Corporate Social Responsibility and Earnings Management: Evidence from Saudi Arabia after Mandatory IFRS Adoption

This study attempts to examine the relationship between corporate social responsibility (CSR) disclosure and earnings management practices in the context of Saudi Arabia after mandatory IFRS adoption. It is carried out on an unbalanced panel of 277 observations over the period 2017-2019. For this purpose, CSR disclosure is measured by Bloomberg ESG scores, while the residuals from the modified Jones model are considered for earnings management. As control variables, we have retained the firm performance, market-to-book ratio, firm size, financial leverage, board independence, ownership concentration, managerial ownership, and lagged discretionary accruals. Using the system GMM estimator in the dynamic panel, the results show a positive association between CSR disclosure and earnings management practices, thus supporting the perspective of agency theory. Managers engage in socially responsible activities beforehand to conceal their wrongdoing and convince stakeholders that the organization is transparent. They probably use ethical codes as a tool to achieve their own goals rather than the firm's goals. Our contribution is the use of recent data (2017-2019) taking into account the mandatory adoption of IFRS in Saudi Arabia. Additionally, to our knowledge, this study is the first to address CSR disclosure and earnings management practices using GMM system estimates.