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Corporate social responsibility disclosure and market valuation: evidence from Spanish listed firms

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Abstract

Using a sample of listed Spanish companies pertaining to the IBEX35 index for the period 2007–2011, this paper examines whether those firms with higher CSR disclosure ratings are more valued by market participants. This study also complements the literature addressing the value relevance of CSR disclosure by further analyzing not only the direct effects of CSR reporting on stock prices but also its indirect effects through its interaction with main accounting variables (i.e., earnings and book value of equity). CSR reports can also affect stock price indirectly because the sustainability report may be perceived by investors to be a source of further and complementary information regarding the nature, composition and trends of the traditional value-relevant accounting variables. Finally, this study also analyzes whether CSR disclosure by firms operating in environmentally-sensitive industries is assessed differently by market participants than CSR disclosure by companies operating in other industries. By using a modified Ohlson (Contemp Account Res 1:661–687, 1995) model, it is found that CSR disclosure do have both a direct and indirect effect on stock prices by modifying the value-relevance of earnings and book value of equity. Moreover, CSR disclosure by companies operating in environmentally-sensitive industries is associated with higher market valuations than CSR disclosure by companies operating in nonsensitive industries. This may be due to the fact that CSR disclosures provide information that allow investors to make better assessments of the increased risk related to potential litigation and future environmental liabilities, thereby reducing information asymmetries and the risk of adverse selection.

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Notes

  1. As the value relevance studies rely on the basic assumption of stock market efficiency, i.e., that stock prices pick up the effects of all relevant information, their inferences may be misleading if the stock market under analysis is not efficient. In this respect, the study by Kristoufek and Vosvrda (2014) compare the efficiency of 41 stock indices worldwide based on the correlation structure of the returns (long-term and short-term memory) and local herding behavior (fractal dimension). Their results show that Spain attains 12th place out of the 41 indices in the efficiency index.

  2. Prior research has not found a consistently significant association between environmental performance and environmental disclosure. As pointed out by Al-Tuwaijri et al. (2004), if we assume that good environmental performance reduces the firm’s exposure to future environmental costs, then disclosure of this information should be perceived as good news by investors. Therefore, firms with good environmental performance should disclose more environmental information (in quantity and quality) than should firms with poorer environmental performance. On the other hand, if greater disclosure provides information that may be used in litigation against the disclosing firm (presumably by third parties with political or social agendas), good environmental performers might elect to minimize such disclosure (Li et al. 1997).

  3. The underlying assumption of a value-relevance study is that the information used by investors when valuing a share will be incorporated into the firm’s share price (Barth et al. 2001). Value relevance could thus be measured in terms of the levels of equity prices (i.e., price-levels models) or in terms of changes in share prices (i.e., returns models). The objective when using a return approach is to evaluate what is reflected in share price changes during a particular period, whereas the objective when using a price levels approach is to evaluate what is reflected in stock price at a specific time (Barth 2006). Both types of value relevance studies inform us of the value relevance of information although the research question when using share returns instead of share prices may also be related to the information timeliness (Barth 2006).

  4. It could be the case that the information on the future cash flows of the firm provided by CSR information may be negative if the firm needs considerable investments in order to retain the ‘license to operate’. In addition, previous literature (Kallapur and Kwan 2004) has indicated that managers may adjust their voluntary disclosures due to incentive schemes or as an ‘excuse’ for having missed the earnings benchmark. When the reliability of earnings declines, the market may place less reliance on earnings and look for other sources of information, such as book value.

  5. CSR ratings usually employed in this literature (such as the KLD Strenghts and Concerns or the ASSET4 ratings) are intended to measure CSR performance (not CSR disclosure). The rating used in my study developed by the OCSR is more similar in spirit to others based on content analysis to evaluate CSR disclosure (e.g., Al-Tuwaijri et al. 2004).

  6. Disclosure of CSR reports tends to lag the provision of annual financial statements. For the case of Spanish listed firms, annual accounts are usually disclosed within 2 months after fiscal year-end (i.e., around mid or end of February). However, CSR reports are usually disclosed within 3–6 months after fiscal year-end (depending on the company). Therefore, I have decided to take share prices corresponding to 6 months after the fiscal year-end in order to ensure that CSR reporting was available to investors.

  7. Based on the SIC classification, we consider the following sectors: mining, oil and gas extraction (SIC1), manufacturing (SIC2 and 3), utilities (SIC4), commercial (SIC5) and services (SIC 7 and 8). Financial sector (SIC 6) is excluded from my sample.

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Authors and Affiliations

  1. Department of Accounting and Finance, Technical University of Cartagena, C/Real, no 3, 30201, Cartagena, Spain

    Carmelo Reverte

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  1. Carmelo Reverte
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Correspondence to Carmelo Reverte.

Appendix: Methodology of the CSR disclosure score developed by the Observatory on Corporate Social Responsibility (OCSR)

Appendix: Methodology of the CSR disclosure score developed by the Observatory on Corporate Social Responsibility (OCSR)

The OCSR issues each year a very exhaustive report on CSR disclosures by Spanish listed firms included in the IBEX35 index, which comprises the largest 35 firms in terms of market capitalization. By means of an in-depth analysis of annual reports and sustainability and corporate governance reports, OCSR performs a content analysis by assigning each of the covered firms a numerical rating (ranging from 0 to 4 in a continuous scale) based on the reporting of more than 500 indicators/requirements included in the following guidelines/principles: (a) Global Reporting Initiative (GRI)’s Guidelines (G2 and G3) (especially in the fields of environmental performance, human rights, labor practices and decent work, society and product responsibility); (b) United Nations Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights; (c) AA1000 Accountability Principles issued by the Institute of Social and Ethical Account Ability); (d) New Economics Foundation (NEF) Principles and (e) Corporate Governance recommendations issued by the Spanish stock market regulator and, in the case of US cross-listed firms, the Sarbanes–Oxley Law.

The table with the scoring for a given firm takes the following form:

Indicator

Scoring

Global reporting initiative (GRI)

 

Index and GRI profile

 

 Strategy and analysis

 

 Organizational profile

 

 Governance, commitments to external initiatives and stakeholder engagement

 

 GRI content index

 

GRI indicators

 

 Economic performance

 

 Environmental performance

 

 Social performance, including:

 

  Human rights

 

  Labor practices and decent work

 

  Society

 

  Product responsibility

 

GRI principles

 

 Relevance/materiality

 

 Stakeholder inclusiveness

 

 Reliability/auditability

 

 Neutrality

 

 Sustainability context

 

 Accuracy

 

 Comparability

 

 Clarity

 

 Completeness

 

 Timeliness

 

 Transparency

 

Corporate governance recommendations

 

 Good corporate governace practices

 

 Board

 

 Remunerations policy and disclosure

 

 Annual general meeting

 

 Board commissions

 

United nations norms

 

 Non-discrimination (Norm 2)

 

 The right to security of persons (Norms 3–4)

 

 The rights of workers (Norms 5–9)

 

 The respect for national sovereignty and human rights (Norms 10–11), including the prohibition of corruption and fundamental rights to development (food and drinking water, housing, highest attainable physical and mental health standards etc.)

 

 Obligations with regard to consumers (Norm 13)

 

 Environmental protection (Norm 14)

 

AA1000 accountability principles

 

 Completeness

 

 Materiality

 

 Regularity and timeliness

 

 Quality assurance

 

 Information quality

 

 Embeddedness

 

 Continuos improvement

 

 Accessibility

 

New economics foundation (NEF) principles

 

 Inclusivity

 

 Completeness

 

 Comparability

 

 Embeddedness

 

 Disclosure

 

 External verification

 

 Continuous improvement

 

 Evolution

 

Total mean score

 

The scoring from 0 to 4 is assigned based on the following criteria:

Score

 

0

Anecdotical information (at least 25 % of the aspects analyzed)

1

Scarce information (at least 50 % of the aspects analyzed)

2

Incomplete information (at least 75 % of the aspects analyzed)

3

Complete information on all aspects analyzed (but without much detail)

4

Exhaustive and detailed information on all aspects analyzed

The scoring by indicator and the total score for the firm are obtained by arithmetic means of their respective components.

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Reverte, C. Corporate social responsibility disclosure and market valuation: evidence from Spanish listed firms. Rev Manag Sci 10, 411–435 (2016). https://doi.org/10.1007/s11846-014-0151-7

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