Do female and independent directors explain the two-way relationship between corporate social responsibility and earnings management of Chinese listed firms?

• DOI: https://doi.org/10.1108/IJAIM-03-2018-0027
• Pages: 442-460
• Date: 05 August 2019
• Published date: 05 August 2019
• Author: Muhammad Safdar Sial,Zheng Chunmei,Nguyen Vinh Khuong
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

Do female and independent

directors explain the two-way

relationship between corporate

social responsibility and earnings

management of Chinese

listed firms?

Muhammad Safdar Sial

Department of Management Sciences, COMSATS University Islamabad (CUI),

Islamabad, Pakistan

Zheng Chunmei

School of Economics and Management, Wuhan University, Wuhan,

China and Yunnan College of Business Management, Yunnan, China, and

Nguyen Vinh Khuong

Faculty of Accounting and Auditing, University of Economics and Law,

VNU-HCM, Ho Chi Minh City, Vietnam

Abstract

Purpose –This study aims to explore the possibility of a two-way relationship between corporate social

responsibility(CSR) and earnings management (accrualsand real EM) with the moderating role of female and

independentdirectors.

Design/methodology/approach –The authors use STATA to test the generalized methodof moments

on a sample of Chinese listed firms data over the period 2009-2015. The unbalanced sample obtained 3,481

observations from China stock market and accounting research database and CSR rating provided by

Rankins.

Findings –The results indicate a significant negative relationship between two-way CSR and accrual-

based EM. Moreover, female and independent directors moderate the two-way relationship between

CSR and EM.

Research limitations/implications –The present study does not include all financial, insuranceand

investment firms to impact on CSR and EM. Furtherresearch might consist of family ownership to enhance

the evidencefor an emergingmarket.

Originality/value –This study primarily contributes to the literature on CSR, female and independent

directors, and EM by providing evidencefor the moderating role of female and independent directors on the

two-way associationbetween CSR and EM.

Keywords Independent directors, Female directors, Corporate social responsibility (CSR),

Accrual-based earnings management (AEM), Corporate governance (CG),

Real earnings management (REM)

Paper type Research paper

IJAIM

27,3

442

Received9 March 2018

Revised1 May 2018

Accepted28 May 2018

InternationalJournal of

Accounting& Information

Management

Vol.27 No. 3, 2019

pp. 442-460

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-03-2018-0027

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

www.emeraldinsight.com/1834-7649.htm

1. Introduction

The significance of corporate social responsibility (CSR) in the Chinese economy has

increased very much in recentyears. It is a result of market globalization and demands from

stakeholders to know about the environmental and social commitment of the firm along

with the engagement of stakeholders(Hossain and Alam, 2016). In spite of the fact that CSR

is obligatory and regulated by law in some of the developed countries (Perrault Crawford

and Clark Williams, 2010), and in the developing economiesit is yet to be made obligatory.

Al Farooque and Ahulu (2017) conductedthe study on three Anglo Saxon counties countries

(South Africa, Australia and UK) and found that sustainability reports contain much

information on CSR as compare to yearly reports and used as a base to collecting data

related CSR and economic disclosures(Lynch, 2010).

However, the origin of CSR dates back to the nineteenth century, when activism and

cooperation as a means of concealing enterprise goals, human, cultural and ethical

objectives emerged. Now a day’s, companies are in the area, where not only the excellent

financial performance treated as more important but also the firm actions and activities

related to environment and society are similarly significant. Because stakeholders require

effective corporate management,and moreover, they demand social loyalty to recapture the

belief they vanished as a result of increasing disgraceful actsof business. These increasing

environmental and social issues and principles have generated manners and perform

designs driving to the accomplishment of a triple (ecological,economic and social) objective.

These behavior designs, which basedon socially active activities, contain the expression of

CSR. This unique planning, which makes themanagement of CSR activities possible based

on the demand of participant, so that the public is happy and that the firm createsvalue for

stockholders.

Good corporate governance(CG) is supposed to linked with a lower cost of capital, higher

returns on investment, more efficient use of recourses and higher accountability to all

stakeholders (L

opez-de-Foronda et al.,2007;Porta et al.,1998;Shleifer and Vishny, 1997). CG

ensures the concern of the shareholders, and it plays a vital role in corporate responsibility

by disclosing social issues (Hossain and Alam, 2016). CG and earnings management (EM)

often discussed in the results of different corporate scandals such as Enron and WorldCom

(US), Parmalat (Italy) and Nortel (Canada). The interest of the public is much affected by

these scandals and due to these scandals increasedthe interest in business ethics. CG serves

the intention to monitor managers to ensure the association with shareholders (Lin and

Hwang, 2010) and as a results of these scandals prior studies on the CSR and EM practices

(Chih et al., 2008;Prior et al., 2008), empiricalfindings remain unconvincing with respect to

whether CSR has a positive or negative effect on the quality of financial reporting (Chih

et al., 2008) and vice versa. Due to the mixture of the results the significance of this

relationship for market participants and academics, more research is required (Kim et al.,

2012). In this regard, we explore the two-way CSR-EM relationship by focusing on Chinese

firms with a moderatingrole of female and independent directors.

The current study has two primary objectives. First, we analyze the possible two-way

relationship between CSR and EM practices and second, we consider the moderating role

played in this relationshipby female and independent directors. The studyperformed on the

listed Chinese companies on a sample of 3,481 observations from Shanghai and Shenzhen

stock exchanges from 2008 to 2015. Our approachto the two-way relationship between CSR

and EM is different from the prior studies. We estimate a simultaneousequation system by

using the generalized methodof moments (GMM) estimator proposed by Arellano and Bond

(1991) to control for any endogeneity problem by taking lags of CSR and earning

management as an instrument variableof the independent variables. The estimation of two

Corporate

social

responsibility

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