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Corporate Social Responsibility and Management Forecast Accuracy

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Abstract

This study examines the association between corporate social responsibility (CSR) and management forecast accuracy. Using data from 1995 to 2009, we find that firms provide more accurate earnings forecasts in the face of CSR activities. We also find that the positive association between CSR and management forecast accuracy is only present for the post-regulation period of 2001–2009, after the introduction of disclosure regulations intended to mitigate managers’ opportunistic behavior. These findings are consistent with the notion that managers strive to improve the quality of financial disclosure following superior CSR performance in the recent period.

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Notes

  1. Jones (1995) posits that managers have incentives to commit to ethical behavior, thus developing a reputation for acting honestly and ethically. This commitment enhances mutual trust and cooperation with various stakeholder groups, such as communities, employees, customers, and suppliers. Such a reputation for honest and ethical behavior helps mitigate transaction costs associated with information asymmetry (Cho et al. 2013; Kim et al. 2014). Consistent with stakeholder theory, recent survey evidence indicates that reputation building is the primary motivation behind CSR (Adam Friedman Associates 2012).

  2. See also Berman et al. (1999), Hillman and Keim (2001), Coombs and Gilley (2005), Shropshire and Hillman (2007), Benson and Davidson (2010), and Benson et al. (2011).

  3. A firm might simply explain its future plans to address current problems in its CSR report. For example, DeTienne and Lewis (2005) use the accusations made against Nike Corporation for its poor labor practices to show that the company began publishing a detailed CSR report in 2005 as part of its efforts to address public concerns. Nike initiated in-depth CSR disclosure to explain the current status of labor conditions and its commitment to increase factory workers’ interests against the backdrop of the accusations. This case illustrates that the issuance of CSR reports does not necessarily indicate that the company has strong CSR practices.

  4. Using earnings management as a proxy for the quality of financial reporting, prior studies provide mixed evidence for the association between CSR and financial reporting quality, based on different sample periods and countries. Choi and Pae (2011) and Kim et al. (2012) find a negative relationship between earnings management and CSR-oriented activities, whereas Prior et al. (2008) and Salewski and Zülch (2014) provide some evidence for a positive relationship between earnings management and CSR activities.

  5. Building on stakeholder theory, Cennamo et al. (2009) argue that managerial discretion is also crucial for understanding managers’ underlying intentions behind CSR engagement. In general, managers have great latitude of action in their CSR policies (Goll and Rasheed 2004; Wood 1991). When managers have a large degree of discretion in various corporate policies, such as disclosure and investment, their actions have direct implications on the value of the firm (Hambrick and Finkelstein 1987) and social value of corporate actions (Wood 1991). Thus, it is important to consider managers’ ex ante disclosure behavior regarding future earnings to gain a better understanding of whether they possess value-increasing reputation-building motives or value-decreasing opportunistic motives with respect to CSR activities.

  6. Since 2010, KLD data is renamed and marketed as “MSCI ESG Historical Data and STATS.” We use the term KLD to make it consistent with prior research using this database.

  7. KLD also provides corporate governance category as well as exclusionary category items (i.e., alcohol, gambling, military, firearms, nuclear power, and tobacco) which only pertain to concern ratings. This study does not use these additional categories because corporate governance is considered as a distinct construct from CSR (Kim et al. 2012), and exclusionary category items do not reflect managers’ discretionary choices in CSR (Kim et al. 2014).

  8. Unreported analysis shows that results are qualitatively similar when the sample is limited to the 1995–2002 period to ensure roughly similar numbers of observations in the pre-Reg FD (n = 539) and post-Reg FD (n = 607) periods.

  9. We conduct a Hausman (1978) test to check for the existence of endogeneity in our data. This test examines whether the unique error terms are correlated with the regressors in the model. The null hypothesis of the test is that unique errors are not correlated with the regressors. The Hausman test of our data strongly rejects the null hypothesis, with a Chi-square of 242.34 and a p-value less than 0.0001. This, in turn, indicates that the use of the firm-fixed effects model is more appropriate in our data than the random effects model. When the null of no endogeneity is rejected, the fixed effect estimator is still consistent from a statistical standpoint, but the random effect estimator is inconsistent. Therefore, Gormley and Matsa (2014) suggest that researchers use the consistent fixed effect estimators to obtain adequate inferences from regression analyses.

  10. Herrmann et al. (2008) note that the analysis of a constant sample of firms existing in both pre- and post-regulation periods mitigates concerns that correlated omitted variables might affect empirical results. The disadvantage of using a constant sample is a potential loss of statistical power due to a smaller sample size after imposing survivorship. The sample size decreases from 5578 to 1599, but the coefficient on CSR × POST remains significant at the 0.01 level (β = 0.650), alleviating concerns about correlated omitted variables. When we further limit the sample to the 1995–2003 period, to have an approximately equal number of observations in the pre- and post-Reg FD periods, the sample size decreases to 837 (i.e., 426 in the pre-period and 411 in the post-period). Despite the significant reduction in sample size, the coefficient on CSR × POST continues to be significant at the 0.05 level (β = 0.586), confirming the robustness of our results.

  11. We caution readers that the chronological ordering of events does not conclusively establish causality. It is only a necessary, but not sufficient, condition for a cause-and-effect relationship.

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Acknowledgments

The author thanks an anonymous referee, Rong Huang, Marcus Burger, Sangwan Kim, and Seoyoung Lee for valuable comments. This paper also benefitted from the constructive feedback of audiences at the 2014 Management Accounting Section Midyear Meeting and the 18th IESE International Symposium on Ethics, Business, and Society. The author acknowledges the financial support provided by Desautels Faculty of Management and the Internal Social Sciences and Humanities Development Grant program at McGill University.

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    Dongyoung Lee

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Lee, D. Corporate Social Responsibility and Management Forecast Accuracy. J Bus Ethics 140, 353–367 (2017). https://doi.org/10.1007/s10551-015-2713-2

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