Forced corporate social responsibility and incentive to manage earnings: evidence from a quasi-natural experiment

This paper investigates whether forced Corporate Social Responsibility (CSR) induces managers to engage in earnings management, particularly downward earnings management. We primarily take advantage of a regulatory intervention in India that mandates all firms over the threshold to spend 2% of their three-year average profits on CSR efforts. We use the difference in differences and regression discontinuity methods. We also use propensity score matching-based DiD to validate our hypothesis. We find that firms subject to mandated CSR spending regulations engage in more downward earnings management than firms not subject to the same law. In addition, our results indicate that firms that do not invest in consumer awareness and those operating in polluting sectors are more likely to understate their earnings (downward earnings management). These results show that firms underreport their earnings to cut their mandated CSR spending, particularly those whose CSR efforts provide less benefit.