The effect of corporate social responsibility on earnings management and tax avoidance in Chinese listed companies

• Date: 07 October 2019
• DOI: https://doi.org/10.1108/IJAIM-08-2018-0095
• Pages: 632-652
• Published date: 07 October 2019
• Author: Haijing Liu,Hyun-Ah Lee

The ef‌fect of corporate social

responsibility on earnings

management and tax avoidance

in Chinese listed companies

Haijing Liu and Hyun-Ah Lee

Gachon University, Seongnam, Republic of Korea

Abstract

Purpose –This paper aims to verify the effect of corporate social responsibility (CSR) on Chinese listed

f‌irms’earnings management and tax avoidance. Specif‌ically, this study investigates whether government-

guided CSR implementationindeed drives f‌irms to behave in a responsible manner by constrainingearnings

managementand tax avoidance.

Design/methodology/approach –The paper analyses a sample of Chinese listed companies that are

confronted with the unique situation of CSR being developedatarapidpacebygovernment-ledpolicyand

regulation. The study further investigates whether the effect of CSR on earnings management and tax avoidance

is different for state-owned and private enterprises by partitioning the sample into these twosubgroups.

Findings –The f‌indings of this studyshow that government-guided CSR could be effective in reducingthe

f‌irms’earningsmanagement and tax avoidance, even thoughthe effect is limited to state-ownedenterprises.

Originality/value –This paper providesnew evidence on the relation of CSR with earnings management

and tax avoidance in the Chinese context and sheds light on the importance of differentiating between the

state-ownedand private enterprises when studyingthe corporate behaviors of Chinese f‌irms.

Keywords China, Corporate social responsibility, Earnings management, Tax avoidance,

State-owned enterprise, Private enterprise

Paper type Research paper

1. Introduction

In China, corporate social responsibility (CSR) hasbecome a prominent issue in the contextof

growing concerns about the social and environmental problems that have accompanied the

strong economic growth since the late 1980s. In response, the Chinese government has

actively promoted CSR by issuing or amending relevant laws and guidelines. For example,

Article 5 of the new Chinese Company Law, enacted in 2006, requires f‌irms to undertake

social responsibilities in their business operations. The guidelines, which were released by

the State-Owned Asset Supervision of Administration Commission (SASAC) in 2008,

demand that state-owned enterprise (SOEs) fulf‌ill their social responsibilities. Therefore, in

China, CSR is motivated by the need to comply with the regulations and, thus, building a

good relationshipwith the government,rather than being a voluntaryprivate sector initiative

(Carey et al.,2017;CS R Asia, 2015). In addition, SOEs have taken the lead in implementing

CSR because the government took the initiative to promote CSR through legislations and

guidelines,particularly for theSOEs that are under the controlof the central government.

Given this background, we analyze empirically whether this government-guided CSR

implementation indeeddrives f‌irms to behave in a responsible manner by being transparent

in f‌inancial reporting and fulf‌illingtax obligations. If f‌irms engage in CSR merely to comply

IJAIM

27,4

632

Received22 August 2018

Revised15 January 2019

Accepted21 February 2019

InternationalJournal of

Accounting& Information

Management

Vol.27 No. 4, 2019

pp. 632-652

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-08-2018-0095

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

www.emeraldinsight.com/1834-7649.htm

with government requirements, without integrating its principles into their business

operations, CSR would be ineffective in reducing the f‌irms’opportunistic earnings

management or aggressive tax avoidance.Alternatively, if CSR engagement brings about a

practical change in corporate behaviors and f‌irms start making responsible operating

decisions on transparent f‌inancial reporting or tax planning, they are expected to constrain

earnings management or tax avoidance activity. Meanwhile, there is also a possibility that

f‌irms view CSR as a strategic tool for neutralizing the reputational damage on account of

earnings managementor tax avoidance.

Given the above context, we investigate the effect of CSR on earnings management and

tax avoidance in China using a sample of 1,374 f‌irm-year observations of Chinese listed

companies covering the 2010-2014 period. In addition, we further investigate whether the

effect of CSR on earnings management and tax avoidance is different for SOEs and private

enterprises (non-SOEs) by partitioning our sample into these two subgroups. SOEs, as

leading players in CSR, are expected to participate more actively in CSR and fulf‌ill their

social responsibilities, under the control and supervision of the government, than the non-

SOEs, who face less pressure from the government. Thus, we presume that a negative

relation betweenCSR and tax avoidance is more likely for SOEs than non-SOEs.

Our f‌indings are summarized as follows. First, f‌irms with better CSR performance, in

general, are less likely to engage in earnings management. By analyzing further, we f‌ind

that SOEs with better CSR performance exhibit lower level of earnings management;

however, such a relation does not exist for non-SOEs. These results indicate that the

principles of CSR are actually adopted and used by SOEs, thereby constraining earnings

management. However, non-SOEs appear to be engaging in CSR simply to create a

favorable impression on the government and neglect the social responsibility to deliver

transparent f‌inancial reporting. Second, for the full sample, there is no signif‌icant

relationship between CSR performance and tax avoidance. However,when we partition our

sample into SOEs and non-SOEs, we f‌ind that SOEs with better CSR performance are less

likely to engage in tax avoidance. This suggests that the CSR activities of SOEs are in line

with the principles for fulf‌illing social responsibilities, thereby constraining tax avoidance

practice. In contrast, we f‌ind a positiverelationship between CSR and tax avoidance for non-

SOEs, which implies that CSR is likely to be used to window-dress the negative impact of

tax avoidance on the corporateimages of these enterprises.

This study contributes to the literature in several ways. First, we provide compelling

evidence that differences in the environment in which CSR develops could potentially

impact the relation between CSR and the corporate opportunistic behaviors, such as

earnings management andtax avoidance. By analyzing data of Chinese listed f‌irms that are

confronted with theunique situation of CSR being developed at a rapid pace by government-

led policy and regulation, we f‌ind new evidence on the relation of CSR with earnings

management and tax avoidance that is not provided by the literature. Our f‌indings indicate

that the inconsistent evidenceof existing CSR studies could be attributed to different factors

at the country level. Second, this study conf‌irms that the practice of CSR in China depends

on the f‌irms’ownership structure.It is notable that Chinese SOEs play a key role in various

sectors owing to their size and impact on the economy and society.Our results shed light on

the importance of differentiating between the SOEs and non-SOEs when studying the

corporate behaviors of Chinese f‌irms. Last, our f‌indings suggest that government-guided

CSR could be effective in reducing f‌irms’opportunistic behavior related to earnings

management or tax avoidance, even though the effect is limited to SOEs. Overall, our

f‌indings provide an insight into the effects of CSR on f‌irms’opportunistic behaviors in the

Chinese context and have important implications for policymakers, regulators, and capital

Corporate

social

responsibility

633