Corporate Social Performance and Earnings Quality: The Role of Materiality

This study tests whether managers of firms with high material corporate social performance (CSP) engage less in earnings management. We use a sample of 542 European firms from 27 different industries and materiality guidance from the Sustainability Accounting Standards Board (SASB). Managers of firms with high material CSP are expected to be more determined about ESG issues and thus also about ethical behaviour in general. Results indicate that material CSP firms indeed manipulate their accruals less than non-material CSP firms do. However, we also find that both material and non-material CSP firms engage more strongly in real earnings management. In robustness checks, we further find that the higher accruals quality of material CSP firms dissolves when controlling for regulated and non-regulated industries. Both material and non-material CSP firms in regulated industries exhibit less earnings management through accruals. In contrast, in non-regulated industries, we do not find any statistically significant association between CSP and earnings quality as measured by accruals and real earnings management. Findings of this study further suggest that firms are using real earnings management as a substitute for manipulating accruals.