This section tests whether the mean of several characteristics differs according to the level of discretionary accruals. The aim of this analysis is to consider whether companies are affected differently depending on the level of discretionary accruals. In doing so, the pooled study sample is divided into two subsets of data according to the discretionary accruals yearly cross-sectional median. The first data set comprises firms that have discretionary accruals above the median and is identified as “High EM”. Meanwhile, the
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second data set comprises firms with discretionary accruals below the median and is identified as “Low EM”. The results of univariate tests using t-test and Mann-Whitney U test are presented in Table 7.2. Descriptive statistics show the mean and standard deviation of each variable, and t-test and Mann-Whitney U test are performed to provide the mean difference between High EM and Low EM firms.
PM shows a significant difference between the means of High EM and Low EM groups at the 1% level. Mean discretionary accruals are 7.2 per cent for High EM firms and 1.5 per cent for Low EM firms, suggesting that discretionary accruals in the High EM group are higher than those in the Low EM group by 5.7 per cent on average. The mean CSRI of the High EM subset is 35 per cent, which is lower than that of the Low EM group (38 per cent) and is significantly different from zero at the 1% level. This result suggests that firms with higher discretionary accruals may be more likely to provide less information related to CSR than those firms with lower levels of discretionary accruals. In other words, firms with a high level of CSR have a lower magnitude of discretionary accruals compared with firms with a lower level of CSR. These results are in line with the findings of the previous studies by Choi et al. (2013); and Kim et al. (2012), who find a negative relationship between the level of CSR and the magnitude of EM.
Table 7.2 shows that the average efficiency of BRDEF and AUDEF in High EM firms is insignificantly different from those in the Low EM group, suggesting that corporate governance effectiveness does not differ between High and Low EM firms. A possible explanation for these results is that the study sample consists of the FTSE 350 firms, which may have similar corporate governance requirements and recommendations. In spite of that, univariate tests do not reveal any significant differences between the means
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regarding BRDEF and AUDEF for the two groups; they show that the percentages of BRDEF and AUDEF are higher in the Low EM group compared to those companies in the High EM group.
With regard to the other control variables, Table 7.2 reveals that OCF, LVEG, ROA, and MB ratio are insignificantly different from zero in the two groups. The difference between mean values of firm SIZE in High EM and Low EM groups is significant at the 5% level, with values of 7.127 and 7.456 respectively. This result is consistent with the notion that larger companies engage in lower levels of EM compared to smaller companies, which might manage earnings aggressively. In this regard, Chih et al. (2008) argue that larger companies are required to disclose their information more often; hence, they are less inclined to manage reported earnings compared with smaller companies. Empirically, this result is in line with the previous findings of Chih et al. (2008), who found that larger companies are less likely to engage in a higher level of EM. A comparison of losses (LOSS) reveals that firms making losses may engage in higher discretionary accruals. The mean values are 19.8 per cent for High EM firms and 7.4 per cent for those of low EM firms, which differs significantly from zero at the 1% level.
In light of the above, discretionary accruals in higher CSR firms appear to be lower than those in firms with lower levels of CSR. In other words, firms that provide lower CSR information are more likely to engage in a higher level of discretionary accruals than their counterparts with higher levels of CSR. Furthermore, larger firms appear to engage in lower levels of discretionary accruals compared with smaller firms, and larger firms may provide higher levels of CSR information. It appears that firms with losses tend to provide
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lower levels of CSR and are therefore more likely to manage earnings than companies that have reported profits.
Table 7-2: Univariate Test
High EM Low EM T-test Mann Whitney Tests
Variable Mean Sd. Mean Sd. T-Value P-Value Z-Value P-Value
PM 0.072 0.044 0.015 0.009 -20.411 *** -19.634 *** CSRI 0.350 0.118 0.384 0.109 3.389 *** 3.66 *** BRDEF 0.226 0.419 0.287 0.453 1.590 1.587 AUDEF 0.587 0.493 0.632 0.483 1.032 1.032 OCF 0.587 0.493 0.632 0.483 1.032 1.032 LEVG 0.598 0.241 0.599 0.192 0.057 0.126 ROA 0.086 0.129 0.082 0.103 -0.411 0.727 SIZE 7.127 1.455 7.456 1.501 2.520 ** 2.754 *** LOSS 0.198 0.400 0.074 0.262 -4.194 *** -4.128 *** MB 3.021 3.137 2.867 2.965 -0.572 -0.231
PM = Discretionary accruals using Performance-adjusted model; CSRI = Corporate social responsibility score; BRDEF = Board of directors effectiveness coded as 1 if more than 50% of directors on the board who are not on audit committee are independent, and at least a sample median of directors on the board are financial experts; and 0 otherwise; AUDEF = Audit committee effectiveness coded as 1 if all the members are independent, and at least a sample median are financial experts; and 0 otherwise; OCF = Operating cash flow; LEVG = Financial leverage as measured by total liabilities to total assets ratio; ROA = Firm performance as measured by net revenue to total assets ratio; SIZE = Firm size as measured by natural logarithm of total assets; LOSS = Coded 1 if firm has loss; and 0 otherwise; MB = Market-to-book ratio.