Sustainability‐Oriented Businesses and Earnings Management. What Is the True Relationship? Evidence From Italian Benefit Corporations

Abstract

This study examines how benefit corporations (BCs)—a type of sustainability-­ oriented hybrid business dedicated to corporate social responsibility (CSR) goals—are associated with earnings management (EM). Two theoretical perspectives—long-­ term strategy and managerial opportunism—shape the hypotheses on the association between BC adoption and EM practices. An empirical analysis is conducted on a panel dataset of 2449 Italian firms (354 BCs and 2095 non-­ BCs) from 2014 to 2021. Using Stubben's (2010) conditional earnings model and propensity score matching, the findings suggest that adopting the BC model is linked to a higher likelihood of managerial engagement in EM. Although the BC model emphasizes transparency and accountability, it might unintentionally enable opportunistic behavior, calling into question the assumption that CSR-­ oriented business models inherently limit financial manipulation. These findings shed light on the impact of legal frameworks for hybrid organizations like BCs on corporate behavior, offering valuable insights for policymakers and practitioners working to foster ethical business practices