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Published in: Review of Quantitative Finance and Accounting 1/2024

12-10-2023 | Original Research

Corporate social responsibility, earnings management and firm performance: evidence from panel VAR estimation

Authors: Mark Anderson, Soonchul Hyun, Hussein Warsame

Published in: Review of Quantitative Finance and Accounting | Issue 1/2024

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Abstract

Research that relates corporate social responsibility (CSR) to earnings management (EM) interprets directional relations between CSR and EM as indicators of opportunistic or ethical behavior by managers. On the one hand, EM leads to higher levels of CSR by opportunistic managers seeking reputational benefits from CSR. On the other hand, CSR leads to lower levels of EM by managers whose engagement in CSR reflects their ethical values. The attribution of opportunistic and ethical behaviors to managers in a firm setting is incomplete without also considering how EM and CSR relate to what firms strive to do as economic entities – create value. Therefore, we introduce financial performance (represented by Tobin’s Q) as an endogenous variable that influences managers’ engagement in CSR and EM. We estimate a panel vector auto-regression (PVAR) model to evaluate the complex directional relations between CSR, EM and Q. We find that EM positively affects CSR, consistent with reputation-building, but we find no directional relation from CSR to EM. We find that firm performance (Q) positively affects EM, suggesting that EM may be economically motivated, and that CSR positively affects Q, consistent with economic motives driving engagement in CSR. Our analysis addresses endogeneity concerns and provides a more complete basis for ascribing managers’ decisions about CSR and EM to economic and behavioral motives.

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Footnotes
1
At the time of this writing, Prior et al. (2008) has 1071 Google citations and Kim et al. (2012) has 1933 Google citations.
 
2
The Helmert observation for time t is the original observation for time t minus the mean of observations time t + 1 through T, that is the mean of all future observations (referred to a note by Ryan Decker)
 
3
Forward mean-differencing is referred to as the ‘Helmert procedure’ (see Arellano and Bover, 1995). This procedure removes only the forward mean, i.e. the mean of all the future observations available for each firm-year. (Love and Zicchino, 2006).
 
4
This used to be called KLD STATS. We use interchangeably ESG STATS and KLD STATS.
 
5
MSCI ESG Research builds on the expertise and achievements of sustainability pioneers KLD, Innovest, and IRRC acquired via MSCI’s acquisition of RiskMetrics in 2010.
 
6
We excerpt the description of the rating system from MSCI ESG STATS User Guide & ESG Ratings Definition, MSCI ESG Research (2011).
 
7
We do not include the dimension of human right because it has been provided from 2002. And we do not use the governance ratings provided in the KLD data because the KLD governance factors do not measure the attributes we are interested in.
 
8
Restricted stock and option grant values are based on the valuation methodologies used in the ExecuComp database. In 2006 the valuation of restricted stock and stock options granted was changed from Standard & Poor’s Black-Scholes methodology to the grant-date fair value reported by the companies detailed in FAS 123R (ASC Topic 718 after 2009).
 
9
The mean of positive DA is 0.076 (median: 0.052) and the mean value of negative DA is -0.061 (median: -0.040).
 
10
Andrews and Lu (2001) proposed consistent moment and model selection criteria (MMSC) for GMM models based on Hansen’s (1982) \(J\) statistic of over-identifying restrictions. Their proposed MMSC are analogous to various commonly used maximum likelihood-based model selection criteria, namely the Akaike information criteria (AIC), the Bayesian information criteria (BIC), and the Hannan-Quinn information criteria (HQIC) (Abrigo and Love, 2016).
 
11
When we set the maximum lag as 3, lag 3 has the lowest values of J statistic, MAIC, and MQIC (not tabulated), but we do not perform our main analysis with the third-order panel VAR model because it causes substantial loss of observations in the analysis and may result in unrobust results.
 
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Metadata
Title
Corporate social responsibility, earnings management and firm performance: evidence from panel VAR estimation
Authors
Mark Anderson
Soonchul Hyun
Hussein Warsame
Publication date
12-10-2023
Publisher
Springer US
Published in
Review of Quantitative Finance and Accounting / Issue 1/2024
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI
https://doi.org/10.1007/s11156-023-01203-x

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