Do governance mechanisms deter earnings management and promote corporate social responsibility?

Abstract

Purpose – This study aims to investigate the influences of corporate governance mechanisms on earnings management practices and corporate social responsibility (CSR) disclosure, at the manufacturing companies listed on the Indonesian Stock Exchange. The authors consider the moderating effect of earnings management on the relationship between governance mechanisms and CSR. Design/methodology/approach – Insights are drawn from five years company data generated between 2010 and 2014, thus covering a five-year period. Ordinary least squares (OLS) regression analysis is applied to test the hypotheses developed. Finding – OLS regression results indicate that institutional ownership, managerial ownership and independent boards have a significant deterrent effect on earnings management, while institutional ownership and board of directors have significant positive impact on CSR. Moreover, OLS results reveal a strong moderation effect of earnings management and a positive link between governance and CSR. Originality/value – These findings have significant policy implications for public policy, regulatory bodies, companies and other stakeholders including the investors in Indonesia. Insights from this study will help to shape and implement an optimal governance system that can address the problem of earnings management and CSR initiatives in Indonesian companies.