Human behavior analysis under financial information science Evidence from corporate social responsibility

Purpose - The purpose of this paper is to investigate the relationships among corporate social responsibility (CSR), analyst forecast accuracy and firms' earnings management behavior using US-based firms. Design/methodology/approach - The authors use the Kinder, Lydenberg, Domini (KLD) database to construct CSR performance scores and divide all firms into ten groups from high to low as a proxy for CSR performance. The authors obtained an initial sample of 33,364 firm-year observations from 1991 to 2012. Filtering for records which exist in the KLD, Compustat, and Center for Research in Security Prices databases lefts a total of 16,807 firm-year observations and CSR evaluation reports for 5,896 firms. Findings - The authors find that high CSR-score firms have lower rates of analyst forecast error than their low CSR-score counterparts, suggesting that CSR performance is a useful means of forecasting earnings. Furthermore, firms with better CSR performance have significantly lower accrual-based earnings management behavior. However, the level of the manipulation behavior of real earnings management (REM) activities increased significantly in better CSR firms, suggesting that high CSR-score firms substituted REM methods for accrual-based methods. REM methods are consistent with the stipulations of the Sarbanes-Oxley Act and allow high CSR-score firms to better manipulate earnings behavior. These results hold after the authors control for various factors related to firm financial characteristics. Originality/value - Overall, the findings have important implications for investors and regulators to more easily assess firms' earnings manipulation behavior and earnings stability under CSR performance and financial information in financial markets.