Is earnings management associated with corporate social responsibility? Evidence from Zakat environment

Purpose The purpose of this paper is to examine whether there is a relationship between corporate social responsibility (CSR), proxied by Zakat, and earnings management. Design/methodology/approach This study examines a sample of 1,097 firm-year observations of publicly traded Saudi firms over the 2007–2019 period. Multivariate regression models are used to test the hypothesized relationship between CSR and earnings management. Findings This study consistently demonstrates a negative and significant relationship between CSR and earnings management, aligning with the myopia avoidance hypothesis. This implies that Saudi firms are less likely to manage earnings when using Zakat as a proxy for CSR. The findings of this study remain robust to using alternative econometric estimations. Research limitations/implications This study contributes to the literature on the relationship between CSR and earnings management by examining Zakat as a faith-based model of Islamic CSR. The findings reveal a negative association between CSR and earnings management, consistent with prior research. Practical implications Policymakers may view Zakat as a tool for enhancing social welfare by reducing poverty and inequality. The findings can help corporate managers integrate Zakat into CSR programs, particularly in Muslim countries, and may encourage ethical behavior among employees, improving the firm’s public image. Additionally, investors can use these findings to assess financial transparency, as firms with high CSR contributions are often perceived as more transparent. Finally, this study offers regulators insights into the financial reporting environment of firms that contribute more to Islamic CSR programs. Originality/value To the best of the author’s knowledge, this is the first study to move beyond the traditional concept of CSR by focusing on the Islamic perspective, specifically CSR based on Zakat. This research offers a novel contribution to this understudied area from an Islamic perspective.