The contextual relationship between earnings management and corporate social responsibility: managerial myopia versus myopia avoidance perspectives

Author: Salmin Mostafa

Mostafa, Salmin, 2022 The contextual relationship between earnings management and corporate social responsibility: managerial myopia versus myopia avoidance perspectives, Flinders University, College of Business, Government and Law

Terms of Use: This electronic version is (or will be) made publicly available by Flinders University in accordance with its open access policy for student theses. Copyright in this thesis remains with the author. You may use this material for uses permitted under the Copyright Act 1968. If you are the owner of any included third party copyright material and/or you believe that any material has been made available without permission of the copyright owner please contact with the details.


This study provides an in-depth investigation of the relationship between corporate social responsibility (CSR) and earnings management (EM), two contemporary issues in academic research. While CSR and EM are linked both empirically and theoretically, prior studies suggest conflicting results on the effect of CSR on EM. The present study addresses this existing debate by examining the CSR-EM relationship more closely through answering why, how and when CSR affects EM. I investigate the CSR-EM relationship using two contrasting managerial behaviour perspectives, namely managerial myopia and myopia avoidance hypotheses. The managerial myopia hypothesis suggests that managers engaged in CSR are short-term oriented, and therefore are more likely to manage earnings. CSR can create more opportunities for EM (opportunity-driven myopia) and/or greater incentives for EM (incentive-driven myopia). In contrast, the myopia avoidance hypothesis suggests that managers engaged in CSR are long-term oriented, and therefore are less likely to manage earnings. This is because managers have genuine concern about their relationships with stakeholders (relationship-driven myopia avoidance), and/or strong ethical and moral values (value-driven myopia avoidance).

The study makes a number of contributions to knowledge and practice, by providing a framework for understanding the CSR-EM relationship through the lens of managerial behaviour perspectives and underlying motives under various contexts. To this end, I undertake three individual research studies.

The first research study examines organisation capital (OC) as a mediating channel via which CSR indirectly affects EM. OC refers to a firm-specific, non-imitable set of intangibles that include the integration of organizational design, process, managerial quality practices and culture. Using structural equation modelling (SEM) and 2 stage least squares (2SLS) estimation on a sample of 46,816 firm-year observations from USA between 2002 and 2017, I find that that in general CSR has a negative direct effect on EM, consistent to the myopia avoidant perspective (long-term orientation). However, the results also show that CSR has a positive indirect effect on EM via OC. This suggests, consistent with the managerial myopia perspective (short-term orientation), that managers engaged in CSR may take advantage of their firm’s unique abilities (that is, OC) to manage more earnings.

The second research study examines the direct CSR-EM relationship and the indirect CSR-EM relationship via OC, in a crisis context. Specifically, the study examines the moderated mediation effect of financial distress (FD), a very relevant concept in present times as businesses around the globe are still struggling from the social and economic restrictions imposed by the Covid-19 pandemic. Using SEM and 2SLS estimation on a sample of 36,811 firm-year observations from USA between 2002 and 2017, I find that when firms experience FD, the positive indirect CSR-EM relationship via OC becomes weaker, that is managerial myopia behaviour (short-term orientation) weakens. The result highlights an important role of OC in financially distressed firms. During crisis managers are more likely to divert their efforts and their firms’ resources to assist the firm’s recovery. When firms with high OC experience crisis, managers are less likely to use CSR opportunistically to manage earnings.

The third research study examines the effects of country-level collectivist culture, corruption and investor protection on the CSR-EM relationship. Using hierarchical linear modelling on a sample of 3,472 firm-year observations from 10 emerging market countries between 2012 and 2016, I find that in emerging market countries, the CSR dimensions have contrasting effects on EM. While the environmental (ENV) dimension has a negative effect on EM, the social dimension has a positive effect on EM. The findings reveal that managers may have different underlying motives behind their engagement in different CSR initiatives. In particular, managers engaged in ENV initiatives tend to be myopia avoidant, whereas managers engaged in SOC initiatives tend to be myopic. The results also show that both collectivism and investor protection separately affect the CSR-EM relationship. Additionally, while collectivism and corruption have a joint effect, collectivism and investor protection do not have a joint effect on the CSR-EM relationship. The findings highlight that cultural background has a stronger influence on the CSR-EM relationship than corruptive practices or institutional framework of a country.

The findings of this study have important implications to theory and practice, particularly for investors, policymakers, regulators, and academics. The findings show that the CSR-EM relationship is contextual. Rather than taking CSR as a reflection of management’s ethical disposition, it is important to understand how various contexts may affect managerial behaviour and motives. By examining mediating and moderating factors on the CSR-EM relationship, the study provides an initial foundation to understand the CSR-EM relationship from a managerial behaviour perspective.

Keywords: earnings management, corporate social responsibility, organization capital, financial distress, discretionary accruals, financial distress, collectivism, culture, corruprion, investor protection, emerging markets

Subject: Business thesis

Thesis type: Doctor of Philosophy
Completed: 2022
School: College of Business, Government and Law
Supervisor: Dr Wee Ching Pok