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Firms’ earnings smoothing, corporate social responsibility, and valuation

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  • Gao, Lei
  • Zhang, Joseph H.

Abstract

Earnings smoothing via accounting discretion could improve or garble actual earnings information. Although managers prefer a less volatile earnings path and perceive lower risk for earnings smoothness, prior studies show that there is no discernible relation between smoothness and firm valuation. Recent literature documents that socially responsible firms behave differently from other firms in their earnings management and financial reporting. We conjecture that the reported earnings of smoothers that are socially responsible deviate less from their permanent earnings, thus their reported earnings are more value relevant. Our empirical tests show income-smoothing firms with higher corporate social responsibility (CSR) experience higher contemporaneous earnings-return relationship, greater Tobin’s Q, and stronger current return-future earnings relationship. The results show that CSR is proved desirable as it adds a unique “quality dimension” to earnings attributes and is useful for firm valuation.

Suggested Citation

  • Gao, Lei & Zhang, Joseph H., 2015. "Firms’ earnings smoothing, corporate social responsibility, and valuation," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 108-127.
  • Handle: RePEc:eee:corfin:v:32:y:2015:i:c:p:108-127
    DOI: 10.1016/j.jcorpfin.2015.03.004
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    Cited by:

    1. Wu, Dejun & Lin, Chen & Liu, Sibo, 2016. "Does community environment matter to corporate social responsibility?," Finance Research Letters, Elsevier, vol. 18(C), pages 127-135.
    2. repec:eee:jbfina:v:88:y:2018:i:c:p:442-454 is not listed on IDEAS
    3. Li, Ting & Zaiats, Nataliya, 2017. "Information environment and earnings management of dual class firms around the world," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 1-23.
    4. Arouri, Mohamed & Gomes, Mathieu & Pukthuanthong, Kuntara, 2019. "Corporate social responsibility and M&A uncertainty," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 176-198.
    5. Liu, Sibo & Wu, Dejun, 2016. "Competing by conducting good deeds: The peer effect of corporate social responsibility," Finance Research Letters, Elsevier, vol. 16(C), pages 47-54.
    6. repec:gam:jsusta:v:10:y:2018:i:8:p:2955-:d:164683 is not listed on IDEAS
    7. repec:eee:jbrese:v:97:y:2019:i:c:p:76-93 is not listed on IDEAS
    8. Diogo Batista da SIlva & António Cerqueira & Elísio Brandão, 2017. "Earnings Management Dynamics in Portuguese Listed Firms," FEP Working Papers 587, Universidade do Porto, Faculdade de Economia do Porto.
    9. repec:eee:glofin:v:38:y:2018:i:c:p:97-109 is not listed on IDEAS
    10. repec:gam:jsusta:v:10:y:2018:i:9:p:3302-:d:170025 is not listed on IDEAS
    11. Chen, Changling & Kim, Jeong-Bon & Yao, Li, 2017. "Earnings smoothing: Does it exacerbate or constrain stock price crash risk?," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 36-54.
    12. repec:kap:rqfnac:v:51:y:2018:i:2:d:10.1007_s11156-017-0680-7 is not listed on IDEAS
    13. Boubakri, Narjess & El Ghoul, Sadok & Wang, He & Guedhami, Omrane & Kwok, Chuck C.Y., 2016. "Cross-listing and corporate social responsibility," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 123-138.

    More about this item

    Keywords

    Earnings smoothness; Corporate social responsibility; Earning and return relations; Firm valuation;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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