Corporate social responsibility and operating cash flows management : An examination of credit market incentives

This paper examines whether firms that engage in corporate social responsibility activities (CSR firms) manage reported cash flows from operations (CFO) when they have strong credit market incentives. We find that CSR firms near financial distress and those having a long‐term credit rating near the investment/non‐investment grade cutoff are more likely to inflate reported CFO, compared to all other firms. We also find evidence that CSR firms with these credit market incentives appear to resort mainly to classification rather than timing as a tool for managing CFO. Further, we find that the degree of CFO management performed by those CSR firms is more pronounced under weaker corporate governance. Overall, our findings suggest that CSR firms with stronger credit market incentives are more likely to manage CFO, and that such CFO management behavior is likely to be implemented at the expense of shareholders’ interest.