Does better CSR disclosure minimise the problem of asymmetric financial reporting? The role of market supervision

ABSTRACT

Corporate social responsibility (CSR) is a crucial business practice that has attracted the attention of companies and market participants worldwide. This paper examines the impact of CSR on financial reporting comparability. Specifically, this study investigates two main topics: (1) whether CSR leads to a more comparable financial report and (2) whether market supervision (i.e. liquidity and investor concerns) components of CSR are the channels through which CSR affects financial report quality. The results reveal that good CSR practice effectively minimises the problem of asymmetric financial reporting, even when accounting for other factors that affect financial reporting quality. CSR has the potential to attract market supervision and encourage companies to maintain comparability in their financial reporting practice. This observation indicates that CSR participation is a tool to elicit market supervision and to improve the information reporting environment.

KEYWORDS:

• CSR
• financial reporting asymmetry
• financial reporting comparability
• market supervision
• adverse selection
• moral hazard

JEL CLASSIFICATION:

• G32
• G38

Acknowledgments

This manuscript was edited by Wallace Academic Editing.

Disclosure statement

No potential conflict of interest was reported by the authors.

Ethical approval

This article does not contain any studies with human participants or animals performed by any of the authors.

Availability of data

Data available on request from the authors.

Author Contribution

Dr. Ho is a subject editor for Emerging Markets Finance and Trade. He has published more than 60 SSCI papers in the Finance field: Journal of Corporate Finance, Journal of Forecasting Pacific-Basin Finance Journal, International Review of Financial Analysis, International Review of Economics and Finance, International Journal of Finance and Economics; Accounting field: Journal of Accounting, Auditing and Finance, Review of Quantitative Finance and Accounting; Business field: Journal of Business Research, Corporate Governance: An International Review, Corporate Social Responsibility and Environmental Management; Economic field: Energy Economics, Emerging Market Reviews, Managerial and Decision Economics, etc. Besides, he participated in dozens of academic conferences, including American Accounting Association, Asian Finance Association, China Financial Annual Conference, China Financial Engineering Annual Conference, China FinTech Research Conference, China Management Annual Conference, CICF, European Finance Association, European Financial Management Association, Financial Management Association, Taiwan Management Institute, Western Economic Association International and so on. He is also a reviewer, including Asia Pacific Journal of Management, Corporate Governance: An International Review, Economic Modelling, Emerging Markets Finance and Trade, Financial Innovation, Finance Research Letters, Investment Analysts Journal, International Journal of Emerging Markets, International Review of Economics and Finance, Managerial and Decision Economics, etc.

Compliance with Ethical Standards

All authors declare that he has no conflict of interest.

Informed consent

Informed consent was obtained from all individual participants included in the study.

Notes

1. FRC indicates the differences between two entities or items in an accounting period, and can be reduced by using different accounting methods to measure and report the same economic phenomenon.

2. The reason why our sample period ends in 2018 is that Hexun.com adjusts the CSR score until 2 to 3 years after rating.

3. Although there have been previous documents questioning the impact of CSR, such doubts have gradually been alleviated with the development of CSR. Meanwhile, Chong and Rahman (2020) found that investors will be more discerning when interpreting the quality of web-based CSR, and it will be more difficult to be misled by such information. With the development of the Internet, concerns about companies using CSR to cover up other unethical behaviours of the company can be eased.

4. The report was jointly compiled by the China Securities Investment Fund Association (CSIFA) and the Financial Research Institute of the Development Research Center of the State Council.

5. We assume that companies experiencing the same economic event have the same stock return.

6. Institutional ownership includes investment funds, social security funds, qualified foreign institutional investors, brokers, trusts, banks, insurance companies, finance companies, and listed non-financial companies.

7. We also run regression without control variables, and the results remained consistent. For the sake of brevity, we only report the results that include control variables to account for potential influences on FRC. The untabulated results can be obtained from the authors upon request.

8. We perform several tests such as Sargan’s test and F test. The results show that there are no overidentification problems and no weak instrumentation variables. The instrumental variables are appropriate, which are related to the endogenous explanatory variables, but have nothing to do with the disturbance term.

Additional information

Funding

The authors were funded by NSFC number (71903199).