CORPORATE ETHICS OR EARNINGS MANIPULATION? INVESTIGATING THE CSR–EM NEXUS IN PAKISTAN’S NON-FINANCIAL SECTOR

Abstract

Earnings management (EM) entails the intentional manipulation of financial information by managers, thereby undermining the reliability of financial reporting and potentially misleading stakeholders. In contrast, corporate social responsibility (CSR) initiatives are intended to improve social, environmental, and economic outcomes while enhancing corporate reputation and stakeholder confidence. This study examines the nexus between CSR and EM in Pakistani manufacturing firms, a context characterized by information asymmetry, market volatility, regulatory challenges, and cultural influences rooted in Islamic ethical principles. Using 1,694 firm-year observations, the Jones model based on discretionary accruals serves as the proxy for EM, with return on assets and firm growth included as controls. The results demonstrate a significant negative association between CSR and EM, indicating that firms with stronger CSR engagement are less likely to engage in earnings manipulation. These findings contribute to the literature by highlighting the role of CSR as a governance mechanism in an emerging economy setting.