Do cultural differences moderate the relationship between CSR and earnings quality: common law evidence pre and during COVID-19 crisis

• Date: 19 December 2024
• Pages: 213-240
• DOI: https://doi.org/10.1108/IJAIM-02-2024-0046
• Published date: 19 December 2024
• Author: Karima Lajnef,Siwar Ellouz

Do cultural differences moderate the

relationship between CSR and earnings

quality: common law evidence pre and

during COVID-19 crisis

Karima Lajnef and Siwar Ellouz

Graduate School of Commerce of Sfax, University of Sfax, Sfax, Tunisia

Abstract

Purpose –This paper aims to describethe role of corporate social performance as a potentialmechanism for

reducing earnings management. This paper contributesto the existing literature by addressing the moderator

effectsof nationalculture on the relationship between CSR and earnings management.

Design/methodology/approach –This study investigates the moderating impact of Hofstede’scultural

dimensions on the association between corporate social responsibility (CSR) and earnings management. The

data set covers71,893 f‌irm-year observationsspanning 2006–2022 and involving4,229 f‌irms listed in common

law countries.

Findings –The result conf‌irms that corporate social performance reduces the use of real earnings

management and controls the change of method AEM to REM method. When testing the indirect effect,

the results show that cultural dimensions moderate the relationship between CSR and earnings

management. These f‌indings have many theoretical and practical implications for researchers, investors

and decision-makers.

Originality/value –This paper contributes substantially to extant literatureby comprehensively exploring

the moderating inf‌luence of nationalcultures on the intricate nexus between CSR and earnings management,

encompassing the pre- and post-COVID-19periods. The implications of these f‌indings extend to researchers,

investorsand policymakers, offering valuable insights for informeddecision-making.

Keywords Corporate social responsibility (CSR), Earnings management (EM),

Hofstede cultural dimension theory, Common law system, Moderating model, COVID-19 crisis

Paper type Research paper

1. Introduction

Inthewakeoff‌inancial scandals and corporate collapses, the scrutiny on earnings quality and

corporate transparency has intensif‌ied, leading to a critical evaluation of business ethics and

management practices. Earnings management, through techniques such as accrual earnings

management (AEM) and real earnings management (REM), remains a central concern in

f‌inancial reporting, as it manipulates reported earnings to meet targets at the cost of f‌inancial

integrity (Roychowdhury, 2006;Zang, 2012). Simultaneously, corporate social responsibility

(CSR) has emerged as an ethical and strategic response to societal expectations, ref‌lecting a

company’s commitment to broader stakeholder concerns. However, an increasing body of

literature suggests a complex relationship between CSR and earnings quality, raising questions

about whether CSR is being used as a moral check or as a tool to mask f‌inancial manipulation

(Garcia-Sanchez et al., 2017;Kumala and Siregar, 2020;Lu et al.,2021;Lajnef and Ellouz,

2024a,2024b).

International

Journal of

Accounting &

Information

Management

213

Received16 March 2024

Revised12 September2024

Accepted2December2024

InternationalJournal of

Accounting& Information

Management

Vol.33 No. 1, 2025

pp. 213-240

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-02-2024-0046

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

Recent studies have investigated how external crises, such as the COVID-19 pandemic,

inf‌luence this relationship. For instance, Dakhlallh et al. (2020) demonstrate that CSR

commitment during the pandemic worsened earnings management practices, with socially

responsible f‌irms more likely to engage in income-increasing activities than their

counterparts. This f‌inding supports the cognitive biases hypothesis, which posits that f‌irms

may engage in opportunistic behaviorduring crises despite their CSR efforts. Such behavior

highlights the need to explore how crises reshape the CSR-earnings management dynamic,

especially when f‌irms face pressures to appear socially responsible while maintaining

f‌inancial performance.

The motivations behind CSR engagement can oftendiffer across cultural contexts, and

the role of national culture in moderating the impact of CSR on earnings quality is

underexplored. Hofstede’s cultural dimensions provide a theoretical framework for

understanding how cultural norms and values shape corpora te behavior, including

transparency, accountability and ethical decision-making (Hofstede, 1980). Recent

research has begun to examine how cultural factors inf‌luence the relationship between

CSR and f‌inancial outcomes, but f‌indings remain fragmented (Zhang et al.,2024). This

oversight is signif‌icant, especially given that cultures vary in their expectations around

corporate transparency and ethical conduct, leading to different outcomes in earnings

management and CSR performance.

Moreover, a recent meta-analysis by Shi et al. (2024) conf‌irms that CSR is negatively

associated with earnings management and that this relationship is moderated by cultural

differences,CSR measurement and the period of the sample selection.

The COVID-19 crisis has further complicatedthe relationship between CSR and earnings

quality. As companies faced unprecedented social and f‌inancial pressures, many responded

by amplifying their CSR initiatives to maintain legitimacy and meet immediate social

demands (He and Harris, 2020). However, the crisis also provided opportunities for some

f‌irms to engage in earnings management, exploiting reduced regulatory scrutiny and

increased societal focus on corporatesocial contributions (Aljughaiman et al., 2023). Recent

studies have found that the economic impact of the pandemic intensif‌ied earnings

management practices in some f‌irms, while others strengthened CSR commitments as a

strategic response (Zhang et al., 2022). Understanding how cultural differences moderate

these relationships during such a period of global upheaval is crucial for policymakers,

investors and academicsalike.

This study focuses on common law countries becauseof their distinct legal and f‌inancial

systems, which offer a unique setting for exploring the interaction between CSR, earnings

management and cultural factors. The legal systems in common law countries (such as the

USA, the UK and Australia) prioritize shareholder protection and emphasize transparency

and accountability in f‌inancial reporting (La Porta et al.,2008). Common law countries are

characterized by a strong tradition of judicial precedent, where court rulings serve as legal

guides for future cases. This results in a dynamic and adaptable legal framework that

responds f‌lexibly to emerging corporate challenges, including those posed by crises suchas

the COVID-19 pandemic. In contrast, civil law countries, such as France, Germany and

Japan, rely on comprehensive statutory codes and place greater emphasis on protecting

broader stakeholder groups, including employees, communities and governments (La Porta

et al., 1999). Civil law systems are less f‌lexiblethan common law systems, as legal decisions

are grounded in codif‌ied laws rather than judicial precedents. These differences between

legal systems inf‌luence corporate governance, with common law countries focusing on

competition and transparencyas drivers of economic success, while civil law countries adopt

for stakeholder approach.

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