The effects of mandatory corporate social responsibility policy on accounting conservatism

Abstract

Purpose – This paper aims to investigate whether government-mandated corporate social responsibility (CSR) engenders conservative financial reporting in emerging markets. It is expected that CSR plays a substitute role for governance mechanisms in reducing information asymmetry. Design/methodology/approach – The C-Score developed by Khan and Watts (2007) was adopted to measure the degree of firm-year specific accounting conservatism. This study uses the CSR rating established by the Shanghai National Accounting Institute. Findings – Empirical evidence indicates that the government-mandated CSR policy may be sufficient to induce conservative financial reporting. However, due perhaps to political affiliations, the evidence to support this claim is weaker for state-owned enterprises (SOEs) than for non-SOEs. Originality/value – The findings provide a deeper understanding of the potential role of CSR in firms. The results also provide evidence on the dynamics between CSR activities and the reporting behavior of managers. These findings have important implications for investors, analysts and regulators.