Does CSR Affect the Impact of Real Earnings Management on the Cost of Debt?

Purpose - We explore how corporate social responsibility (CSR) plays a role in the debt market when companies engage in real earnings management. Specifically, we analyze the cost of capital of a company with real earnings management as measured by abnormally operating cash flows, abnormally production costs and discretionary expenditures, and examine the role of CSR in the relationship. Design/Methodology/Approach - The analysis sample is for Chinese publicly listed companies, the data were obtained from China Stock Market and Accounting Research (CSMAR), and the CSR data were collected from the Hexun database. We implemented OLS regression analysis by setting the proxies of real earnings management as dependent variable, cost of debt capital as a dependent variable, and CSR as a moderating variable. Findings - Our empirical results show that real earnings management significantly increases the cost of debt after controlling for discretionary accruals, another proxy variable for earnings management. Especially, we find that corporate social responsibility weakens the negative impact of real earnings management on the cost of debt. Research Implications - This study provides evidence that corporate social responsibility plays a significant role in mitigating the adverse impact of real earnings management on the debt market. Therefore, creditors in the debt market need to be more cautious in assessing the impact of real earnings management that may be underestimated due to high CSR performance.