Literaturereview and research hypothesis Corporate Social Responsibility (CSR) hasbeen the interest of a substantial number of academic studies in recent decades(Tsang, 1998). Recent claims about the common interests between firms andcommunities have raised levels of perception about the importance of CSR amongmanagers and investors. These claims have made several companies increase theirinvolvement in corporate social responsibility activities rather than any otheractivities. Engaging in social responsibility activities may show levels ofintegrity of managers (Pyo and Lee 2013).However, some managers may have motivations to issue a strategic CSR policyopportunistically. The absence of corporate governance mechanisms might drivemanagers to use CSR activities to distract attention from their opportunisticactions.
Insuch cases, there is a positive association betweenCSR activities and earnings management practices when firms reveal theirfinancial information to the public. On the other hand, monitoring earningsmanagement practices by corporate governance mechanisms is expected to reducemanagers’ ability to manipulate earnings through the production of reliable andtransparent financial reports (Wild, 1996; Dechow et al., 1996; Klein,2002). These managers are likely to report financial information characterisedby accuracy and reliability.
However, most previous research has failed to finda direct interpretation regarding the link between CSR and earnings management.Recently, some attempts were conducted to determine the specific link betweenCSR and earnings management (Chih et al. 2008, Prior et al. 2008, Pyoand Lee 2013, Kim et al. 2012).
According to Chih et al. (2008), companies that report on corporatesocial responsibility in their annual reports are supposed to providetransparent financial reports, as such they are accountable to all relevantparties. Pyoand Lee (2013)note that active businesses in the domain of CSR revealed higher qualityfinancial information and they have a low level of discretionary accruals.
Kimet al. (2012)observe that there is a negative relationship between CSR and earningsmanagement practices and note that ethical concerns contribute in producinghigh quality financial reports. Similarly, Yipet al.
(2011)note that there is a positive link between the degree of CSR and the quality of financial reporting in oil andgas companies compared to the food industry. Accordingly, this researchproposes that the link between CSR and earnings management is influenced by CGmechanisms and firm culture. Haniffa and Cooke (2005)argue that some CG mechanisms, especially, ownership structure and combinationsof Boards of Directors are significant factors, because levels of reporting onCSR can be affected by available choices, motivations and instilled values. Onthe other hand, a company’s position in relation toCSR can be affected by the culture of the firm as a whole (Berkhout 2005).
Firm culture, relying on its type, might have an influence on CSR. According to(Cooke and Rousseau 1988),firm culture in terms of its orientation comprises of two important aspectswhich are connected to CSR: trend and intensity. The trend reflects what thecontents of the culture are, such as behavioural rules, values and the way ofthinking. While, intensity levels represent the power of the trend of theculture.
Thus, organisational members, in terms of their thinking andbehaviour, are expected to be affected by the trend and intensity of the culturein respect with fulfilling their responsibilities and behaviour to others.Inshort, this research hypothesises that in a firm wherehumanistic culture is prevalent, with the existence of sound corporategovernance mechanisms (such as ownership structure, a board of directors andaudit committee), levels of CSR are predicted to be associated negatively withthe degree of earnings management practices. This is because earningsmanagement can be reduced by CG mechanisms and CSR can be enhanced by corporate governancemechanisms and humanistic culture. Therefore, the main hypothesis of thisresearch is as follows:Infirms with sound CG mechanism and firm culture, levels of CSR are significantlyand negatively associated with the extentof earnings management. Corporategovernance mechanisms and reducing earnings management According to stakeholder theory, a senseof balance can be achieved by corporate governance. This is because theinterests of all outsiders, including support groups, should be taken intoconsideration, which explains the implied meaning of corporate governance incorrelation to the stakeholder agreement (L’Huillier2014).
Therefore, a companyemploying a, “set of mechanisms that influence the decisions made by managerswhen there is a separation of ownership and control”, might be significant toreduce earnings management (Larcker et al.2007, p.964). Using a sample oflisted companies in the Athens, Milan and Madrid Stock Exchanges, Bekirisand Doukakis (2011),it was found that corporate governance mechanisms can limit the tendency ofmanagers to manipulate earnings, which leads to the production of higherquality and transparent financial reports. In the same context, Liuand Lu (2007)have examined the link between earningsmanagement and corporate governance in China’s listed companies during theperiod from 1999–2005.
The empiricalresults show that high levels of corporate governance are associated with lowlevels of earnings management. There are three key factors that affect theactivities of a corporation with regards to the relationship between corporategovernance and earnings management: ownership structure, composition of theboard and the quality of the audit committee (Sunet al. 2010).Some recent evidence has been presented by Choi et al. (2013) andthis has indicated that the motives of managers to engage in corporate socialresponsibility activities opportunistically can become weaker when theownership structure contains a higher percentage of institutional ownership.Also, Gillan and Starks (2003) havepointed out that foreign ownership in a firm can play a pivotal role in theoversight of companies’ activities directly by influencing administrativedecisions of companies by using voting rights. Guo et al. (2014), Ben-Nasr et al.
(2009) havenoted that companies which have a higher foreign institutional ownership are lessinvolved in earnings management practices. Additionally, there has beensubstantial evidence endorsing the points of view that independent outsidedirectors can provide a protection to shareholders in some cases when an agencyconflict exists (Brickleyand James 1987, Lee et al. 1992, Weisbach 1988).
Moreover, Xieet al. (2003)have found that a lesser possibility to engage in earnings management exists whenthe board of a firm contains more independent outside directors and experiencedmanagers. Additionally, they found that the composition of the audit committeecan provide monitoring functions which can influence the extent of earningsmanagement practices, especially when it contains members with financialexperience. Also, the number of audit committee meetings and board meetings isassociated inversely with earnings management levels. This means that members’ capabilityin observing financial activities can be enhanced by an audit committee and theboard of directors effectively.
Therefore, this research hypothesises thatfirms’ activities can be monitored in a more effective way when: the ownershipstructure includes institutional or foreign ownership, the board includes moreoutside directors than insiders, the board contains expertise directors, and there is an audit committee withexpertise members and there are an increasing number of board and committeemeetings. Therefore:Institutionalownership is significantly associated with reducing earnings managementpractices in Libyan listed companies. Foreignownership is significantly associated with reducing earnings managementpractices in Libyan listed companies. Boardswith more outside directors are significantly associated with reducing EMpractices in Libyan listed companies.Boards with more expertise directors are significantly associatedwith reducing EM practices in Libyan listed companies.
An audit committee with expertise members is significantlyassociated with reducing EM practices in Libyan listed companiesThe number of board and committee meetings is significantlyassociated with reducing EM practices in Libyan listedcompanies. Corporategovernance and its role in enhancing CSR applications It is broadly argued that applications of CSR in a firm can be affectedby corporate governance mechanisms (Andayaniand Atmini 2012, Beltratti 2005, Berghe and Louche 2005, Choi et al.2013, Jamali et al. 2008). According to Jamali et al. (2008),sound CG is a necessary underpinning in order to achieve good implementation ofCSR. Similarly, Beltratti (2005)argues that CSR and CG are associated positively with the market value of thecompany.
Moreover, studies in this context have principally concluded apositive link between CSR and corporate governance mechanisms, such as boardindependence, board leadership and institutional ownership (Joand Harjoto 2011, Johnson and Greening 1999).Khanet al. (2013) have examined the linkbetween corporate governance and the degree of corporate social responsibilitydisclosures (CSRD) in a sample of Bangladeshi firms. This study has focused onunderstanding whether some mechanisms of corporate governance, such as managerialownership, public ownership, foreign ownership, board independence and auditcommittees, affect corporate responses to multiple stakeholders. The findingsof this study propose that CSRD has a negative link with managerial ownership,while public ownership, foreign ownership, board independence and auditcommittees are positively and significantly associated with CSR disclosures.Similarly, Soliman et al. (2013)have investigated the effect of ownership structure on Corporate SocialResponsibility (CSR) in Libya. They found that ownership structure has a significantinfluence on engaging companies in CSR activities.
Consistent with previousresearch in this regard, this study reaffirmed that ownership structure has aneffect on strategic decisions of companies. They also showed how institutionaland foreign investors in Libya have a tendency to be more interested inrefining their companies’ CSR ranking than top managers. In short, corporategovernance can assist in encouraging companies to be ethical, fair, transparentand accountable in all their dealings, alongside with maintaining continuity ingenerating profits, which is consistent with the notion of CSR. The associationbetween corporate social responsibility and corporate governance is significant,as Bhimani and Soonawalla (2005)point out, CG and CSR complement each other. Which makes companies directlyresponsible for creating and maintaining the value of the firm to stakeholders (Post et al. 2002).Therefore:Institutionalownership is significantly associated with enhancingCSR levels in Libya listed companies.
Foreignownership is significantly associated with enhancingCSR levels in Libya listed companies. Boardswith more outside directors are significantly associated with enhancingCSR levels in Libya listed companies.Boardswith more expertise directors are significantly associated with enhancingCSR levels in Libya listed companies.Anaudit committee with expertise members is significantly associated with enhancingCSR levels in Libya listed companiesThenumber of board and committee meetings is significantly associated with enhancingCSR levels in Libya listed companies.Firmculture and CSR Firm culture is defined by Gibson et al.
(2000) asthe personal traits or feelings that have an effect on human behaviour. Accordingto Schein (1984),firm culture is a set of beliefs, principles and norms held by an organisationwhich explain the extent of conducting responsibly or irresponsibly by firms. Forexample, firm culture guides behaviour that necessitates producing productswith certain criteria, commitment to ethics when advertising goods andservices, and dealing with employees and customers fairly (Herndon Jr et al. 2001).More clearly, Simons and Ingram (1997), Masood et al. (2011),have argued that firm culture is relevant to corporate social responsibilitybecause the inherent values of a company can influence the decision-makingprocess at an organisational level, depending on corporate targets and beliefsregarding how the globe works. Therefore, there is aneed to redirect the culture to be concentrated on refining human resourcespolicies, encouraging the staff through a transparent flow of information, involvingthem in the decision-making process and in developing a fair system of incentives. Inorder to achieve higher levels of competitive advantage for CSR creations, itis necessary that the essence of social and cultural values is instilled in theemployees.
Integration between firms and the social requirements entailed havecreated improvements in firms as a whole, such as reporting systems,interrelationships and incentives mechanisms. It provides sustainability in CSRoutputs to issues related to the environment, society and also to the firm (Kramer and Porter 2007).Insome cultural types, such as the competitive culture, the main emphasis is onachieving high levels of personal achievements. In a competitive environmentthere is a tendency to control others, which leads to collision and a lack ofcooperation (Cooke and Rousseau, 1983, 1988). Therefore, the extent ofattention paid to others is likely to be at low levels; consequently, theinterests of stakeholders and their requirements might be ignored and theorientation towards CSR is weak. On the other hand, in the dimension culture, thereis a focus on collaboration, teamwork and issues related to humanistic aspects.In contrast to the competitive culture, the human culture is one that promotesand maintains harmony in human relationships (Cooke and Rousseau, 1988). Hence,in firms where a humanistic culture is revealed, members not only concentrateon their own personal interests, but, they pay attention to the demands andinterests of others (Cooke and Hartmann, 1989).
Furthermore, firms are likelyto widen their orientation beyond insiders to include outsiders, such ascustomers and other stakeholders. Thus, in organisations where humanisticculture is prevalent, officials within these organisations are struggling tomeet the demands of the stakeholders towards corporate social responsibility.Therefore:H1humanistic culture is significantly associated with corporate socialresponsibility levels in Libya listed companies.