CSR Reporting Quality: Measures, Incentives, and Effects

Project: Research

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Disclosure of nonfinancial information has become a mainstream business issue and policy tool (KPMG, 2017). While prior accounting research primarily focuses on the issuance of standalone corporate social responsibility (CSR) reports, CSR materiality, and value implications from the shareholders’ perspective (Dhaliwal, Li, Tsang, and Yang, 2011; Grewal, Hauptmann, and Serafeim, 2018; Khan, Serafeim, and Yoon, 2016), it is relatively unknown whether CSR reporting accurately reflects the firm’s CSR activities and provides unbiased information to stakeholders. This project will propose a new measure of CSR reporting quality and, based on the measure, provide the first largescale evidence on the underlying incentives and effects of CSR reporting quality. To overcome the challenges of measuring CSR reporting quality (i.e., the multidimensional nature of CSR activities, qualitative CSR reporting, and dual endogeneity of CSR activities and disclosures), this project will use a topic modeling approach to identify the topics discussed in firms’ CSR reports and then construct a disclosure score (based on, e.g., readability and tone) using the narratives for each topic.  Next, this project will map the ESG performance scores from MSCI ESG Ratings Database to each CSR topic, and the portion of the topic-specific disclosure score that is unexplained by CSR performance will be determined as discretionary CSR reporting quality. Based on the discretionary CSR reporting quality measure, this project will test three hypotheses regarding the association between CSR reporting quality, reporting incentives, and capital market effects. First, as prior research shows substitution between accrual and real activities management (Cohen and Zarowin, 2010; Zang, 2012), this project will examine the circumstances under which firms are more likely to engage in CSR reporting management. Second, this project will examine the contracting role of CSR reporting quality. As CSR compensation contracting has become prevalent over time (Flammer, Hong, Minor, 2018), this project will examine whether managers have incentives to manipulate CSR reporting for personal gain. Third, to extend the research on the issuance of CSR disclosure (Dhaliwal, Li, Tsang, and Yang, 2011), this project will take further steps to examine the effects of CSR reporting quality on firms' cost of capital, ownership structure, and other capital market effects. Overall, this project will contribute to the literature on CSR disclosure, compensation contracting, and textual analysis. Moreover, it will provide policy implications for regulators and standard setters regarding the development of a transparent CSR information environment, which can enhance stakeholder discipline and strengthen the social impact of CSR.


Project number9048197
Grant typeECS
Effective start/end date1/12/20 → …