The Relation Between Corporate Social Performance and Financial Reporting Bias

Abstract

Research provides mixed evidence for the relation between discretionary accruals and corporate social performance. Because accruals reverse, a single year’s observation may not represent the firm’s overall discretion. Yet the literature does not consider the reversing nature of accruals, nor does it consider the articulation between the income statement and balance sheet. The current study considers both and examines the relation between a firm’s cumulative earnings management and its corporate social performance. As earnings are managed upwards (downwards) this discretion in net income is also recognized in the balance sheet as higher (lower) net asset values. Ceteris paribus, lower net asset values represent a form of slack. Consistent with expectations, evidence shows higher corporate social performance strengths for firms that have a greater cumulative negative bias in earnings recognition.