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How financial distress affects the relationship between CSR investment and earnings management in competitive markets
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DOI：10.1108/jfra-09-2024-0595.png)
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Abstract
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<jats:sec>
<jats:title>Purpose</jats:title>
<jats:p>This study aims to investigate how financial distress influences the relationship between CSR investment and earnings management while also exploring the effect of market competition on this relationship in the French context.</jats:p>
</jats:sec>
<jats:sec>
<jats:title>Design/methodology/approach</jats:title>
<jats:p>The sample includes 104 non-financial French firms listed on the SBF-250 index from 2005 to 2020. The study primarily uses the GMM estimator to address potential heteroskedasticity and endogeneity issues associated with the causal relationships among CSR, earnings management and financial distress. Earnings management measured using accruals and real earnings management, while CSR is assessed through the overall ESG score, as well as the social and environmental dimensions. To ensure robust results, the study also uses alternative measures and propensity score matching.</jats:p>
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<jats:title>Findings</jats:title>
<jats:p>The study finds that distressed firms are more likely to use CSR investments, both in environmental and social dimensions, as a greenwashing tool to hide earnings management. This behavior is more prevalent in competitive markets.</jats:p>
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<jats:title>Research limitations/implications</jats:title>
<jats:p>The study enhances stakeholders’ understanding of management’s manipulative behaviors and the use of CSR as a greenwashing mechanism during financial distress in competitive markets, aiding in more informed risk management decisions.</jats:p>
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<jats:title>Originality/value</jats:title>
<jats:p>To the best of the authors’ knowledge, this study is one of the first, following Almubarak et al. (2023), to examine the role of CSR, as a greenwashing tool, in hiding a firm’s financial distress. It is also the first to incorporate market competition as a moderating variable.</jats:p>
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