Corporate social responsibility and earnings management in U.S. banks

• Reverse causality between EM and CSR is explored in the U.S. banking sector.
• Banks actively engaged in EM practices are found to be deeply involved in CSR.
• CSR seen as part of legitimation strategies aimed at deflecting attention from EM.
• Bank's engagement in CSR activities is found to have no significant impact on EM.
• Extreme caution should be exhibited when factoring CSR commitment in firm analyses.

Business decision making depends on financial reporting quality. In identifying the drivers of financial reporting quality, proxied by earnings management (EM), prior literature has drawn attention to the association between corporate EM practices and commitment to corporate social responsibility (CSR). Empirical evidence, however, provides inconclusive results regarding the direction of this association. Using simultaneous equations, we examine the bi-directional CSR–EM relationship in U.S. commercial banks. We demonstrate that, although banks that engage in EM practices are also actively involved in CSR, the reverse relationship is not significant. We provide implications for investors, analysts, business participants and regulators.