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CSR Disclosure Items Used as Fairness Heuristics in the Investment Decision

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Abstract

The growth in demand for corporate social responsibility (CSR) information raises the question of how various CSR disclosure items are used by investors, an important stakeholder group driven by instrumental, moral, and relational motives. Prior research examines the instrumental motive to maximize individual shareholder wealth and the moral motive to actualize personal stewardship interests. We contribute to the literature by examining investors’ relational motive to realize positive stakeholder relationships within and between organizations and communities. The relational motive arises when investors look at a company’s treatment of other stakeholder groups as a heuristic to form a perception of how fairly they will also be treated by that company in the future, and thus invest in the company they perceive as fair. Fair treatment in the future matters to the investor who purchases stock from the company or via the capital markets in exchange for becoming a shareholder and thus a residual claimant of the company. As such, the investor expects future cash flows from holding and/or reselling the stock and expects to be treated fairly by the company in the future. We propose that investors, use as a fairness heuristic, CSR disclosure items—CSR investment level or CSR assurance—that represent the company’s commitment to its stakeholders, and that the resulting fairness perception affects the extent to which the CSR disclosure items influence their investment decision. Using responses from 113 investors in an online experiment, we find that fairness perceptions are higher when CSR investment is above (versus below) the industry average, and that fairness perceptions partially mediate the impact of the CSR investment level on investment amount allocations. We do not find that the presence (versus absence) of CSR assurance is used by investors as a fairness heuristic. Our results are robust to controlling for preferences for financial performance and hence investors’ instrumental motive, and to controlling for individual environmental attitudes, and hence investors’ moral motive. Implications for future research and public policy are discussed.

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Notes

  1. Following prior research (e.g., Dhaliwal et al. 2012), we define CSR information as voluntary company engagement in activities that extend beyond compliance and focus on a variety of social issues which may include achieving carbon neutrality, designing recyclable products, providing safe working conditions, and greening communities.

  2. http://www.pwc.com/us/en/cfodirect/assets/pdf/sustainability-reporting-disclosure-transparency-future.pdf.

  3. Financial information and CSR disclosures in a separate CSR report was adapted from an actual, highly rated, manufacturer/retailer in the apparel industry. The name of the company was changed to avoid any preconceived attitudes that participants might have about the actual company.

  4. http://www.ft.com/intl/cms/s/0/95239a6e-4fe0-11e4-a0a4-00144feab7de.html.

  5. For example, in 2014, sustainability investing (SI) mandates for funds serving clients, including retail investors, amounted to over $4 trillion in the US (http://www.factset.com/insight/2014/1/csr-esg-sri-risk#.VigSqm4k1CE).

  6. Aguilera et al. (2007) argue that in general, investors pressure companies to engage in CSR activities by exercising their voice (i.e., via shareholder voting) and by deciding to enter/exit (i.e., via investment or divestment). In this study, we focus on the latter, specifically the investment allocation decision. We leave it to future research to examine how current shareholders use their voice/vote to pressure certain CSR activities and consequently, CSR disclosures.

  7. In formulating this proposition, Aguilera et al. (2007) borrow from the organizational justice literature, particularly Lind’s (2001) Fairness Heuristic Theory (FHT), which has generally been applied to the context of employees and consumers. There is one subtle but notable difference in the application of FHT to the context of investors. Whereas employees and consumer contribute resource to or withhold resources from the company in exchange for future compensation/career opportunities and future utility from goods/services, respectively, investors contribute resources to or withhold resources from the company or its current shareholders. As such, regardless of whether the investor contributes to or withholds resources from the company or via the capital markets in exchange for company stock, the investor, as a shareholder, expects future cash flows from holding company stock and/or upon resale, and expects that the company treat him/her fairly in the future.

  8. We made this sequential design choice to establish that our participants indeed viewed the CSR disclosures as positive and incrementally informative beyond the financial data; to make salient that for two of the experimental conditions the CSR disclosure was without assurance whereas the financial data was audited (for all cell conditions); and to mimic CSR reports in practice that are primarily stand-alone rather than bundled with financial information (Aras and Crowther 2007; KPMG 2008; Simnett et al. 2009a; Adams et al. 2011; Dhaliwal et al. 2011).

  9. We used Qualtrics to recruit suitable participants and to distribute the online experiment that we designed using their proprietary software. Brandon et al. (2014) discuss recent research, emerging opportunities, and the appropriateness of using Qualtrics and other recruitment, survey, and design tools in behavioral accounting research.

  10. The description of the fictitious apparel company was as follows: “a global manufacturer and retail distributor of children’s clothing. In the past decade, the company has expanded its manufacturing facilities overseas, primarily in Southeast Asia. The company has a good reputation among its customers for delivering rugged clothing in classic styles. The segments of the apparel industry in which [the company] operates continue to be competitive but [the company] is a solid player in the industry… On the day preceding the release of these financial statements, the stock price was $15.00 and the average industry P/E ratio was 12.00.” This approach of providing a common benchmark stock price is consistent with prior studies (e.g., Hopkins 1996).

  11. We chose to present a financially healthy company because these are the types of companies that can report on, invest in, and acquire assurances services for CSR (Lougee and Wallace 2008; McWilliams and Siegel 2001).

  12. The CSR information provided is the following statement: “Our goal is to challenge ourselves, our competitors, and community at-large to reach the highest levels of corporate social responsibility and accountability. To reach this goal, we focus on four pillars: reducing our collective contribution to global warming (ENERGY PILLAR), creating sustainable products (PRODUCTS PILLAR), improving workers’ quality of life (WORKPLACE PILLAR) and empower [sic] our employees and local communities (SERVICE PILLAR).”

  13. The CSR investment level manipulation includes the word ‘remaining’ which implies there have been CSR disclosures from prior years and that may have been already impounded in the prevailing stock price provided. This potentially biases against us finding support for our expectations.

  14. These failure rates are similar to those in other studies using electronic survey methods (e.g., Andrews et al. 2003; Oppenheimer et al. 2009) and comparable to those using paper-and-pencil surveys (e.g., Kongsved et al. 2007).

  15. The ten outliers were identified based on extreme financials data-based and CSR-based investment judgments being in the 1st or 99th percentiles. Untabulated analysis also indicates that the outliers spent significantly less time on average the CSR disclosures screens (p < 0.01, two-tailed).

  16. Untabulated analysis indicates no differences in any of these demographic dimensions across cell conditions (p < 0.10), indicating that random assignment across experimental conditions was obtained.

  17. We yield inferentially similar results when we eliminate CSR assurance from the models presented in Table 3. We also yield inferentially similar results when we use alternative dependent variables and model specifications. For alternative dependent variables, we use the percent change in investment amount allocation (i.e., investment amount allocation after viewing the CSR information versus that previously made after viewing only the financial data) and the sum of short- and long-term investment amount allocation. For model specifications, we use alternative mediation tests (Sobel 1982, 1986; Muller et al. 2005), repeated models, and path analysis using structural equation modeling (SEM) (e.g., Blanthorne and Kaplan 2008). Though directionally similar, results are weaker when we use as an alternative dependent variable stock price assessment after viewing the CSR information.

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Acknowledgments

We would like to acknowledge the helpful comments of the Editor Gary Monroe, as well as comments by Paul Coram, Kristina Demek, Jane Kennedy, Ganesh Krishnamoorthy, Jon Greneir, Lori Holder-Webb, Yue Li, Ella Mae Matsumura, Divesh Sharma, Greg Trompeter, Robin Roberts, participants in the European Accounting Association Congress, the Social Responsibility Research Conference, the ABO Research Conference, the Audit Midyear Meeting, and workshop participants at Villanova University. Jeffrey Cohen would like to acknowledge the PWC Inquiries program.

Author information

Authors and Affiliations

  1. Department of Accounting and Information Systems, Rutgers Business School, One Washington Park, Newark, NJ, 07102, USA

    Helen Brown-Liburd

  2. Accounting Department, Carroll School of Management, Boston College, 140 Commonwealth Ave., Chestnut Hill, MA, 02467, USA

    Jeffrey Cohen

  3. Department of Accounting, Albers School of Business and Economics, Seattle University, 901 12th Avenue, P.O. Box 222000, Seattle, WA, 98122-1090, USA

    Valentina L. Zamora

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  1. Helen Brown-Liburd
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Correspondence to Jeffrey Cohen.

Additional information

The experimental instruments are available from the authors upon request.

Appendix 1: Assessment Questions, Experimental Manipulations, and Fairness Perceptions

Appendix 1: Assessment Questions, Experimental Manipulations, and Fairness Perceptions

Baseline investment amount allocation:

If you have a total of $10,000 to invest, how much would you invest in this company in the short-term and/or in the long-term, if at all? Please make sure the investment amounts total to $10,000.

CSR Investment Level below [above] industry average manipulation:

This year, we remain ranked in the TOP [BOTTOM] 10 percent in the industry in terms of the percentage of pretax income dollars invested to achieve corporate social responsibility goals.

CSR Assurance absent [present] manipulation:

No Assurance Report

[Assurance Report on Nonfinancial Information contained in the Corporate Social Responsibility Report

To the Shareholders of Joyful Jumpers, Inc.

We have reviewed the nonfinancial information contained in the corporate social responsibility report for the year ended December 31, 20 × 2 detailed above. The directors are responsible for the preparation and presentation of the nonfinancial information and the information contained therein. We have conducted an independent review of the nonfinancial information to express a conclusion on it to the shareholders.

This review included such tests and procedures as we considered necessary in the circumstances. These procedures have been undertaken to determine whether the nonfinancial information has been properly collected, summarized and reported.

Conclusion

Based on our review, we conclude that in all material respects the nonfinancial indicators were properly collected, summarized, and reported.]

Updated investment amount allocation:

Recall that based solely on the audited financial performance, you indicated that you would have invested $ (XX) in Joyful Jumpers, Inc. in the short-term, $ (XX) in Joyful Jumpers, Inc. the long-term, and $ (XX) in a different company or companies.

Now considering the additional unaudited [audited] corporate social performance disclosure, if you have a total of $10,000 to invest, how much would you invest in this company in the short-term and/or in the long-term, if at all? Please make sure the investment amounts total $10,000.

CSR fairness perceptions:

Please indicate your views about the company’s social corporate responsibility activities along the following dimensions:

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Brown-Liburd, H., Cohen, J. & Zamora, V.L. CSR Disclosure Items Used as Fairness Heuristics in the Investment Decision. J Bus Ethics 152, 275–289 (2018). https://doi.org/10.1007/s10551-016-3307-3

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