The link between corporate social responsibility and earnings management and the impact of corporate governance in Egypt

This thesis investigates the relationship between corporate social responsibility (CSR) and accrual earnings management (AEM), in Egyptian listed firms. The thesis also examines the impact of corporate governance (CG) on this relationship. Previous studies on the CSR-AEM relationship have reported inconsistent results, in addition to the fact that the issue of endogeneity has been overlooked in most of these studies. In addition, only a few studies have investigated the influence of CG on the CSR-AEM relationship, which has not been examined in the context of developing countries. These considerations have provided the motivations for this study in order to fill these gaps in the literature.

The study employs an Egyptian sample of 772 firm-year observations and CSR annual scores from the Egyptian environmental, social and governance index (S&P/ESG index) for the 100 highest scoring firms from 2007 to 2015. The results reported that CSR has an insignificant link with AEM in top 30 ranked firms according to the index. In addition, the results from the bottom 70 ranked firms, according to the index show that CSR has a positive association with AEM. This indicates that bottom 70 firms have higher agency costs and higher AEM and may use CSR to ‘greenwash’ weaker earnings.

The findings also show that CSR has a positive association with AEM for the whole sample without considering the impact of CG. However, when CG is considered, the findings reveal that CSR is negatively associated with AEM in firms that have good CG standards.

The findings suggest that good CG standards reduce agency costs, restrict management’s misreporting behaviours and, thus, discourage the agency motives behind CSR.