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Corporate Hypocrisy: Role of Non-Profit Corporate Foundations in Earnings Management of For-Profit Founder Firms

Liping Xu (), Shuxia Zhang (), Ning Liu () and Li Chen ()
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Liping Xu: Business School, Hunan University, Changsha 410079, China
Shuxia Zhang: Business School, Hunan University, Changsha 410079, China
Ning Liu: Business School, Hunan University, Changsha 410079, China
Li Chen: School of Management, Huazhong University of Science and Technology, Wuhan 430074, China

Sustainability, 2018, vol. 10, issue 11, 1-24

Abstract: The purpose of this study is to examine whether for-profit firms make opportunistic use of their corporate foundations to pursue self-serving earnings objectives in China. Using data on corporate foundations and a sample of firms listed on the A-share market from 2010 to 2016, we first use the propensity score matching method to explore the effect of corporate foundations on earnings management of their founder firms. We find that the overall discretionary accruals of firms with corporate foundations are significantly higher than for those without corporate foundations. Given the ownership property with Chinese characteristics, we further find that the significant difference is driven by privately-owned firms. Then we develop a model of discretionary donation expenditures to measure the magnitude of earnings management associated with corporate foundations. We observe that firms with small profits and consecutive earnings increase record income-increasing discretionary donation expenditures. While firms that record income-decreasing discretionary donation expenditures create earnings reserves that they can use in subsequent periods to report consecutive earnings increases. The results demonstrate that the visibly ethical behavior of establishing corporate foundations does not necessarily represent the consistent embodiment of corporate social responsibility (CSR), but can be regarded as corporate hypocrisy with self-interest embedded in benevolence.

Keywords: corporate social responsibility; corporate foundations; discretionary donation expenditures; earnings thresholds; stock price sensitivity; earnings reserves (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2018
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