Earnings management in B-Corps: Evidence from an Italian study

Abstract

The expression «earnings management» identifies the managerial practice of manipulating the reported accounting figures in order to achieve a desired outcome. Such practice is potentially legal per se, but it represents an unethical behaviour, as the management takes an unfair advantage from the existence of an information asymmetry around the actual performance and future prospects of the firm, primarily at the expenses of the shareholders. The notions of corporate social responsibility and sustainability frame earnings management in a wider perspective. A firm that is committed to include sustainability in its business is therefore committed to, among others, provide a transparent and reliable financial communication with the public. Accordingly, the purpose of the dissertation is to examine whether there is evidence that more sustainable firms engage in earnings management to a lesser extent. In order to do so, we selected a sample of 57 Italian firms that are certified as B-Corps. We then compared the level of earnings management, measured by the level of the discretionary accruals, in certified and non-certified firms, using a diff-in-diff approach. The results do not indicate the existence of a relationship between the B-Corp certification and the level of discretionary accruals, thus suggesting that the B-Corp certification cannot be used in practice as an indicator of the quality of financial reporting.