Resumen de Relationship between earnings management and corporate atrategies: social responsibility and enterprise risk management
Social transparency and financial transparency have been in the spotlight of investors and corporate stakeholders during the past decades. Firms have opted to disclose CSR information through different channels. Many companies have used the management report section of the 10-K’s as the main channel for disclosure of their CSR information. However, companies have substituted or complemented communication on the 10-K by releasing voluntary and self-prepared CSR reports, which are frequently available on the company’s website. The policy of public dissemination (disclosure) of CSR activity can be considered a separate element of the company’s CSR strategy and a part of the firm’s communication policy (jointly with the financial disclosure). Given that communication of CSR information is mostly voluntary and not subject to explicit regulation or ex-post scrutiny, it is important that we try to understand both the determinants and the effects of this disclosure on the actual level of CSR activity and its possible effects on the quality of financial disclosure (a relevant element of the firm’s communication strategy). Good quality companies (high in CSR activities) may show higher probability to initiate CSR disclosure to distinguish from poor performers. On the other hand, low quality firms may attempt to “dress up” their social concern motivated by the belief that capital providers and stakeholders in general, will not be able to see through this “dressing up” process and reap the benefits of higher transparency (e.g. lower cost of debt, see Dhaliwall et al. 2011). From an economic perspective, voluntary disclosure theory suggests that firms with better performance will provide more voluntary disclosure as long as this “signal” is costly. However, socio-political theories, such as stakeholder theory and legitimacy theory, posit both positive and negative relations between good performers and disclosure, depending upon the strategy adopted by the management. This ambiguity could be behind the mixed results shown by the literature: there may be two types of companies depending on how CSR disclosure is related to CSR activity and the quality of financial information.
In Chapter 1, I analyze the relationship between a firm’s prior CSR activity and the decision to initiate CSR disclosure. I examine, in particular, the choice of the channel of disclosure and the subsequent effect that this choice has on the level of CSR activity. I find that companies with higher levels of CSR activity (which we term “socially-transparent” firms), have a higher probability of initiating CSR disclosure through regulatory channels, more explicitly, in the 10-K filings. On the other hand, the decision to issue CSR information through voluntary standalone reports is not associated with a high level of CSR activity and I interpret that this decision is associated with a desire to use strategically the information about the firm’s social commitment (we call firms who do so “socially-labeled” firms). Additionally, I find that after initiation of CSR disclosure, companies that disclose through voluntary reports show a higher and more persistent increase on subsequent social activities, thus suggesting that disclosure through voluntary channels acts as an incentive to avoid inconsistencies and to maintain social legitimacy.
In Chapter 2, I follow a similar identification strategy to analyze if socially transparent companies are equally transparent when disclosing financial information. Results suggest that companies with high levels of past (accrual-based) earnings management show higher probability of initiating CSR disclosure in the 10-K filings. They also suggest that continued disclosure on the 10-Ks is associated with subsequent lower levels of earnings management. These results are suggestive that firms view CSR disclosure on the 10-Ks as a commitment device, so financial and social transparency reinforce one another (thus going beyond being pure complements). On the other hand, initiation of voluntary reports does not seem to be related to prior transparency, but immediately after initiation companies show higher levels of earnings management and less evidence of subsequent reductions in earnings management from continued disclosure. I interpret these results as suggestive that firms view voluntary disclosure as a strategic device, or financial disclosure and social disclosure through voluntary channels as substitutes.
In Chapter 3, I provide initial evidence on the determinants of adoption by firms of Enterprise Risk Management (ERM) mechanisms and on the subsequent effects of such adoption. The results show that the presence of an ERMC is mostly determined by the volatility of previous earnings, but does not respond to the firm’s levels of earnings management practices. After implementation, earnings volatility and the use of transaction-based earnings management decrease from the continued presence of the ERM committee, but this is not the case for accrual-based earnings management. These results suggests that an ERMC is effective in reducing opportunistic transactions and perceived measures of risk, but not necessarily in increasing financial transparency
