Earnings management and CSR report tone: Evidence from China

Abstract This study explores whether and how the management manipulates the tone of CSR reports to greenwash earnings management. Using the dataset of Chinese A‐share companies that published CSR reports over period 2007–2017, we discover that corporates with higher abnormal discretionary accruals and those with zero or slightly positive earnings changes are likely to release CSR reports with a more optimistic tone. Additional analyses show that this greenwash behavior is stronger when the management manages earnings upward than downward. Furthermore, the supplementary association between CSR report tone and earnings management is reduced in firms with assured CSR reports, lower financing demands and equity issue, higher accounting conservatism, as well as a better information disclosure environment, whereas the relationship is not correlated with the manner of the reporting disclosure. This study reveals that managers strategically employ CSR report tone to hide earnings management and shape stakeholders' expectations, and provides insights into both qualitative and quantitative disclosure literature.