Corporate Social Responsibility and Firm Value: The Mediating Role of Earnings Management

According to the agency theory, the company manager may use his discretion to maximize his personal welfare. Thus, on the one hand, he manages earnings and on the other hand – based on the entrenchment strategy – uses his discretion to conceal the negative effect of earnings management on the firm value by performing and disclosing real social responsibility activities or by formally disclosing such activities (where both will have a positive effect on the company reputation and stakeholders’ support). The main purpose of this paper is to examine the effect of earnings management on the relationship between social responsibility and the firm value. To this end, a sample of 150 companies listed in the Tehran Stock Exchange during the period 2011-2016 has been used to test the research hypotheses. The research findings obtained through regression analysis showed that carrying out social responsibility activities increases the value of the company in the stock market, but earnings management cannot affect the relationship between social responsibility and stock market value of the company. It seems that on the one hand, due to the novelty of the social responsibility discussion in Iran, both in its performing and disclosing, managers are not aware of the enveloping effect of the disclosure of social activities on the abuse of their discretion. On the other hand, because of the deficiencies in Iran's capital market, investors do not get aware of the lowered quality of social responsibility.