Forcing responsibility? examining earnings management induced by mandatory corporate social responsibility: evidence from India

Abstract

Purpose – This study aims to investigate the impact of mandatory corporate social responsibility (CSR) spending legislation on the earnings management strategies of firms. Design/methodology/approach – The authors use panel data regression models to analyze the data for this study. This study covers the post-legislation period, which spans over five years from the financial year ending March 2015 to the financial year ending March 2019. Findings – The results show that firms manipulate accounting measures to avoid breaching the cut-off criteria for mandatory CSR. In particular, the results show that firms operating around the operating revenue threshold misclassify operating revenue as non-operating revenue. In contrast, firms operating around the net worth and net profit thresholds do downward real and accrual earnings management. These results are consistent with several robustness measures. Originality/value – To the best of the authors’ knowledge, this is the first study that examines the impact of mandatory CSR spending on earnings management.