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Top in CSR, Flop in Financial Reporting?

Research paper "The Impact of Corporate Social Responsibility (CSR) on Financial Reporting Quality - Evidence from European Blue Chips" by Marcus Salewski and Prof. Dr. Henning Zülch of HHL Leipzig Graduate School of Management (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2141768).

Corporate social responsibility's (CSR) popularity has recently been increasing with companies, authorities and the media. Sustainable and responsible company leadership is moving more and more into the focus of companies and investors. Whether companies in fact do change so as to become more social, sustainable and responsible remains to be seen. Marcus Salewski and Prof. Dr. Henning Zülch from HHL's Chair of Accounting and Auditing analyzed the association between CSR and the quality of financial reporting in their new working paper titled: "The Impact of Corporate Social Responsibility (CSR) on Financial Reporting Quality - Evidence from European Blue Chips".

The two authors hypothesize a negative association between corporate social responsibility and the quality of financial reporting. Companies may, for example, invest in CSR so as to purchase for themselves a kind of "reputation insurance", enabling them to practice earnings management behind the facade of a responsible enterprise. The decision to invest in CSR can also be made from the decision maker's self interest, for example to polish their personal image.

Increase in CSR-Activities Does Not Necessarily Lead to High-Quality Financial Reports

The two HHL scientists confirm this hypothesis in their analysis. Companies that are seen as leading in the CSR sector have a tendency towards lower quality in their financial reporting: they are more likely to engage in earnings management and they are less conservative. This outcome is relevant for standard setters as well as authorities. They need to be aware that an increase in CSR-activities does not necessarily lead to transparent and high-quality financial reports. On the other hand CSR should not be regarded as something positive and desirable just like that: some companies probably only invest in CSR for opportunistic reasons.

Data Base: CSR-Ranking of the 90 Largest European Companies

Marcus Salewski's and Prof. Dr. Henning Zülch's analysis is based on the so-called "Good Company Ranking" of the Kirchhoff Consult AG. This is a ranking of the 90 biggest European companies in regards to the sustainability of their company leadership. The following criteria are taken into account: society, employees, environment and performance. The renewal of the ranking has occurred every two years since 2005. This data was connected with fundamental accounting information from Thomson Reuters Datastream, which serves as basis for the determination of financial reporting quality variables.

HHL Researchers Carry Out First Europe-Wide Study

Prof. Dr. Henning Zülch says: "Previous studies about the association between CSR and the quality of financial reporting had diverse results. With our research paper we contribute to this discussion by carrying out the first such study for Europe. What is more, we provide an explanation why previous results have been so diverse. This explanation we see in the difference between insider and outsider economies. In our research paper we also show a further development of Jones' model, which is used as a basis for a number of scientific studies about earnings management. We put a new variation of this model up for discussion, a model which, we think, is especially suited to IFRS-samples."

Prof. Dr. Henning Zülch is putting the contents of the research paper up for discussion, for example during the HHL-Forum 2012 on November 22, 2012 in Leipzig. He will chair a panel discussion about "Financial Reporting - A Sustainable Management Tool?".

Further Information on the research paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2141768 and on the HHL Forum 2012: http://www.hhl.de/service/events/hhl-forum-2012/

HHL Leipzig Graduate School of Management

HHL is a university-level institution and ranks amongst the leading international business schools. The goal of the oldest business school in German-speaking Europe is to educate effective, responsible and entrepreneurially-minded leaders. In addition to HHL's international focus the combination of theory and practice plays a key role. HHL stands out for its excellent teaching, its clear research focus, its effective knowledge transfer into practice as well as its outstanding student services. www.hhl.de

idw :: 17.09.2012

BIGSSS - Graduate School
The Bremen International Graduate School of Social Sciences is an inter-university institute of the University of Bremen and Jacobs University Bremen.

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