Differentiation Strategy, CSR, And Real Activities Earnings Management: Evidence From Korea

Abstract

We empirically investigate whether a differentiation strategy constrains real activities earnings management (RAEM). Further, considering corporate social responsibility (CSR) activities are a popular tool of differentiation strategy, we examine whether interactive synergy between CSR activities and the differentiation strategy strengthens the negative relationship between differentiation strategy and RAEM. Using a sample of 659 firm-year observations of Korean manufacturing listed firms during 2005-2010, we find that differentiation strategy is negatively associated with RAEM, suggesting that firms pursuing a differentiation strategy are likely to refrain from managing earnings using RAEM that goes against their strategy. We also observe that interactive synergy between differentiation and CSR strengthens the negative relationship between differentiation strategy and RAEM, implying that synergy effect between CSR and differentiation strategy even more constrains RAEM that is in conflict with both CSR and differentiation strategy. These findings are robust after we perform sensitivity tests. This study contributes to the literature by providing the first evidence on the relationship between differentiation strategy and RAEM and the moderating role of CSR activities on the relationship.