attributes and is useful for firm valuation.

Keywords: Earnings smoothness; Corporate social responsibility; Earning and return relations; Firm valuation (search for similar items in EconPapers)
JEL-codes: G31 G32 M14 M41 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (48)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:32:y:2015:i:c:p:108-127

DOI: 10.1016/j.jcorpfin.2015.03.004

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