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Do Corporate Social Responsibility Reports Convey Value Relevant Information? Evidence from Report Readability and Tone

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Abstract

Corporate social responsibility (CSR) reporting is becoming mainstream, yet there is limited research on whether and how CSR reports communicate value relevant information. We examine the effects of CSR report readability and tone on future CSR performance and the market reaction around the release of CSR reports. Using a hand-collected dataset of Fortune 500 companies that published stand-alone CSR reports from 2002 to 2014, we find that 1-year-ahead CSR performance is positively associated with the changes in both CSR report readability and tone, suggesting that more readable text and more optimistic tone in a firm’s CSR report are indicative of better future CSR performance. Furthermore, consistent with the view that CSR reports communicate important value relevant information to the market, we document significant market reactions to report readability and tone around the release of CSR reports. Additional analyses suggest that CSR report readability enhances the association between the abnormal returns and the change in CSR report tone, and that the market reaction to CSR report readability is more pronounced for firms with lower analyst following and higher financial opacity. Taken together, our results substantiate the important roles of CSR report readability and tone in communicating future CSR performance and imparting value relevant information to the market.

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Notes

  1. Different terms are used to refer to company reports that communicate social and environmental performance, such as corporate social responsibility (CSR) reports, corporate responsibility/citizenship reports, sustainability reports, and so on. For simplicity, we use the term “CSR reports” to broadly refer to these reports.

  2. An alternative stream of mostly theoretical research (e.g., Kim and Verrecchia 1994) suggests that less readable reports are likely to increase information asymmetry and divergence in investor belief, leading to an increase in trading volume. Under this alternative view, there should be a negative association between abnormal trading volume and CSR report readability.

  3. Margolis et al. (2007) conducted a meta-analysis of 167 studies and found an overall positive link between CSR performance and financial performance. Later studies have confirmed this overall positive link (e.g., Mishra and Suar 2010; Hasan et al. 2018). In addition, this positive relationship is contingent upon a variety of factors, such as consumer awareness (Servaes and Tamayo 2013), CSR type (Peng and Yang 2014), firm competence (Luo and Bhattacharya 2006), and others.

  4. For the complete list of positive and negative words, please refer to https://sraf.nd.edu/textual-analysis/resources/#LM%20Sentiment%20Word%20Lists. Examples of the most frequent positive words in our sample of CSR reports are: opportunities, leadership, improve, efficiency, progress, better, innovation, improvement, success, achieve, good, strong, benefit, innovative, leading, effective, highest, integrity, excellence, achieved. Examples of the most frequent negative words in our sample are: challenges, critical, concerns, against, incidents, hazardous, prevention, injury, loss, questions, disaster, force, violations, non-compliance, problems, concern, fines, corruption, challenging, crisis.

  5. Available at https://sraf.nd.edu/textual-analysis/resources/#LM_10X_Summaries.

  6. Following Franco et al. (2015), we also replace ABSΔTONE with ΔTONEPOS and ΔTONENEG in model (5) to allow asymmetric volume reaction to positive vs. negative change in tone. ΔTONEPOS (ΔTONENEG) is equal to ΔTONE if ΔTONE is positive (negative), and zero otherwise. We find no evidence that the trading volume reaction is related to positive or negative tone revision.

  7. The increase in market value is computed as follows: the coefficient on ΔREAD * the interdecile range of ΔREAD * the mean market value (i.e., 0.026*0.028*56.3 = 0.04).

  8. The increase in market value is computed as follows: the coefficient on ΔTONE * the interdecile range of ΔTONE * the mean market value (i.e., 0.188*0.012*56.3 = 0.127).

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Acknowledgements

We appreciate the research assistance from Jia Gao and Minyi Chen in data collection.

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  1. Peter T. Paul College of Business and Economics, University of New Hampshire, 10 Garrison Avenue, Durham, NH, 03824, USA

    Shuili Du

  2. College of Management, University of Massachusetts, 100 Morrissey Blvd, Boston, MA, 02125, USA

    Kun Yu

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Du, S., Yu, K. Do Corporate Social Responsibility Reports Convey Value Relevant Information? Evidence from Report Readability and Tone. J Bus Ethics 172, 253–274 (2021). https://doi.org/10.1007/s10551-020-04496-3

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