Corporate Social Responsibility, Related Party Transaction and Earnings Management: Evidence from India

We examine the interplay between corporate social responsibility (CSR) and related party transactions (RPTs). As per our findings, aggregate RPTs is associated with higher CSR expenditure. The level of business RPTs positively correlates with CSR spending, whereas a negative association is witnessed in the case of tone RPTs. Further analysis reveals a greater propensity among firms with significant RPTs to expropriate resources through manipulative earnings management practices that could lower CSR spending. We also document that high ownership concentration reduces CSR expenditure. While the results are robust to alternate variable and model specifications, concerns surrounding endogeneity and sample selection bias have been addressed through the use of two-step system generalized method of moments (GMM) estimations and the Heckman two-step selection models, respectively. The study extends the extant literature on the relationship between CSR and RPTs, with the potential moderating roles of earnings management and ownership concentration. From regulatory standpoint, the focus should be on the implementation of robust monitoring mechanism to curb misuse of RPTs as a tool for expropriating firms’ resources. Indian firms, on their part, should strengthen their internal corporate governance mechanisms to improve transparency in RPTs oversight, ensuring alignment with sustainability goals.