Publication

Abstract : This study examines the association between mandatory corporate social responsibility (CSR) and earnings management. The Government of India mandated all industries to spend and disclose CSR through the Indian Companies Act 2013 with effect from financial year 2014. Management has an incentive to manage reported earnings and avoid fluctuations in reported income as investors prefer firms reporting steady growth in income. We use panel data from a sample of 80 Indian non-financial companies over the period 2014 to 2017. We investigate the possibility of using unspent CSR funds for earnings management. Earnings management calculated using the coefficient of variation method is regressed against unspent CSR and control variables such as Size, Market to Book (MB), Return on Assets (ROA) and Leverage (LEV) to evaluate the effect of unspent CSR on earnings management. We expect a positive association between unspent (carried forward) CSR funds and earnings management. Our findings indicate that companies may use unspent CSR funds to manage reported earnings. This study provides evidence to policymakers and enforcement authorities that mandating CSR spending could have unintended consequences such as facilitating earnings management and thus impeding the financial transparency.