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How does corporate social responsibility decrease serious misstatement likelihood?
Author(s) -
Hong Yongtao,
Young Alex
Publication year - 2021
Publication title -
journal of corporate accounting and finance
Language(s) - English
Resource type - Journals
eISSN - 1097-0053
pISSN - 1044-8136
DOI - 10.1002/jcaf.22480
Subject(s) - corporate social responsibility , business , path analysis (statistics) , salient , actuarial science , econometrics , accounting , economics , political science , statistics , public relations , law , mathematics
Abstract In this article, we offer two explanations for the observed negative association between corporate social responsibility (CSR) performance and the likelihood of serious misstatements being detected (PSMD). We find that CSR significantly decreases the probability of engagement in a serious misstatement (PE) in general, whereas it increases the detection probability (PD) only when there are salient indicators of misstatement engagement. The asymmetrical impact of CSR on the engagement probability and detection probability provides the first explanation for the lower PSMD in CSR firms. Second, we provide evidence that CSR indirectly affects PSMD by attenuating the materiality and magnitude of misstatements. A path analysis suggests that the indirect path accounts for 33.3% of the total impact of CSR on serious misstatement likelihood. These findings advance our understanding of the mechanism through which CSR reduces PSMD.