Does Mandatory CSR Legislation Facilitate Earnings Management Evidence from India
Karthika.S1, Rajiv Nair2
1Karthika.S, Department of Management, Amrita Vishwa Vidyapeetham, Amritapuri, Kollam (Kerala), India.
2Rajiv Nair, Department of Management, Amrita Vishwa Vidyapeetham, Amritapuri, Kollam (Kerala), India.
Manuscript received on 01 May 2019 | Revised Manuscript received on 15 May 2019 | Manuscript published on 30 May 2019 | PP: 2865-2868 | Volume-8 Issue-7, May 2019 | Retrieval Number: G6065058719/19©BEIESP
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© The Authors. Blue Eyes Intelligence Engineering and Sciences Publication (BEIESP). This is an open access article under the CC-BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/)
Abstract: This study examines the association between mandatory corporate social responsibility (CSR) and earnings management. The Government of India mandated all industries to spend and disclose CSR through the Indian Companies Act 2013 with effect from financial year 2014. Management has an incentive to manage reported earnings and avoid fluctuations in reported income as investors prefer firms reporting steady growth in income. We use panel data from a sample of 80 Indian non-financial companies over the period 2014 to 2017. We investigate the possibility of using unspent CSR funds for earnings management. Earnings management calculated using the coefficient of variation method is regressed against unspent CSR and control variables such as Size, Market to Book (MB), Return on Assets (ROA) and Leverage (LEV) to evaluate the effect of unspent CSR on earnings management. We expect a positive association between unspent (carried forward) CSR funds and earnings management. Our findings indicate that companies may use unspent CSR funds to manage reported earnings. This study provides evidence to policymakers and enforcement authorities that mandating CSR spending could have unintended consequences such as facilitating earnings management and thus impeding the financial transparency.
Keyword: Corporate Social Responsibility, Earnings Management, Income Smoothing, Unspent CSR.
Scope of the Article: Digital Rights Management