Corporate social responsibility disclosure assurance and financial performance : a cross-country study

Abstract

The study evaluates in a cross-country setting whether corporate social responsibility (CSR) assurance represents a signal of the quality of CSR disclosure to investors. As part of this objective, the study also evaluates whether the associations of CSR disclosure and CSR assurance with subsequent financial performance are in the same or in opposite directions. Agency Theory and information asymmetry considerations are used as basis to develop testable hypotheses. The first step is to test the association between CSR disclosure and subsequent financial performance. Next, the association between third-party assurance provided on CSR disclosure and subsequent financial performance is evaluated. The two market-based measures of financial performance chosen are share price and market-to-book ratio. The two accounting-based measures of financial performance used are actual future cash flows and actual future profitability. The study examines a sample based on the 100 largest firms from different countries included in KPMG’s 2008, 2011 and 2013 international surveys of CSR reporting practices. The measures of CSR disclosure and CSR assurance used are based on data collected by KPMG, as an independent and credible source. The overall findings show that CSR assurance does not represent a signal of the quality of CSR disclosure to investors and that the associations of CSR disclosure and CSR assurance with market-based measures of financial performance are in opposite directions. CSR disclosure included in a firm’s annual report at a level higher than the sample mean has a positive association with market-based measures of financial performance. These results are driven by firms in environmentally non-sensitive industries.1 CSR assurance has a negative association with market-based measures of financial performance. Additional tests suggest that this negative association is driven by firms in non-sensitive industries from countries where some form of CSR disclosure is required, or is in the process of being mandated. The results are robust to various additional tests. Associations of CSR disclosure and CSR assurance with accounting-based measures of financial performance are mostly not significant for the one- to three-year-ahead periods. Prior studies on the association between CSR disclosure and market-based measures of financial performance have provided inconsistent results. In respect of CSR assurance, limited prior archival studies have been conducted on the association between CSR assurance and market-based measures of financial performance. Prior research on CSR assurance did not evaluate whether associations could be different for firms in environmentally sensitive industries compared to firms in environmentally non-sensitive industries. Prior research also did not control for country-level institutional strength and country-specific characteristics. Analysing CSR disclosure together with CSR assurance in a study using the same underlying financial data made it possible to evaluate whether associations of CSR disclosure and CSR assurance with financial performance are in the same or in opposite directions.