Ethical Social Image in Unethical Financial Reporting: The Effect of Positive Corporate Social Responsibility Activities on Managers’ Expected Costs of Misreporting

• In Event: Potpourri II

Abstract

This paper investigates the effect of positive corporate social responsibility (CSR) image on managers’ expected costs of committing accounting misconduct. Using data on CSR activities and a sample of firms with accounting irregularities from 2000 to 2013, we find that positive CSR activities decrease managers’ expected costs of misreporting by (1) helping to conceal accounting irregularities, i.e., lessening the likelihood of detection, and (2) reducing the likelihood of CEO dismissal upon discovery, i.e., lowering the punishment costs upon detection. Further evidence shows that misreporting firms opportunistically increase CSR activities in the misreporting period. Overall, our findings suggest that ethical CSR image may decrease managers’ expected costs of unethical misconduct and might be misused by managers for self-serving purposes.

Authors

• Jun Guo, Rutgers University - Camden

• Sungsoo Kim, Rutgers University

• Linna Shi, University of Cincinnati