Can Corporate Social Responsibility Counteract Managers’ Incentives to Manage Earnings?

Abstract

Many firms engage in corporate social responsibility (CSR) initiatives, which aim to serve a broader set of stakeholders (e.g., workforce, communities, environment). These companies often encourage management to consider these stakeholders when making operational and financial decisions. One such decision that managers face involves managing earnings. We conduct an experiment in which experienced managers are placed in the role of a division manager facing an accrual decision. We find that a company’s demonstrated commitment to CSR moderates both upward and downward earnings management attempts. We propose, and find support for, a moderated-mediation model in which the firm’s commitment to CSR influences managers’ consideration of constituents. Managers’ consideration of these stakeholders differentially affects the level of accruals, depending on the direction of the earnings management incentive. Our results provide insight into how CSR may influence individuals’ decisions within the organization, minimizing the impact that incentives have on maximizing one’s self-interest.

Keywords

corporate social responsibility earnings management discretionary accruals personal incentives consideration of stakeholders

Introduction

This study examines whether a company’s corporate social responsibility (CSR) practices help mitigate managers’ willingness to manage earnings and explores a potential mechanism through which CSR may influence earnings management. CSR involves a variety of activities including promoting the health and safety of workers, providing for equal treatment of all employees, protecting the environment, and being involved in community initiatives (Clarkson, 1995; Harding, 2005; McWilliams & Siegel, 2001). Thus, for a company that demonstrates a commitment to social responsibility, the interests of the broader set of its stakeholders (e.g., employees, creditors, customers, communities, the environment) help guide firm-level strategic decisions and overarching philosophies (Harjoto & Jo, 2011).¹ In turn, socially responsible companies often encourage their employees to consider the broader stakeholder set when tasked with making operational and financial decisions (Dhaliwal et al., 2011; Slack et al., 2015). Thus, a company’s social responsibility practices have the potential to influence employee decision making. While there has been attention paid to the relation between CSR and firm-level financial performance, tax compliance, and accounting outcomes (e.g., Davis et al., 2016; Dhaliwal et al., 2011; Kim et al., 2012; Prior et al., 2008),² we respond to calls to address the mechanisms through which CSR influences individuals’ decisions (Aguinis & Glavas 2012; Moser & Martin, 2012).

One such decision that managers face involves managing earnings. In his 2002 testimony before the U.K. Parliament Select Committee on Treasury, International Accounting Standards Board (IASB) Chair Sir David Tweedie expressed strong concerns over the widespread use of aggressive earnings management (Tweedie, 2002). Several years earlier, then Chair of the U.S. Securities and Exchange Commission (SEC) Arthur Levitt warned that earnings management can erode investor confidence and undermine credibility of the financial markets (Levitt, 1998), an issue that remains a concern for the (e.g., SEC, 2008; Schek, 2020). The investment community (e.g., Lawton, 2007) points to a number of instances in which international firms have utilized discretionary accruals to manage earnings and then had to restate earnings due to SEC enforcement action or internal investigation (e.g., Xerox, Nortel, Beazer Homes, and Dell). These restatements resulted in substantial losses of market capitalization (Bandler & Hechinger, 2003; Brown & Heinzl, 2004; Corkery & Reilly, 2007; Lawton, 2007; Palmrose et al., 2004).

Prior archival research documents the relation between firms’ discretionary accruals and management incentives, such as meeting bonus targets or earnings forecasts, which are often more immediate and more tangible in nature. Results of these studies suggest that the net effect of discretionary accruals tends to be income-decreasing when corporate executives have incentives to defer earnings and income-increasing when there are incentives to accelerate earnings (e.g., Ghosh & Olsen, 2009; Healy, 1985; Holthausen et al., 1995; Teoh et al., 1998). Given the potential negative effects of earnings management, it is prudent for the financial/investing community to explore ways to help mitigate these actions (SEC, 2008). Due to the focus of CSR on the benefits to a broader set of stakeholders rather than to just benefits at a firm or individual level, a company’s social responsibility practices may have the potential to influence managers’ willingness to manage earnings.

To investigate the effect of CSR on managers’ willingness to manage earnings, we conduct an experiment in which experienced managers with significant familiarity recording accruals are asked to assume the role of division manager in a hypothetical company and to make a year-end accrual decision.³ We manipulate participants’ incentive to manage earnings either up or down, and whether the company has demonstrated (i.e., acted upon) a commitment to social responsibility (demonstrated commitment vs. no-demonstrated commitment). A fifth condition, without information regarding incentives to directionally manage earnings or corporate commitment to social responsibility, serves as a baseline from which to assess managers’ earnings management attempts.

Consistent with prior findings, our results indicate that managers tend to manage earnings in line with their incentives. Specifically, managers tend to defer the recognition of expenses when there are incentives to manage earnings upward and accelerate expense recognition when they have incentives to manage earnings downward to reach a bonus target. However, we find that a demonstrated corporate commitment to social responsibility moderates managers’ willingness to manage earnings in either direction. Furthermore, we propose and find support for a model in which a company’s social responsibility actions influence the consideration managers give to the interests of the organization’s broader set of stakeholders. Managers’ consideration of the broader set of stakeholders then differentially affects the level of accruals based on the direction of the earnings management incentive.

Our findings have implications for both research and practice. For example, our study is the first to demonstrate experimentally that a firm’s social responsibility practices can dampen the effect of personal incentives to manage earnings, responding to a call to investigate the relation between CSR and earnings-related variables (Huang & Watson, 2015). Furthermore, we address Moser and Martin’s (2012) call to experimentally examine the motivations and consequences of CSR activities and managers’ decisions. Our findings suggest that firm-led CSR commitments have the positive effect of curbing managers’ decisions that would benefit their immediate self-interest (i.e., reach a bonus target). Specifically, our results indicate that managers will tend to internalize their company’s commitment to consider the interests of the broader set of its stakeholders (e.g., its workers and the community in which it operates) when such a commitment is an important part of the company’s mission (i.e., the commitment is backed up by actions). Thus, corporate boards may be able to mitigate self-interested behavior by fostering a genuinely socially responsible climate (Mason & Simmons, 2014; Sanders, 2008; Sprinkle & Maines, 2010).

Similarly, the financial/investing community might want to consider the approach to/type of CSR a firm takes when evaluating the reliability of that firm’s financial statements, as well as its earnings volatility (e.g., potentially less “smooth” earnings for CSR firms). Also, gaining a better understanding of factors that influence managers’ tendencies to manage earnings can help top-level executives better understand the consequences of incentives on earnings management that occur throughout the organization and can help auditors and regulators direct their investigative and enforcement actions (Healy & Whalen, 1999). For example, external and internal auditors can take into consideration how firm-led CSR initiatives affect management’s incentives and factor such information into risk assessments and testwork considerations. Finally, given our findings in a setting in which firm policies demonstrate a commitment to CSR, we call for future research to explore how specific policies or dimensions of a firm’s CSR practices (e.g., authenticity, impact, efficacy) influence managers’ financial reporting decisions.

The remainder of this article is organized as follows. The next section discusses the background literature and develops hypotheses. This is followed by a description of the research method and a presentation of the results. The final section offers conclusions and implications.

Background and Hypothesis Development

Managing Earnings Through Discretionary Accruals

Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) allow management some latitude in determining the amount and timing of certain period-ending accruals (Ball, 2006; Healy & Wahlen, 1999; Schipper, 1989). This accounting discretion can result in earnings management, or the transfer of earnings from one period to another to obtain an outcome managers deem favorable (e.g., maximizing individual bonuses, maximizing stock price) as opposed to merely facilitating an unbiased outcome for the financial reporting process (e.g., Healy, 1985; Schipper, 1989). In his September 1998 “Numbers Game” speech, then SEC Chair Arthur Levitt expressed concern about the high number of companies that manage earnings and went on to discuss several common techniques managers use (Levitt, 1998). For example, management might defer the recognition of expenses (i.e., underaccrue) when there is a need to maximize earnings in the current period. Similarly, management might choose to accelerate the recognition of expenses (i.e., overaccrue) when the company is profitable. This latter technique is often referred to as a “cookie jar reserve” and, once established, allows management to release such reserves when it is more beneficial (e.g., to avoid falling short of a bonus threshold or earnings target). Discretionary accrual techniques such as these can involve the manipulation of revenues as well as expenses, and persist post Sarbanes–Oxley (SOX) and EuroSox reforms (Bergstresser & Philippon, 2006; Braiotta, 2005; Cohen et al., 2008; Ghosh et al., 2010; Jackson & Liu, 2010).⁴

Prior archival research documents that the net effect of all discretionary accruals made within a firm are associated with several types of incentives including short-term bonus incentives and IPO incentives (e.g., Guidry et al., 1999; Healy, 1985; Holthausen et al., 1995; Teoh et al., 1998). These studies show that the net effect of discretionary accruals tends to be income-decreasing when management has incentives to defer earnings for bonus purposes and tends to be income-increasing when management has incentives to accelerate earnings for purposes of maximizing IPO issue price or achieving bonus targets (e.g., Guidry et al., 1999; Healy, 1985; Holthausen et al., 1995; Teoh et al., 1998). However, similar to these firm-level effects, such incentives are likely to influence individual managers’ decisions as well. For example, assume a business-unit manager’s bonus is based on achieving expense targets. If prior to making an accrual decision, the manager has an incentive to accelerate (defer) the recognition of expenses, the manager may recommend higher (lower) discretionary accruals in the current period. This type of action makes it easier for the manager to minimize expenses recorded in the subsequent (current) year and, thus, potentially game the system to maximize his or her combined 2-year bonus payout. Thus, we expect managers to make larger (smaller) expense accruals when there is an incentive to accelerate (defer) the recognition of expenses in the current period.

The Mitigating Effect of CSR

CSR involves such actions as protecting the health and safety of workers, promoting equal treatment of all employees, protecting the environment, and being involved in community initiatives (Clarkson, 1995; Harding, 2005; McWilliams & Siegel, 2001). For example, as part of their CSR initiative, Starbucks maintains a Supplier Code of Conduct for product manufacturers that outlines principles regarding worker rights and treatment, workplace health and safety, and environmental protection. They also invest in social programs benefiting the farmers that supply their coffee, have established emissions-reduction targets, and engage in an aggressive recycling program (Starbucks, 2016). While a commitment to social responsibility was once viewed as a fringe counter-argument to profit maximization, it is now viewed by many organizations as an important business strategy that makes corporate goals more transparent and achievable (Franklin, 2008; Zeller, 2010). The importance of CSR is highlighted by Corporate Responsibility (2022) and Forbes (2018) magazines’ rankings of firms according to how well they serve stakeholder interests and conform to socially responsible business practices.

For managers and employees, a demonstrated commitment to CSR conveys a guiding philosophy of the organization. By acting in a socially responsible manner, a company demonstrates that principles and values such as human rights, worker rights, and protecting the environment are important considerations. Prior research suggests that organizational climates have the potential to influence employees’ and managers’ attitudes and actions (Collier & Esteban, 2007; Jones, 2010; Schein, 2004; Slack et al., 2015; Trevino, 1986; Wimbush & Shepard, 1994). Similarly, prior research suggests that priming individuals for a broader social identity can shift focus away from their own self-interest (e.g., personal incentives/bonuses) toward the interest of the broader group (e.g., Brewer & Gardner, 1996; Haslam et al., 2006). Thus, a corporate commitment to socially responsible practices could lead managers/employees to internalize values such as a responsibility and concern for others (e.g., Collier & Esteban, 2007; Cullen et al., 2003; Jones, 2010), making it more likely that they will act in the best interest of the organization’s broader set of stakeholders.

Therefore, we expect a company’s level of commitment to social responsibility to influence managers’ earnings management decisions (Kim et al., 2012; Beaudoin et al., 2018). Specifically, we predict an interaction between CSR (demonstrated commitment to CSR vs. no-demonstrated commitment to CSR) and managers’ incentives to manage earnings (either up or down). That is, as a result of considering a broader collection of interests (i.e., due to a demonstrated commitment to CSR), managers with incentives to manage earnings downward will record lower discretionary expense accruals (i.e., reduce their downward earnings management attempts) relative to when there is no demonstrated commitment to social responsibility. In contrast, managers with incentives to manage earnings upward will book higher discretionary expense accruals (i.e., reduce attempts to manage earnings upward) relative to when there is no demonstrated commitment to CSR. Specifically, when a company demonstrates a commitment to CSR, we expect a reduction of the impact of personal incentives, leading to a reduction in earnings management. Effectively, when a company is committed to socially responsible actions, managers will be less willing to put their own interests (i.e., personal incentives in the form of bonuses) ahead of those of the broader set of stakeholders.⁵ Thus, we hypothesize an interaction of the form depicted in Figure 1:

Hypothesis 1 (H1): A demonstrated corporate commitment to social responsibility will reduce managers’ attempts to engage in incentive-consistent earnings management via their discretionary expense accrual decisions (relative to when no corporate commitment to social responsibility is demonstrated).

Figure 1.

Proposed form of CSR/earnings management incentive interaction (H1).

The development of H1 is predicated on the notion that a demonstrated corporate commitment to social responsibility will enhance managers’ internalization of values such as responsibility and concern for others, relative to when no commitment to CSR is demonstrated (e.g., Collier & Esteban, 2007; Cullen et al., 2003; Jones, 2010). And, in turn, managers’ greater consideration of the company’s broader stakeholder set will reduce their attempts to manage earnings in a manner consistent with their incentives. That is, we expect a positive relationship between consideration of the broader stakeholder set and managers’ accrual decisions when there are incentives to defer expense recognition (i.e., to manage earnings upward), and a negative relationship when there are incentives to accelerate expense recognition (i.e., to manage earnings downward). The combination of these thoughts suggests the following moderated-mediation hypothesis (see Figure 2):

Hypothesis 2 (H2): Managers’ consideration of a company’s broader set of stakeholders will mediate the relationship between a company’s demonstrated commitment to CSR and managers’ accrual decisions, and this mediating relationship will be moderated by the direction of managers’ earnings management incentives such that there will be a positive (negative) relationship between consideration of stakeholders and accrual decisions when incentives are to defer (accelerate) expense recognition.

Figure 2.

Proposed moderated-mediation model (H2).

Research Method

Participants

Participants were 194 managers with significant professional experience (M = 10.7 years) and who were enrolled in an executive MBA program at a large public university in the northeastern United States. Experienced managers are chosen to serve as participants because, in their corporate environments, they are often relied upon to make judgments relating to operating activities that have accrual considerations.⁶ Participants indicated familiarity with the task of recording expense accruals (M = 6.0 on a 10-point scale where 1 represents not at all familiar and 10 represents very familiar).⁷

Procedure and Task

Participants were provided with a case that placed them in the role of a production division manager for a manufacturing firm. Case materials contained company background information, a schedule of unbilled consulting and advisory projects that are in process, the task objective, and a post-experimental questionnaire. The background and task objective sections provided information on the company, named HCP, and the experimental task. Participants were asked to consider a year-end accrual decision relating to consulting that is in process, but for which no billing has yet occurred. Each participant was given the same schedule of services provided by vendors, along with project status information and estimated contract amounts. The project status for each vendor was described as in the “early stages,” with estimated completion dates that indicate the projects are expected to be finished within 1 year of their start dates. Participants were informed that they had contacted the vendors in an effort to obtain greater clarity; however, the vendors were unable to provide further details regarding anticipated completion of the contracts. The uncertainty surrounding the project completion date is typical of situations where managers utilize discretion when making accrual decisions. The total estimated contractual value for these services is US$3.0 million. Participants then indicated their accrual recommendation regarding consulting and advisory services that have not yet been billed. Participants also completed a post-experimental demographic and case-related questionnaire.

Dependent and Independent Variables

Our primary dependent variable is the dollar amount of managers’ consulting and advisory services accrual. Participants had the option of recommending that no accrual be made for these services (i.e., US$0 recommendation). We also measured variables relating to participants’ consideration of other stakeholders. Specifically, we asked participants to indicate their agreement (on a 10-point scale, where 1 = strongly disagree and 10 = strongly agree) with the following statement: “Given the environment at HCP, I feel it is important for me, as a manager, to consider the concerns of constituents beyond corporate executives and myself (e.g., employees, creditors, and society).” Two independent variables (direction of earnings management incentive and level of CSR) were manipulated between participants, creating a 2 × 2 complete factorial design. A fifth condition (discussed below) serves as a baseline from which to assess earnings management attempts.

Our first independent variable, CSR, is operationalized by manipulating whether or not the company demonstrates a commitment to being socially responsible. In the demonstrated commitment (or high CSR) condition, participants are informed that the company is well known throughout its industry and the business world as being socially responsible and having a positive impact on both society and the environment. For example, it purchases raw materials only from environmentally friendly suppliers and takes steps to ensure the protection of workers’ civil rights and the ecological well-being of the organization. The company’s dedication to being socially responsible requires continuous effort on the part of managers to balance the financial needs of creditors and investors with the human needs of employees, customers, and the communities in which the company operates.⁸ In the no-demonstrated commitment (or neutral CSR) condition, no specific mention of any socially responsible values or activities is made.⁹

The second independent variable, earnings management incentive, relates to managers’ potential bonuses. Bonuses are based on achieving targets for plant expenses and vary as a percentage of base salary (see the appendix). The bonus provides an incentive either to accelerate (i.e., manage earnings downward) or to defer (i.e., manage earnings upward) recording of the consulting and advisory services expenses.

In the incentive to accelerate condition, projected division expenses for Year 1 (US$77.1 million) are US$3.0 million below the maximum 40% bonus target for expenses (i.e., the participant currently qualifies for the largest bonus in Year 1). This US$3.0 million cushion gives the manager the opportunity to accrue for an amount up to the full value of all contract services not yet billed without jeopardizing any portion of the maximum 40% bonus for Year 1, if he or she chooses to make such an accrual. For Year 2, projected division expenses are US$83.05 million, including the full value of all contract services not yet billed (i.e., US$3.0 million). Year 2 projected expenses are, therefore, currently US$50,000 above the bonus target expense threshold of US$83.00 million that would qualify the manager for the minimum 20% bonus (i.e., the participant currently does not qualify for any bonus in Year 2, based on projected expenses). Thus, if a manager decides to make an accrual in Year 1, bonus targets become easier to achieve in Year 2. For example, an accrual recommendation of US$3.0 million in Year 1 will not only preserve the maximum 40% bonus in Year 1 but will also help qualify the manager for a 40% bonus in Year 2 if actual Year 2 results are consistent with the current projections. Therefore, there is incentive for managers to accelerate recording the consulting and advisory services expenses (i.e., recommend higher expense accruals) in the current year that can then be used to improve operating results in the following year (i.e., establishing “cookie jar” reserves).

In the incentive to defer condition, projected division expenses are US$80.1 million for Year 1. Year 2 division expenses are US$80.05 million, including the full value of all contract services not yet billed (i.e., Year 2 projected expenses are US$77.05 million excluding US$3.0 million contract services not yet billed). Thus, if current projections for division expenses hold, the manager qualifies for the maximum 40% bonus in both Year 1 and Year 2. However, while the Year 2 bonus would be unaffected if the manager decides to record an entry for outstanding expenses in Year 1, the manager’s Year 1 bonus would be affected. Specifically, a Year 1 accrual entry of any dollar amount will reduce the manager’s Year 1 bonus (i.e., Year 1 expenses will increase beyond the US$80.1 million bonus target to earn the maximum bonus) and, thus, only a decision not to record a Year 1 entry for outstanding expenses will position the manager for 40% bonuses in both years. For instance, an accrual recommendation for US$3.0 million in Year 1 will result in no Year 1 bonus for the manager (i.e., Year 1 expenses of US$83.1 million would exceed the US$83.0 million expense target necessary to qualify for the minimum bonus). Therefore, there is incentive for managers to defer recording the consulting and advisory services expenses (i.e., to recommend lower expense accruals) in Year 1.

Finally, in addition to our four primary conditions (i.e., the CSR by earnings management incentive 2 × 2 framework), we include a fifth condition to establish a baseline from which to assess earnings management attempts. In this baseline condition, participants had no bonus related incentives to accelerate or defer recording the consulting and advisory services expenses, and no information regarding the company’s CSR practices was provided to these participants.

Results

Manipulation Checks

Manipulation checks for both independent variables indicate that participants generally understood the manipulations. With respect to the earnings management incentive manipulation, we asked participants to indicate the effect that recording an accrual for in-process consulting expenses in Year 1 would have on their chances to earn top bonuses across a 2-year period (Years 1 and 2).¹⁰ Eleven out of 158 participants (excluding the baseline condition) incorrectly interpreted the implications of recording an accrual for in-process consulting expenses in Year 1. Removing these participants from the analysis does not change any of the inferences drawn. A manipulation check for CSR suggests that this manipulation was also successful. On a 10-point scale, participants were asked to indicate how socially responsible HCP, the company in the case, was (1 = not at all socially responsible and 10 = very socially responsible). Means for the demonstrated commitment and the no-demonstrated commitment conditions were significantly different and directionally consistent with the manipulation (7.11 and 5.42, representing higher and more neutral CSR, respectively), t(1, 154) = −4.62, p < .001.¹¹

Establishing Upward and Downward Earnings Management

To demonstrate that a corporate commitment to social responsibility dampens managers’ attempts to manage earnings both upward and downward (via their discretionary accrual decisions), we must first establish that, consistent with prior research (e.g., Guidry et al., 1999), our participants tend to manage earnings in a direction consistent with their incentives. To do this, we separately compare participants’ responses from each of the incentive conditions in the no-demonstrated commitment to CSR setting with those of the baseline condition (i.e., a condition intended to result in responses that represent accrual decisions without earnings management). We choose these comparisons because, by excluding explicit consideration of CSR, they allow us to establish earnings management tendencies in a more neutral setting. That is, participants in these conditions have not been primed for a higher level of CSR and, thus, social responsibility does not explicitly factor into the comparisons. If we find that managers make larger (smaller) discretionary expense accrual decisions in the incentive to accelerate (incentive to defer) condition than in the baseline condition, then downward (upward) earnings management is established.

Consistent with this, we find that managers in the incentive to accelerate condition (when there is no demonstrated commitment to CSR) recommend larger discretionary expense accruals than do those in the baseline condition (US$1,427,632 vs. US$1,037,361), F(1, 109) = 2.51 p = .058, non-tabulated; Table 1 presents means for all cells. Furthermore, managers in the incentive to defer (with no-demonstrated CSR commitment) condition recommend accruals that are significantly lower than those in the baseline condition (Ms = US$540,793 and US$1,037,361, respectively), F(1, 109) = 4.06 p = .023, non-tabulated.¹² These results suggest that managers will tend to manage earnings in line with their incentives, accelerating (deferring) expense recognition when there are incentives to manage earnings down (up).

Table 1.

Managers’ Discretionary Accrual Decisions.

Panel A: Means (Standard Deviations).^a
Condition	No-demonstrated CSR commitment	Demonstrated CSR commitment	Row means(SD)
Incentive to Accelerate M (SD)	Cell 1 US$1,427,632 (US$1,286,084) n = 38	Cell 2 US$1,146,875 (US$1,301,358) n = 40	US$1,283,654 (US$1,293,251) n = 78
Incentive to Defer M (SD)	Cell 3 US$540,793 (US$960,421) n = 38	Cell 4 US$914,095 (US$1,152,335) n = 42	US$736,777 (US$1,075,340) n = 80
Column means (SD)	US$984,212 (US$1,212,550) n = 76	US$1,027,646 (US$1,225,253) n = 82
Baseline Condition(SD)	US$1,037,361(US$876,279)n = 36

Panel B: ANOVA Results.
Independent Variable^b	df	Mean square^c	F statistic	p value
Earnings Management Incentive	1	12,357,376,809	8.818	.003
CSR Commitment	1	84,430,748	0.060	.806
Interaction	1	4,217,159,238	3.009	.085
Error	154	1,401,417,402
Total	158

Panel C: Planned Contrast for H1.
Source of variation	df	Mean square^c	F statistic	p value
Contrast (+3, +1, –3, −1)^d	1	16,021,558,644	11.432	<.001
Residual between-cells variance	2	53,096,567	0.038	.963

Note. CSR = corporate social responsibility; ANOVA = analysis of variance.

The dependent variable is the dollar amount of participants’ expense accrual for consulting and advisory services. ^bThe direction of the Earnings Management Incentive was manipulated as either up (i.e., incentive to defer expense recognition) or down (i.e., incentive to accelerate expense recognition). For CSR Commitment, the manipulation related to whether or not the company has demonstrated a commitment to social responsibility through its actions and behavior. ^cMean squares are presented in thousands. ^dThis p value is based on a one-tailed test.

H1: The Mitigating Effect of CSR

H1 investigates a factor that has the potential to mitigate this tendency. Specifically, H1 predicts that a company’s demonstrated commitment to social responsibility will reduce managers’ willingness to manage earnings (either up or down) via their discretionary accrual decisions. This prediction of a reduction in both upward and downward earnings management when there is commitment to CSR leads to an interaction of the form depicted in Figure 1. Given the predicted pattern specified by H1 (refer to Figure 1), we test for this interaction with a planned contrast using the following weights: +3 for the incentive to accelerate/no-demonstrated commitment condition (Cell 1), +1 for the incentive to accelerate/demonstrated commitment condition (Cell 2), –3 for the incentive to defer/no-demonstrated commitment condition (Cell 3), and −1 for the incentive to defer/demonstrated commitment condition (Cell 4). Table 1 presents the descriptive statistics of managers’ discretionary accrual decisions, and reports results from the contrast used to test H1, along with results of the traditional analysis of variance (ANOVA). Following Guggenmos et al. (2018), we assess the visual fit of our results with the H1 prediction. Figure 3 illustrates good visual fit, as cell means are in a pattern consistent with expectations that CSR moderates managers’ willingness to manage earnings (Ms for Cells 1−4 = US$1,427,632, US$1,146,875, US$540,793, and US$914,095, respectively). Furthermore, the planned contrast is significant, F(1, 154) = 11.43, p < .001, and the residual between-cells variance is not significant (p = .963, two-tailed). Finally, the proportion of between-cells variance not explained by the contrast (q² = 0.006) is low and suggests that our contrast explains much of our observed effect (see Guggenmos et al., 2018). This provides support for H1.

Figure 3.

Observed CSR/earnings management incentive interaction (H1 results).

Interestingly, and also consistent with H1, the accrual decisions made by managers in the demonstrated commitment to CSR conditions (who have an incentive to manage earnings) begin to converge toward the accrual decisions made by managers in the baseline condition (who have no such incentive).¹³ Results indicate that the accrual recommendations of managers in the demonstrated commitment/incentive to accelerate condition (Cell 2), while higher, are not significantly different than those of managers in the baseline condition (Ms = US$1,146,875 and US$1,037,361, respectively), F(1, 115) = 0.18, p = .337, non-tabulated. Similarly, accrual recommendations of managers in the demonstrated commitment/incentive to defer condition (Cell 4) are not significantly lower than those of managers in the baseline condition (Ms = US$914,095 and US$1,037,361, respectively), F(1, 115) = 0.23, p = .317, non-tabulated.¹⁴

H2: Moderated Mediation—Considering a Broader Set of Stakeholders

The development of H1 suggests a moderating-mediation relationship in which a company’s demonstrated commitment to social responsibility will heighten managers’ consideration of the organization’s broader set of constituents, in turn reducing managers’ attempts to manage earnings in a manner consistent with their incentives. That is, we expect a positive relationship between consideration of the broader stakeholder set and managers’ accrual decisions when there are incentives to defer expense recognition (i.e., to manage earnings up), and a negative relationship when there are incentives to accelerate expense recognition (i.e., to manage earnings down).

In our analysis, we use the bias-corrected bootstrapping method (Hayes, 2013; Preacher & Hayes, 2008). To test for a moderated-mediation effect, we use Hayes PROCESS Model 15 to run 10,000 bootstrapped confidence intervals. As noted in Table 2, there is a significant link between CSR Commitment and Consideration of Stakeholders (b = 1.263; p = .001; Panel A).¹⁵ There is also a significant link between Consideration of Stakeholders and Accrual Decision (b = −145,429; p = .002), as well as a significant link between the interaction of Consideration of Stakeholders×Earnings Management Incentive and Accrual Decision (b = 319,508; p<.001).

Table 2.

Moderated-Mediation Analysis (H2).

Panel A: Regression Results.
Independent Variables and Interactions	Coefficient	t statistic	p value
Consideration of Stakeholders regressed on
Constant	7.0789	24.3264	<.001
CSR Commitment	1.2625	3.1255	.002
R ² = .0589; p value = .0021
Accrual Decision (Y)^a regressed on
Constant	2,495,386	6.1879	<.001
Consideration of Stakeholders (M)^a	−145,429	−2.9651	.004
CSR Commitment (X)^a	−145,087	−0.5633	.574
Earnings Management (EM) Incentive (V)^a	−3,141,083	−5.5761	<.00
Consideration of Stakeholders × EM Incentive	319,508	4.5068	<.00
CSR Commitment × EM Incentive	241,782	0.6563	.513
R ² = .1794; p value < .001

Panel B: Conditional Indirect Effects of CSR on Managements’ Accrual Decisions.
Condition	Path estimate	95% one-tailed bootstrapped confidence interval
Earnings Management Incentive to Accelerate (manage Accrual downward)	−183,607	95% of bootstrapped estimates < −53,905
Earnings Management Incentive to Defer (manage Accrual upward)	219,778	95% of bootstrapped estimates > 102,825

Note. Hayes PROCESS Model 15 was used for regression analysis and to test for moderated-mediation (Hayes, 2013). CSR = corporate social responsibility; EM = earnings management.

Letters correspond to Figure 2, which was modeled after examples provided in Hayes (2013).

The conditional indirect moderating effects are a product of the link between Consideration of Stakeholders and Accrual Decision being moderated by Earnings Management Incentive. We find that when there is an Earnings Management Incentive to accelerate expenses, there is a negative indirect effect of CSR Commitment on Accrual Decision through Consideration of Stakeholders (as evidenced by 95% of bootstrapped estimates<−53,905). In addition, we find that when the Earnings Management Incentive is to defer expenses, there is a positive indirect effect of CSR Commitment on Accrual Decision through Consideration of Stakeholders (as evidenced by 95% of bootstrapped estimates>102,825). We test to ensure that the two indirect paths are statistically different from each other, using an Index of Moderated Mediation (Hayes, 2013). We find a confidence interval of [176,541; 715,644] (SE = 162,367; untabulated). As zero is not contained within the confidence interval, we conclude that the two indirect paths are statistically different. Taken together, these results suggest there is moderated mediation as predicted in H2 and depicted in Figure 2.

Testing an Alternative Mediator: Perceptions of Corporate Governance

While we focus our attention on managers’ consideration of a broader set of stakeholders as the mechanism through which a firm’s CSR commitment influences their accrual decisions, we also explore a potential alternative mechanism.¹⁶ Specifically, in addition to increasing managers’ consideration of stakeholders, CSR commitment could also positively affect their perceptions of the firm’s governance and, in turn, it is possible that perceptions of firm governance drive our results as opposed to consideration of stakeholders (as we predict and test with H2). We measure participants’ perceptions of the firm’s governance by asking them to respond to the following item: “Based on the information provided in this case, I feel that corporate governance at HCP is: . . . ” Participants responded on a 10-point scale where 1 = very weak and 10 = very strong.

To test the possibility that perceptions of firm governance drive our results as opposed to consideration of stakeholders, we utilize our moderated-mediation model tested in H2 (PROCESS model 15; see Figure 2), adding Corporate Governance as a parallel mediator to test alongside Consideration of Stakeholders. If our results are driven by the alternative mechanism (i.e., perceptions of firm governance), we would detect a significant indirect effect of CSR Commitment on Accrual Decision through Corporate Governance.

Results from our PROCESS analysis provide evidence that Corporate Governance does not drive our results, and that Consideration of Stakeholders does. First, when there is an incentive to manage earnings upward, there is no significant indirect effect of CSR Commitment on Accrual Decision through Corporate Governance (as evidenced by a 90% confidence interval that contains zero [–121,127; 184,972]). When there is an incentive to manage earnings downward, there is again no significant indirect effect of CSR Commitment on Accrual Decision through Corporate Governance (as evidenced by a 90% confidence interval that contains zero [−401,560; 43,241]). Furthermore, even with the addition of the parallel mediator (Corporate Governance), the indirect effect of CSR Commitment on Accrual Decision through Consideration of Stakeholders remains significant (albeit marginally, given the inclusion of the additional variable in the model) for both an incentive to manage earnings downward (90% of bootstrapped estimates<–9,904) and upward (90% of bootstrapped estimates>104,524). This provides support for our theoretical mediator (consideration of stakeholders), over perceptions of firm governance, as the primary driver of our results.¹⁷

Discussion and Concluding Remarks

In our study, we respond to recent calls to identify mechanisms through which CSR influences managers’ decisions and propose a moderated-mediation model incorporating managers’ consideration of the organization’s broader set of stakeholders. Our results suggest that a company’s demonstrated commitment to social responsibility will moderate its managers’ willingness to manage earnings, upward or downward, via their discretionary accrual decisions. Furthermore, we find support for our moderated-mediation model. Specifically, we find that a company’s commitment to social responsibility influences the consideration managers give to the company’s broader set of constituents. In turn, managers’ consideration of a broader constituency then differentially affects the level of accruals based on the direction of the earnings management incentive.

Our findings have both practical and research implications. From a practical perspective, our findings suggest that a firm’s demonstrated commitment to behaving in a socially responsible manner can counteract strong personal incentives to manage earnings. We find that, when a company acts in a socially responsible manner, managers are less willing to put their own interests (i.e., personal incentives in the form of bonuses) ahead of those of the broader set of stakeholders. Thus, corporate boards may be able to mitigate self-interested behavior by fostering a climate that values socially responsible actions (Mason & Simmons, 2014; Sanders, 2008, Sprinkle & Maines, 2010). Similarly, as a company’s CSR practices are also observable by those on the outside of the company,¹⁸ the financial/investing community might want to consider a firm’s demonstrated commitment to CSR when evaluating the reliability of a firm’s financial statements. Auditors could also consider the impact that firms’ commitment to CSR initiatives has on management’s incentives when assessing risks and planning testwork. Furthermore, a better understanding of factors that influence managers’ tendencies to manage earnings can help top-level executives better understand the consequences of incentives on earnings management that occur throughout the organization and could help in management oversight, as well as with regulators’ investigative and enforcement actions (Healy & Whalen, 1999).

From a research perspective, our study is the first to demonstrate experimentally that a firm’s CSR actions can dampen the effect of personal incentives to manage earnings. Our findings also address Moser and Martin’s (2012) call to experimentally examine the motivations and consequences of CSR activities and managers’ decisions. Specifically, our results suggest that managers will tend to internalize their company’s commitment to consider the interests of the broader set of its stakeholders (e.g., its workers and the community in which it operates) when such a commitment is an important part of the company’s mission. Furthermore, as CSR is publicly observable and related rankings of firms exist (see, for example, Corporate Responsibility, 2022), it may be useful for archival earnings management models to control for differences in CSR, as well as different types/approaches to CSR (e.g., genuine vs. “green washing” attempts), given our finding regarding its dampening effect on earnings management. Interestingly, a reduction in earnings management may, in turn, lead to more volatile earnings patterns for companies with a higher degree of commitment to social responsibility as, in many cases, earnings management attempts are designed to smooth earnings. Future research could explore this potential relationship between CSR and earnings volatility, and how the type of/approach to CSR influences this relationship.

While our study examines only one type of accrual decision, future studies should examine earnings management behavior using other categories of discretionary accruals, as well as real earnings management techniques, to improve the generalizability of our findings. We also only look at a single type of incentive (i.e., a short-term bonus incentive). Further research could examine other types of financial and non-financial incentives. Finally, our study compares a setting in which there is a demonstrated corporate commitment to social responsibility to one in which social responsibility is not emphasized by the company. Future research could explore settings in which companies profess, but do not demonstrate, a commitment to CSR (i.e., “green washing”) or ones in which companies have negative reputations for social responsibility to see how these settings influence managers’ behavior.

Footnotes

Appendix

Appendix.

Bonus Targets and Current Projections of Division Expenses.

	(As of December 31)
Expense Information	Current year	Next year
Bonus targets^a:
Actual division expenses ≤ US$80,100,000	40%	40%
Actual division expenses > US$80,100,000 and ≤ US$83,000,000	20%	20%
Actual division expenses > US$83,000,000	0%	0%
Current projected division expenses
Provided to Incentive to Accelerate condition:	US$77,100,000	US$83,050,000
Provided to Incentive to Defer condition:	US$80,100,000	US$80,050,000

The bonus targets were provided to participants in the Incentive to Accelerate and Incentive to Defer conditions. Participants were told that their bonus is calculated as a percentage of base salary (US$200,000).

Acknowledgements

We thank Bradley Bennett, Joe Brazel, Jeff Cohen, Mary Kate Dodgson, Ryan Guggenmos, Rick Hatfield, Steve Kaplan, Elisa Lee, Jenny McCallen, Don Moser, Mark Peecher, John Schaubroeck, Nick Seybert, Brad Tuttle, and workshop participants at Drexel University and the University of Delaware for their helpful comments.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iDs

Christopher P. Agoglia

Stephen Kuselias

Notes

Author Biographies

Christopher P. Agoglia is the Richard H. Simpson Endowed Professor at the Isenberg School of Management, University of Massachusetts Amherst. He has published in a number of journals including The Accounting Review, Journal of Accounting Research, Contemporary Accounting Research, Accounting, Organizations and Society, and Auditing: A Journal of Practice & Theory. Chris is a past Senior Editor of Auditing: A Journal of Practice & Theory and has served as an Editor for Contemporary Accounting Research and an Associate Editor for Behavioral Research in Accounting.

Cathy A. Beaudoin is retired from the University of Vermont where she was an Associate Professor. After retirement, she has continued to write, penning a number of both fictional and non-fictional short stories. She enjoys life in her adopted hometown of Bend, Oregon, as well as traveling with her dog Winnie.

Stephen Kuselias is an assistant professor at Providence College. He enjoys research on emerging technologies and the psychological impact on its users. He lives in Massachusetts with his wife and two children.

George T. Tsakumis is an Associate Professor of Accounting at the Lerner College of Business, University of Delaware. His research focuses on accountants’ judgment and decision making. He received his Ph.D. from the Darla Moore School of Business, University of South Carolina.

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