Proactive Corporate Social Responsibility Strategies in Financial Misreporting

We investigate whether a proactive reputation-building strategy exists in misreporting firms and study the effect of such a strategy on misreporting managers. Using a sample of fraudulent U.S. firms from 2000 to 2013, we find that firms significantly increase their proactive corporate social responsibility (CSR) activities during periods when they misreport financial information. This finding is consistent with anecdotal evidence that firms may opportunistically invest in CSR reputation-building. We then examine the effects of this strategy on misreporting managers and find that (a) it delays the detection of misreporting, and (b) it reduces the possibility of forced CEO turnover upon the discovery of financial misreporting. Collectively, our results provide empirical evidence that managers could use proactive CSR strategies for self-serving purposes. This finding merits the attention of both researchers and regulators.JEL Classifications: M14; M41; G34