Does Earnings Quality Influence Corporate Social Responsibility Performance? Empirical Evidence of the Causal Link

Author:

Bose Sudipta1,Yu Chuan2

Affiliation:

1. Discipline of Accounting and Finance, Newcastle Business School University of Newcastle Sydney NSW 2000 Australia

2. Discipline of Accounting The University of Sydney Business School, The University of Sydney Sydney NSW 2006 Australia

Abstract

The study examines the causal links between earnings quality and corporate social responsibility (CSR) performance using a large sample of United States (US) firms from 1992 to 2013. We first find that the association between earnings quality and CSR performance is positive and significant. We then test the flow of causality using Granger's (1969) lead–lag analysis to determine whether changes in earnings quality cause changes in CSR performance or vice versa. Our findings show that changes in earnings quality cause changes in a firm's CSR performance but not vice versa. Further analysis shows that earnings quality reduces the cost of equity capital for firms with higher CSR performance. These findings suggest that one plausible means by which firms with higher earnings quality can maintain better CSR performance is to reduce their cost of equity capital.

Publisher

Wiley

Subject

Accounting

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