This paper aims to provide insights into the complicated relationship between earnings management (EM) and corporate social responsibility (CSR) during the financial downturn caused by the COVID-19 pandemic.
Parametric t-tests and non-parametric Wilcoxon rank-sum tests accompanied by ordinary least squares regression analysis, augmented with Newey–West procedure approaches, are used for a sample that consists of 1,984 firms from 47 countries for the period of 2014–2020. EM was proxied once with discretionary accruals using the modified Jones model (1995) and once with real earnings management (REM) using the Roychowdhury model (2006). This study uses environmental, social, and governance scores from the Thomson Reuters database as a proxy for CSR.
The results reveal that firms tend to engage more in EM practices during the pandemic and that more socially responsible firms tend to be honest and transparent during the financial reporting process. Interestingly, it was found that more socially responsible firms engaged less in REM practices during the pandemic.
The findings of this research help lenders, investors, policymakers and managers gain a better understanding of EM practices during a negative shock and shed light on the importance of CSR in being ethical.
The findings extend both the literature on the role of CSR in promoting financial reporting quality and the literature on the impact of COVID-19 on accrual and REM practices.
