Discipline or display? CSR engagement and earnings management in EU-listed firms before and after the NFRD

Sammanfattning

This study examines whether Corporate Social Responsibility (CSR) engagement constrains earnings management among European listed firms over the 2010-2025 period. Using a panel of 1,944 firms across the 27 EU member states, we test two related questions: whether higher Environmental, Social, and Governance (ESG) performance is associated with lower magnitudes of accrual-based and real-activities earnings management, and whether the 2017 Non-Financial Reporting Directive (NFRD), exploited as a quasi-natural experiment within a two-stage least-squares design, exerts a disciplining causal effect on financial reporting quality. The evidence is predominantly null. The baseline cross-sectional association vanishes once firm-level controls and saturated fixed effects are introduced. A marginally negative accrual-based effect emerges only under a joint-substitution specification and concentrates in the Environmental pillar. Although the NFRD produced a large first-stage increase in ESG performance among ex ante low-CSR firms, the directive did not translate into a detectable reduction in either manipulation channel, and the predicted accrual-to-real substitution does not materialise. We interpret these null results as reflecting (i) the civil-law institutional context in which reporting discipline may already be strong, (ii) the dilution of CSR signalling under universal mandatory disclosure, and (iii) the limitations of linear cross-sectional ESG proxies when the CSR-earnings management relationship is non-monotonic.