This paper examines whether firms that act socially responsible engage in different amounts of Earnings Management (EM). In particular, this study tries to disentangle the two main incentives incorporated into Corporate Social Responsibility (CSR) investments and analyses whether these entail diverse EM strategies in terms of accrual-based earnings management (AEM), real activities earnings management (REM), total EM and the trade-off relationship between AEM and REM. Furthermore, we consider the effect of corporate governance (CG) on EM strategies, particularly whether the respective CSR incentives moder-ate this relationship. For our European sample with 2,733 firm-years from the 2005-2014 period, the results show that EM strategies vary between intrinsic and reputational CSR incentives. For both incentives, we find that respective firms engage in lower AEM. However, high-reputation firms use more total EM and trade off from AEM to REM at the expense of shareholder value, whereas intrinsic firms use less total EM and trade off vice versa. Additionally, we find that certain independence in the board limits opportunities to pursue AEM, whereas CSR incentives significantly moderate the outcome of effective monitoring. While both CSR incentives entail a lower use of AEM with increasing independence, high-reputation firms again switch to higher REM and further trade off from AEM to REM. Altogether, the results indicate that firms with a high CSR orientation engage in different EM strategies, depending on their CSR incentives and thereby preserve or jeopardize shareholder value.
Supplementary notes can be added here, including code and math.