Managerial entrenchment, corporate social responsibility, and earnings management

• Published in: Corporate social-responsibility and environmental management 2020-07, Vol.27 (4), p.1818-1833
• Main Authors: García‐Sánchez, Isabel‐Maria, Hussain, Nazim, Khan, Sana Akbar, Martínez‐Ferrero, Jennifer
• Format: Article
• Language: English
• Subjects: accrual‐based earnings management; corporate social responsibility decoupling; Decoupling; Earnings management; Hypotheses; managerial entrenchment; nonfinancial disclosure; Profits; real earnings management; Social responsibility
• ISSN: 1535-3958; 1535-3966
• DOI: 10.1002/csr.1928

Many studies have examined the direct relationship between the two corporate practices: corporate social responsibility (CSR) and earnings management (EM); however, the results remain heterogeneous. To achieve the consensus, this study builds upon the classical agency theory and examines the role of managerial entrenchment in creating organizational facades related to CSR and EM. More specifically, it examines the relationship between CSR performance and EM in the presence of managerial entrenchment and the direct effect of managerial entrenchment on CSR decoupling. In doing so, this article provides evidence of a previously underappreciated yet fundamentally important aspect, that is, managerial entrenchment, that may significantly affect the quality of earnings as well as the level of alignment between CSR disclosure and performance. Our analyses of longitudinal data of an international sample for the period of 2007–2016 supports that managerial entrenchment significantly moderates the relationship between CSR performance and EM. Furthermore, our study reveals that entrenched managers decouple CSR disclosure and performance.