The role of the institutional framework in the relationship between earnings management and corporate social performance

Abstract

This study examines the influence of the institutional framework of European countries: more specifically coordinated market economies and liberal market economies on the earnings management and corporate social performance nexus. Employing econometric models impervious to endogeneity, our results show that socially responsible firms (particularly those with high governance scores) in coordinated market economies engage in earnings management. These findings suggest that in countries in which institutional settings enable implicit undertakings of corporate social responsibility in firm policies, firm practices ostensibly related to corporate social performance may serve purposes other than meeting stakeholders' ethical expectations and those of society at large.