Firms in sensitive industries are punished by capital markets when disclosure on corporate social responsibility is low | Researcher: Ana Marques
Professors Ana Marques (Nova SBE, IIMB) and Charl de Villiers (AUT, University Pretoria) analyze the different levels of corporate social responsibility (CSR) disclosures in Europe. Results suggest that more CSR disclosure is associated with higher share prices. However, a low level of CSR disclosure in sensitive industries is associated with share prices that are lower than the price of firms which make no disclosure.
Why do firms disclose CSR information?
Whereas financial disclosures are highly regulated, CSR information is mostly disclosed on a voluntary basis. Firms disclose CSR information for two main reasons:
1) to conform to societal expectations and thereby ensure continued access to resources, such as capital, customer support, etc., and
2) to provide additional information that allows capital market participants to more accurately assess firms’ financial prospects and risk profiles, potentially leading to higher share prices and higher firm values.
The researchers examine both these reasons, referring to the first as predispositions, and the second as consequences. By way of predispositions, they identify both country level variables and firm level variables that influence the level of firms’ CSR disclosures. Then they examine whether different levels of CSR disclosures are associated with higher/lower share prices, and document the type of country where CSR disclosures and positive economic outcomes are more closely linked.
What do we find?
In terms of predisposition, the authors find that firms are likely to disclose more CSR information in countries with: better investor protection, higher levels of democracy, more effective government services, higher quality regulations, more press freedom, and a lower commitment to environmental policies. In addition, they find firms are likely to disclose more CSR information if they: are bigger, are more profitable, have a higher book to market ratio, have higher leverage, have older assets, have higher capital expenditure, and operate in environmentally sensitive industries.
In terms of consequences, the researchers find that higher levels of CSR disclosures are positively associated with share prices. However, lower levels of CSR disclosure (compared to no disclosure) are associated with lower share prices, in sensitive industries. Furthermore, these positive share price consequences are stronger in countries with stronger governance structures.
Implications for practice and regulation:
These authors are the first to show a differential association between CSR disclosure and economic consequences depending on the level of CSR disclosure. They conclude that investors interpret lower than expected levels of CSR disclosure as an indication that a firm is trying to hide the presence of adverse CSR issues that could lead to future liabilities. Their findings suggest it is not easy for companies with adverse CSR to mimic companies with good CSR, by disclosing a high level of CSR information.
Given these findings, both capital market participants and managers may be motivated to pursue CSR disclosure at a higher level (market participants to maximize returns and managers to enhance job security and incentive pay), while regulators may be concerned about the opportunities for managers to act opportunistically and consider implementing CSR disclosure regulation. Finally, social and environmental activists may use our results as an argument to convince firms to disclose more.
About the authors:
• Ana Marques is an Associate professor of accounting at Nova School of Business and Economics. She is currently visiting the Indian Institute of Management Bangalore. She holds a PhD from the University of Texas at Austin.
• Charl de Villiers is a Professor of accounting at the Auckland University of Technology and the University of Pretoria. He holds a PhD from University of Pretoria.
Corporate social responsibility: country-level predispositions and the consequences of choosing a level of disclosure – forthcoming at Accounting and Business Research and available here.