Henning Zülch

The Association between Corporate Social Responsibility (CSR) and Earnings Quality – Evidence from European Blue Chips

Based on the notion that the results of prior research are mixed, this study reinvestigates the association between corporate social responsibility and earnings quality. More precisely, we examine the association between corporate social responsibility and the degree of earnings management, the degree of accounting conservatism and the quality of accruals. We find that firms with high corporate social responsibility ratings are more likely to engage in earnings management, to report bad news less timely and to have lower quality accruals. In contrast to prior research, our sample is based on European firms applying IFRS. For this reason, we argue that there are country-specific characteristics which moderate the association between corporate social responsibility and earnings quality and provide additional analyses which support this notion. Our results indicate that the increasing trend to invest in and to report about corporate social responsibility is not necessarily accompanied by higher quality financial statements.

The Development of Earnings Quality in Germany and its Implication for Further Research: A Quantitative Empirical Analysis of German Listed Companies Between 1997 and 2006

This paper investigates the development of earnings quality for a sample of 5,817 firm years during the period between 1997 and 2006 using seven different measures (accounting- and market-based). As a result, overall earnings quality of German firms improves over time. However, the measures of timeliness and value relevance indicate a decreasing earnings quality. These findings are tested by taking firm-specific accounting style into consideration using firm fixed effects.

Discretion in the accounting for defined benefit obligations – an empirical analysis of German IFRS statements

Following the research approach of Hann et al. (2007), this study investigates how discretion in the determination of the defined benefit obligation (DBO) is perceived by investors using a sample of listed German companies in the period of 2005–2011. For this, actuarial assumptions – discount interest rates, compensation growth rate and projected future pension increases – are replaced by their respective industry medians to obtain that component of the DBO, which can be attributed to discretion. We find that the discretionary component is not value relevant in overall terms, which is in contrast to prior research. We provide an explanation in the country-specific characteristics of Germany. Furthermore, we find weak evidence that the discretionary component is incorporated in investors equity valuations when pension plans are distinctly underfunded.

Bright Pharmaceuticals SE: Accounting for a Business Combination under IFRS 3

This instructional resource familiarizes students with the accounting for business combinations under IFRS 3 and illustrates the uncertainty and professional judgment involved in asset valuation and consolidation. First, students need to assess the quality of information generated under IFRS 3 and fair value accounting. Second, they are asked to account for a business combination by identifying possible input parameters to measure several intangible assets and a contingent liability. Based on their valuation results, they compute the amount of goodwill recognized on the acquisition and assess the effects of their parameter choices on the values of different assets and liabilities. As an optional third task, the case asks students to consolidate the financial statements and evaluate the impact of the acquisition on the financial position of the acquirer.

The Association between Executive Turnover and Financial Misreporting: Evidence from Germany

This paper investigates personal consequences for management executives in the context of financial misreporting exposed by German enforcement institutions. More specifically, we examine CEO and CFO turnover in the context of an error announcement. By doing so, we compare 103 firms that issued an error announcement between 2006 and 2013 with industry-and-size-matched control firms. First, we find notable differences in executive turnover for the five-year period including two years before and after the year of the error announcements. Second, we show that the likelihood for executive turnover is significantly associated with executive tenure, firm size, firm performance, and chairperson turnover. However, multivariate analysis does not provide similar evidence for financial misreporting. Third, our analysis of the error announcements’ characteristics indicates that the probability for executive turnover particularly increases for errors related to professional judgment and management report issues. That is, executives face personal consequences for non-appropriate use of its discretion.

Determinants of Investor Reactions to Error Announcements - Evidence from Germany

This paper contributes to the understanding of the German two-tiered enforcement set-up. The first tier is represented by the private review panel FREP, which has been investigating IFRS financial statements since 2005 and ensures consistent and faithful application of the latter. The German securities regulator BaFin, as second tier to the mechanism, enforces disclosure of errors established by either FREP or BaFin and therefore substantiates the adverse disclosure mechanism. We investigate short-term reactions to error announcements published between 2006 and 2013 and find evidence for differences of investor reactions between the early and the current years of enforcement. Disentangling the contributing factors of error severity, we provide evidence that investor reaction is primarily associated with the impact of error announcements on profitability. In addition, we detect that the amount of errors established is negatively associated with investor reaction indicating that extensive error announcements have an attenuating effect on investor reaction. Yet we caution to blindly interpret these findings, since they are also subject to change over time and partially driven by outliers. Further multivariate analyses provide additional insights referring to determinants of investor reactions by examining effects of stated errors on core earnings, effects of errors triggered due to second-guessing the use of professional judgment, and changes of investor perception over time.

The Pursuit of Malevolence – Minimizing Corporate Social Irresponsibility to Maximize Social Welfare

This paper turns traditional ideas about the responsibility of corporations upside down by arguing that it is not conducive to aim to maximize corporate social responsibility (CSR). Instead, corporations should embrace their social responsibility by working to minimize corporate social irresponsibility (CSI). It is more straightforward to minimize tangible sources of business and/or reputational risk, such as environmental damage or child labor in the supply chain, than to maximize a construct for which a generally accepted definition is still pending. What’s more, this enables a corporation to use its core business competencies and expertise to maximize social welfare by protecting those societal resources which are relevant to its own value creation process. Thereby, the demand that corporations accept responsibility for a broad range of stakeholders is met but the importance of profits as the fundamental measure of a corporation’s capability to create value for society is not undermined. Failing to introduce this conception means maintaining the status-quo whereby the net societal benefit of corporations’ CSR activities is questionable and the opportunity costs are high as CSI issues and the detrimental effects thereof on corporations’ core business and societal stakeholders will remain unmanaged.

Bilanzpolitik: Zusammenhänge zwischen CSR und zielgerichteter Ergebnissteuerung

Das CSR-Profil eines Unternehmens wird aus einer kontinuierlich steigenden Zahl an Perspektiven betrachtet. So auch aus Sicht der Finanzberichterstattung. Entscheidend hierbei ist die Einschatzung, dass der wirtschaftliche Erfolg eines Unternehmens selbst integraler Bestandteil von CSR ist. Der vorliegende Beitrag greift die okonomische Komponente von CSR auf und analysiert diese vor dem Hintergrund der Qualitat der Finanzberichterstattung, woran zwei zentrale Anspruche an das Management zu konstatieren sind: Angemessen uber nachhaltigkeitsrelevante Themen zu berichten sowie den Anspruchsgruppen eines Unternehmens ein nachhaltiges, den tatsachlichen Verhaltnissen entsprechendes Bild der Vermogens-, Finanz- und Ertragslage zu vermitteln.