Earnings management and readability of CSR report: Evidence from China.

The literature has confirmed that when managers increase profits through earnings management, the readability of annual reports may be reduced Lo (2017), Ye (2018). Whether this conclusion is suitable for Chinese corporate social responsibility (CSR) reports, however, is still unclear. Based on the panel data of 5083 Chinese non-financial listed companies from 2010 to 2019, this paper adopts multiple linear regression to investigate the impact of earnings management on the readability of Chinese CSR reports. The results show that: (1) There is a significant negative correlation between earnings management and the readability of Chinese CSR reports, with the readability of Chinese annual reports as a mediating variable. (2) The negative effect is more significant when companies are not punished for violations, when the internal control index is low, when companies lack ISO14001 certification and when companies do not have independent third-party authentication for Chinese CSR reports. (3) When earnings management just exceeds zero, the readability of Chinese CSR reports decreases. (4) The economic consequences of reducing the readability of Chinese CSR reports are that financing costs are increased and environmental performance is decreased. To improve the quality of information disclosure of listed companies, the recommendations are as follows: First, the government should issue CSR reporting standards to reduce the manipulation of Chinese CSR reports. Second, Chinese CSR reports disclosed by listed companies must be audited by independent third parties to enhance the credibility of the information. Third, the company needs to strengthen its external and internal supervision to reduce the manipulation space for the readability of Chinese CSR reports. This study extends the negative relationship between earnings management and the readability from annual reports to Chinese CSR reports. To prevent investors from detecting earnings management, the readability of Chinese CSR reports may be reduced. At the same time, the study has definitely added value to the existing literature in the domain of CSR

Cross-sectional analysis.

This table of Panel A displays the results of regression estimations of the relationship between earnings management and the readability of Chinese CSR reports, dividing the sample into irregular and nonirregular firms. The irregularities indicator variable equals 1 if companies have irregularities; otherwise, it is 0. Panel B displays the results of regression estimations of the relationship between earnings management and the readability of Chinese CSR reports, dividing the sample into a high internal control index and a low internal control index. We choose the internal control index of the DIB database. When the value is greater than the median of all the samples, the value is 1; otherwise, it is 0. Panel C displays the results of regression estimations of the relationship between earnings management and the readability of Chinese CSR reports, dividing the sample into ISO14001 and non-ISO14001 firms. The value is 1 when the company has passed the ISO14001 certification; otherwise, it is 0. Panel D displays the results of regression estimations of the relationship between earnings management and the readability of Chinese CSR reports, dividing the sample into attestation and non- attestation. If companies have independent third-party authentication for CSR reports, the value is 1; otherwise, it is 0. The dependent variable is Readability_CSR measured as the readability of Chinese CSR reports. The post indicator variable is DA, measured as accrued earnings management. All the controlling variables are obtained from the CSMAR database, and t-statistics are reported in parentheses.</p

Selection process of samples.

This table provides the process of obtaining Chinese CSR reports that need to be observed.</p

Variable definitions.

The literature has confirmed that when managers increase profits through earnings management, the readability of annual reports may be reduced Lo (2017), Ye (2018). Whether this conclusion is suitable for Chinese corporate social responsibility (CSR) reports, however, is still unclear. Based on the panel data of 5083 Chinese non-financial listed companies from 2010 to 2019, this paper adopts multiple linear regression to investigate the impact of earnings management on the readability of Chinese CSR reports. The results show that: (1) There is a significant negative correlation between earnings management and the readability of Chinese CSR reports, with the readability of Chinese annual reports as a mediating variable. (2) The negative effect is more significant when companies are not punished for violations, when the internal control index is low, when companies lack ISO14001 certification and when companies do not have independent third-party authentication for Chinese CSR reports. (3) When earnings management just exceeds zero, the readability of Chinese CSR reports decreases. (4) The economic consequences of reducing the readability of Chinese CSR reports are that financing costs are increased and environmental performance is decreased. To improve the quality of information disclosure of listed companies, the recommendations are as follows: First, the government should issue CSR reporting standards to reduce the manipulation of Chinese CSR reports. Second, Chinese CSR reports disclosed by listed companies must be audited by independent third parties to enhance the credibility of the information. Third, the company needs to strengthen its external and internal supervision to reduce the manipulation space for the readability of Chinese CSR reports. This study extends the negative relationship between earnings management and the readability from annual reports to Chinese CSR reports. To prevent investors from detecting earnings management, the readability of Chinese CSR reports may be reduced. At the same time, the study has definitely added value to the existing literature in the domain of CSR.</div

Substitute dependent variables.

We use Readability_CSR2 to replace Readability_CSR for OLS regression. The regression results are listed in Table 8. The dependent variable is the readability of Chinese CSR reports. The post indicator variable is DA, measured as accrued earnings management. All the controlling variables are obtained from the CSMAR database, and t-statistics are reported in parentheses.</p

Economic consequences of the readability of CSR reports.

The dependent variables are debt costs and equity costs, measured as the financing costs of the company. The dependent variable is CSR performance, measured as social welfare expenditure divided by total number of shares. The post indicator variable is Readability, measured as the readability of Chinese CSR reports. All the controlling variables are obtained from the CSMAR database, and t-statistics are reported in parentheses.</p

The impact of earnings management on the readability of Chinese CSR reports.

To test the impact of earnings management on the readability of Chinese CSR reports, we run the OLS regressions for Model (6). The regression results are listed in Columns 1 to 4 in Table 3. The dependent variable is Readability_CSR, measured as the readability of Chinese CSR reports. The post indicator variable is DA, measured as accrued earnings management. All the control variables are obtained from the CSMAR database, and t-statistics are reported in parentheses.</p

Substitute dependent variables.

We use Readability_CSR1 to replace Readability_CSR for OLS regression. The regression results are listed in Table 7. The dependent variable is the readability of Chinese CSR reports. The post indicator variable is DA, measured as accrued earnings management. All the controlling variables are obtained from the CSMAR database, and t-statistics are reported in parentheses.</p

Sample self-selection test.

We use Pollution as a tool variable to perform Heckman regression. The dependent variable is Readability_CSR, measured as the readability of Chinese CSR reports. The post indicator variable is DA, measured as accrued earnings management. All the controlling variables are obtained from the CSMAR database, and t-statistics are reported in parentheses.</p

The mediating effect of the readability of annual reports.

This table of Panel A displays the results of the mediating effect between earnings management and the readability of Chinese CSR reports. The dependent variable is Readability_CSR, measured as the readability of Chinese CSR reports. The post indicator variable is DA, measured as accrued earnings management. The mediating variable is Readability_AR, measured as the readability of Chinese annual reports.</p