IDEAS home Printed from https://ideas.repec.org/a/bla/bstrat/v34y2025i1p1494-1509.html

What is in a Rating? Exploring the Link Between the Italian Legality Rating and Earnings Management

Author

Listed:
  • Federico Bertacchini
  • Carlotta Magri
  • Gianluca Gabrielli

Abstract

Corporate legality is a key dimension of business strategy. However, due to the difficulties associated with its measurement, little has been done to study the activities and behaviors that legally responsible companies enact towards their stakeholders. To address this gap, we consider the Italian Legality Rating (LR) as a proxy for corporate legality to study the earnings quality of legally responsible companies. Considering the theoretical framework of stakeholder theory and agency theory, we hypothesize that the LR scores and the presence of LR are associated with higher earnings quality. Based on a dataset of over 126,000 companies, the results of the analyses confirm our hypotheses and highlight the role of the LR as an effective tool to recognize ethically responsible companies. Our study provides valuable practical insights to private companies and public institutions.

Suggested Citation

  • Federico Bertacchini & Carlotta Magri & Gianluca Gabrielli, 2025. "What is in a Rating? Exploring the Link Between the Italian Legality Rating and Earnings Management," Business Strategy and the Environment, Wiley Blackwell, vol. 34(1), pages 1494-1509, January.
    • Handle: RePEc:bla:bstrat:v:34:y:2025:i:1:p:1494-1509
    DOI: 10.1002/bse.4059
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/bse.4059
    Download Restriction: no
    File URL: https://libkey.io/10.1002/bse.4059?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    2. Rob Gray & Reza Kouhy & Simon Lavers, 1995. "Corporate social and environmental reporting," Accounting, Auditing & Accountability Journal, Emerald Group Publishing Limited, vol. 8(2), pages 47-77, May.
    3. Bozzolan, Saverio & Fabrizi, Michele & Mallin, Christine A. & Michelon, Giovanna, 2015. "Corporate Social Responsibility and Earnings Quality: International Evidence," The International Journal of Accounting, Elsevier, vol. 50(4), pages 361-396.
    4. Grougiou, Vassiliki & Leventis, Stergios & Dedoulis, Emmanouil & Owusu-Ansah, Stephen, 2014. "Corporate social responsibility and earnings management in U.S. banks," Accounting forum, Elsevier, vol. 38(3), pages 155-169.
    5. Vassiliki Grougiou & Stergios Leventis & Emmanouil Dedoulis & Stephen Owusu-Ansah, 2014. "Corporate social responsibility and earnings management in U.S. banks," Accounting Forum, Taylor & Francis Journals, vol. 38(3), pages 155-169, September.
    6. Tae Choi & Jinhan Pae, 2011. "Business Ethics and Financial Reporting Quality: Evidence from Korea," Journal of Business Ethics, Springer, vol. 103(3), pages 403-427, October.
    7. Jiraporn, Pornsit & Miller, Gary A. & Yoon, Soon Suk & Kim, Young S., 2008. "Is earnings management opportunistic or beneficial? An agency theory perspective," International Review of Financial Analysis, Elsevier, vol. 17(3), pages 622-634, June.
    8. Daryl Koehn & Joe Ueng, 2010. "Is philanthropy being used by corporate wrongdoers to buy good will?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 14(1), pages 1-16, February.
    9. Tae Choi & Jinchul Jung, 2008. "Ethical Commitment, Financial Performance, and Valuation: An Empirical Investigation of Korean Companies," Journal of Business Ethics, Springer, vol. 81(2), pages 447-463, August.
    10. Viruli A. de Silva & H. H. D. N. P. Opatha & Aruna S. Gamage, 2016. "Towards Extending the Ethical Dimension of Human Resource Management," International Business Research, Canadian Center of Science and Education, vol. 9(10), pages 151-161, October.
    11. Roman Lanis & Grant Richardson, 2012. "Corporate social responsibility and tax aggressiveness: a test of legitimacy theory," Accounting, Auditing & Accountability Journal, Emerald Group Publishing, vol. 26(1), pages 75-100, December.
    12. Simone Pizzi & Fabio Caputo & Andrea Venturelli, 2020. "Does it pay to be an honest entrepreneur? Addressing the relationship between sustainable development and bankruptcy risk," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(3), pages 1478-1486, May.
    13. Fabio La Rosa & Francesca Bernini, 2022. "Punishing Vices or Rewarding Virtues? The Motivations for and Benefits of Ethical Ratings for Private Italian Companies," Journal of Business Ethics, Springer, vol. 176(3), pages 467-485, March.
    14. Anis Ben Amar & Salma Chakroun, 2018. "Do dimensions of corporate social responsibility affect earnings management?," Journal of Financial Reporting and Accounting, Emerald Group Publishing Limited, vol. 16(2), pages 348-370, June.
    15. Jones, Jj, 1991. "Earnings Management During Import Relief Investigations," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 29(2), pages 193-228.
    16. Isabel‐Maria García‐Sánchez & Nazim Hussain & Sana Akbar Khan & Jennifer Martínez‐Ferrero, 2020. "Managerial entrenchment, corporate social responsibility, and earnings management," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(4), pages 1818-1833, July.
    17. repec:eme:aaaj00:09513579510146996 is not listed on IDEAS
    18. Iacus, Stefano M. & King, Gary & Porro, Giuseppe, 2012. "Causal Inference without Balance Checking: Coarsened Exact Matching," Political Analysis, Cambridge University Press, vol. 20(1), pages 1-24, January.
    19. Angeloantonio Russo & Francesco Perrini, 2010. "Investigating Stakeholder Theory and Social Capital: CSR in Large Firms and SMEs," Journal of Business Ethics, Springer, vol. 91(2), pages 207-221, January.
    20. Liu Wang & Kenneth Yung, 2011. "Do State Enterprises Manage Earnings More than Privately Owned Firms? The Case of China," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 38(7-8), pages 794-812, September.
    21. Alan Gregory & Julie Whittaker & Xiaojuan Yan, 2016. "Corporate Social Performance, Competitive Advantage, Earnings Persistence and Firm Value," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 43(1-2), pages 3-30, January.
    22. Belal Ali Abdulraheem Ghaleb & Sumaia Ayesh Qaderi & Ahmad Almashaqbeh & Ameen Qasem, 2021. "Corporate social responsibility, board gender diversity and real earnings management: The case of Jordan," Cogent Business & Management, Taylor & Francis Journals, vol. 8(1), pages 1883222-188, January.
    23. Jennifer Martínez-Ferrero & Shantanu Banerjee & Isabel María García-Sánchez, 2016. "Corporate Social Responsibility as a Strategic Shield Against Costs of Earnings Management Practices," Journal of Business Ethics, Springer, vol. 133(2), pages 305-324, January.
    24. Bert Scholtens & Feng‐Ching Kang, 2013. "Corporate Social Responsibility and Earnings Management: Evidence from Asian Economies," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 20(2), pages 95-112, March.
    25. King, Gary & Nielsen, Richard, 2019. "Why Propensity Scores Should Not Be Used for Matching," Political Analysis, Cambridge University Press, vol. 27(4), pages 435-454, October.
    26. Xingqiang Du & Wei Jian & Quan Zeng & Yingying Chang, 2018. "Do Auditors Applaud Corporate Environmental Performance? Evidence from China," Journal of Business Ethics, Springer, vol. 151(4), pages 1049-1080, September.
    27. Yousf Almahrog & Zakaria Ali Aribi & Thankom Arun, 2018. "Earnings management and corporate social responsibility: UK evidence," Journal of Financial Reporting and Accounting, Emerald Group Publishing Limited, vol. 16(2), pages 311-332, June.
    28. Luo, Yadong, 2005. "An Organizational Perspective of Corruption1," Management and Organization Review, Cambridge University Press, vol. 1(1), pages 119-154, March.
    29. Jerry Hausman, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    30. Blaufus, Kay & Hundsdoerfer, Jochen & Jacob, Martin & Sünwoldt, Matthias, 2016. "Does legality matter? The case of tax avoidance and evasion," Journal of Economic Behavior & Organization, Elsevier, vol. 127(C), pages 182-206.
    31. Jeong, Hyun Ju & Paek, Hye-Jin & Lee, Mira, 2013. "Corporate social responsibility effects on social network sites," Journal of Business Research, Elsevier, vol. 66(10), pages 1889-1895.
    32. Dawson, Alexandra & Ginesti, Gianluca & Sciascia, Salvatore, 2020. "Family-related antecedents of business legality: An empirical investigation among Italian family owned SMEs," Journal of Family Business Strategy, Elsevier, vol. 11(1).
    33. Chen, Huimin (Amy) & Francis, Bill B. & Wu, Qiang & Zhao, Yijiang, 2023. "Strategic reaction and tax avoidance: Evidence from the effect of large IPOs on peers," The British Accounting Review, Elsevier, vol. 55(3).
    34. Becchetti, Leonardo & Corrado, Germana & Pelligra, Vittorio & Rossetti, Fiammetta, 2020. "Satisfaction and preferences in a legality social dilemma: Does corporate social responsibility impact consumers’ behaviour?," Journal of Policy Modeling, Elsevier, vol. 42(2), pages 483-502.
    35. Iacus, Stefano M. & King, Gary & Porro, Giuseppe, 2011. "Multivariate Matching Methods That Are Monotonic Imbalance Bounding," Journal of the American Statistical Association, American Statistical Association, vol. 106(493), pages 345-361.
    36. Fabio La Rosa & Sergio Paternostro & Loredana Picciotto, 2018. "Exploring the determinants of anti-mafia entrepreneurial behaviour: an empirical study on southern Italian SMEs," Entrepreneurship & Regional Development, Taylor & Francis Journals, vol. 30(1-2), pages 81-117, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Patrick Velte, 2024. "Corporate social responsibility (CSR) and earnings management: A structured literature review with a focus on contextual factors," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(6), pages 6000-6018, November.
    2. Giovanna Gavana & Pietro Gottardo & Anna Maria Moisello, 2022. "Related Party Transactions and Earnings Management: The Moderating Effect of ESG Performance," Sustainability, MDPI, vol. 14(10), pages 1-21, May.
    3. Sadaf Ehsan & Adeel Tariq & Mian Sajid Nazir & Malik Shahzad Shabbir & Rizwan Shabbir & Lydia Bares Lopez & Wasim Ullah, 2022. "Nexus between corporate social responsibility and earnings management: Sustainable or opportunistic," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(2), pages 478-495, March.
    4. Kamran Ali & Hafiz Muhammad Arslan & Muhammad Mubeen & Hafiz Azeem & Zhao Zhen-Yu & Jiang Yushi & Miao Miao, 2025. "From reporting to responsibility: investigating the influence of sustainability disclosure on earnings management," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 27(12), pages 30431-30464, December.
    5. Yang Deng & Tze San Ong & Rosmila Senik, 2024. "Trick or treat? A bibliometric literature review of corporate social responsibility and earnings management," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(5), pages 4361-4383, September.
    6. Isabel‐Maria García‐Sánchez & Nazim Hussain & Sana Akbar Khan & Jennifer Martínez‐Ferrero, 2020. "Managerial entrenchment, corporate social responsibility, and earnings management," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(4), pages 1818-1833, July.
    7. Shital Jhunjhunwala & Sidra Fatima, 2025. "Two Decades of Research on the Relation of CSR With Earnings Management: Mapping Heterogeneity and Future AGENDA," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 32(3), pages 3438-3453, May.
    8. Jing Jia & Zhongtian Li, 2022. "Corporate sustainability, earnings persistence and the association between earnings and future cash flows," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(1), pages 299-336, March.
    9. Sunil Kumar & Ashish Sharma & Poornima Mishra & Nikhil Kaushik, 2023. "Corporate social responsibility disclosures and earnings management: a bibliometric analysis," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 20(1), pages 27-51, March.
    10. Habiba Al‐Shaer, 2020. "Sustainability reporting quality and post‐audit financial reporting quality: Empirical evidence from the UK," Business Strategy and the Environment, Wiley Blackwell, vol. 29(6), pages 2355-2373, September.
    11. Tiago Gonçalves & Cristina Gaio & André Ferro, 2021. "Corporate Social Responsibility and Earnings Management: Moderating Impact of Economic Cycles and Financial Performance," Sustainability, MDPI, vol. 13(17), pages 1-14, September.
    12. Patrick Velte, 2021. "Environmental performance, carbon performance and earnings management: Empirical evidence for the European capital market," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(1), pages 42-53, January.
    13. Jannik Gerwanski & Othar Kordsachia & Patrick Velte, 2019. "Determinants of materiality disclosure quality in integrated reporting: Empirical evidence from an international setting," Business Strategy and the Environment, Wiley Blackwell, vol. 28(5), pages 750-770, July.
    14. Karima Lajnef & Siwar Ellouz, 2025. "Mediation effect of earnings management techniques on the relationship between CSR and corporate performance: evidence from the civil law countries," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 22(2), pages 555-575, June.
    15. Yamina Chouaibi & Ghazi Zouari, 2022. "The effect of corporate social responsibility practices on real earnings management: evidence from a European ESG data," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 19(1), pages 11-30, March.
    16. Roger C.Y. Chen & Shih‐Wei Hung, 2021. "Exploring the impact of corporate social responsibility on real earning management and discretionary accruals," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(1), pages 333-351, January.
    17. Gavious, Ilanit & Livne, Gilad & Chen, Ester, 2022. "Does tax avoidance increase or decrease when tax enforcement is stronger? Evidence using CSR heterogeneity perspective," International Review of Financial Analysis, Elsevier, vol. 84(C).
    18. Rasmi Meqbel & Mohammad Alta'any & Salah Kayed & Ahmed Al‐Omush, 2024. "Earnings management and sustainability assurance: The moderating role of CSR committee," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(3), pages 1769-1785, May.
    19. Liu, Chengyun & Su, Kun & Zhang, Miaomiao, 2021. "Water disclosure and financial reporting quality for social changes: Empirical evidence from China," Technological Forecasting and Social Change, Elsevier, vol. 166(C).
    20. Samuel Buertey & Eun‐Jung Sun & Jang Soon Lee & Juhee Hwang, 2020. "Corporate social responsibility and earnings management: The moderating effect of corporate governance mechanisms," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(1), pages 256-271, January.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:bstrat:v:34:y:2025:i:1:p:1494-1509. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://onlinelibrary.wiley.com/journal/10.1002/(ISSN)1099-0836 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.