Do Firms Appear to Be More Socially Responsible When They Are Committing Financial Fraud?

This study investigates whether firms adjust their socially responsible activities when committing financial fraud. Using propensity score matching to select control firms that have a similar probability of fraud in the pre-fraud benchmark period, we find that fraud firms achieve significantly higher corporate social responsibility (CSR) scores in the fraud committing period compared with the CSR scores for non-fraud control firms and in their own pre-fraud benchmark periods. We also find that fraud firms invest in both stakeholder and third-party CSR categories and more in CSR strengths. Furthermore, the improved CSR performance is more pronounced for firms located in high-religiosity states and that have longer fraud duration. Overall, our findings suggest that CSR is used as a strategic tool to cover up fraudulent activities.