Accounting conservatism and corporate social responsibility

In this paper, we examine whether a firm's stakeholder orientation, as manifested by its social responsibility endeavors, matters for its choice of accounting conservatism. We find that the level of conservatism in financial reporting significantly increases with socially responsible activities. This result is robust to several conservatism aspects, including market-based conservatism measure, the aggregate of R&D reserves, advertising reserves, and LIFO reserves, and accrual-based conservatism construct. Moreover, our two-stage regression results validate that conservatism is more pronounced for firms that devote more resources to social responsibility programs. Consistent with stakeholder theory, these findings indicate that CSR-oriented firms are more likely to use accounting conservatism to credibly commit to acting in the interests of stakeholders. As a whole, our results provide a novel implication that the extent of accounting conservatism can be entailed by a firm's efforts to enhance stakeholder relations.