Corporate social responsibility and annual report reading difficulty

Abstract

We use more than 21,000 firm-year observations for 2534 U.S. companies between 1993 and 2018 to investigate the relationship between corporate social responsibility performance and the reading difficulty of annual reports. We find a significant negative relationship, suggesting that the annual reports of socially responsible firms are more readable (i.e., easier to read and understand). Overall, our results suggest that socially responsible firms are more ethical and transparent, which is consistent with the stakeholder view.

Appendices

Appendix 1: CSR components (publicly available at www.msci.com)

CSR components	CSR strengths items	CSR concerns items
Community relations	Charitable giving Innovative giving Support for housing Support for education Non-U.S. charitable giving Volunteer programs Other strengths	Investment controversies Negative economic impact Tax disputes Other concerns
Diversity	CEO Promotion Board of directors Work–life benefits Women and minority contracting Employment of the disabled Gay and lesbian policies Other strengths	Controversies Non-representation Other concerns
Employee relations	Union relations No-layoff policy Cash profit sharing Employee involvement Retirement benefits Health and safety Other strengths	Union relations Health and safety concerns Workforce reductions Retirement benefits concern Other concerns
Environment	Beneficial products Pollution prevention Recycling Clean energy Property, plant, and equipment Management systems Other strengths	Hazardous waste Regulatory problems Ozone depleting chemicals Substantial emissions Agricultural chemicals Climate change Other concerns
Product	Quality Research and development innovation Benefits to economically disadvantaged Other strengths	Product safety Marketing/contracting concern Antitrust Other concerns
Corporate governance	Limited compensation Ownership strength Transparency strength Political accountability strength Public policy strength Other strengths	High compensation Ownership concern Accounting concern Transparency concern Political accountability concern Public policy concern Other concerns
Human rights	Positive record in S. Africa Indigenous peoples’ relations Labor rights strength Other strengths	S. Africa Northern Ireland Mexico Burma concern Labor right concern Indigenous peoples’ relations concern Other concerns

Appendix 2: Variable definitions

Variable		Definition
READ_DIFF	=	The Bog Index by Bonsall et al. (2017) to measure reading difficulty;
CSR_NET	=	Total strengths of Community Relations, Corporate Governance, Diversity, Employee Relations, Environment, Human Rights, and Product – Total concerns of Community Relations, Corporate Governance, Diversity, Employee Relations, Environment, Human Rights, and Product;
CSR_STR	=	Total strengths of Community Relations, Corporate Governance, Diversity, Employee Relations, Environment, Human Rights, and Product;
CSR_CON	=	Total concerns of Community Relations, Corporate Governance, Diversity, Employee Relations, Environment, Human Rights, and Product;
SIZE	=	The natural log of total firms assets (AT);
LEV	=	Leverage ratio, measure as the ratio of long-term liabilities (DLTT) to total assets (AT);
ROA	=	Profitability, measured as income before extraordinary items (IB) scaled by total assets (AT);
MTB	=	Market-to-book ratio, measured as market value of outstanding common shares [Outstanding common shares (CSHO) × price at fiscal year-end (PRCC_F)] divided by total book value of outstanding common shares (CEQ);
CFO	=	Cash flows from operating activities (OANCF) scaled by total assets (AT);
CAPINT	=	Capital expenditures (CAPX) scaled by total assets (AT);
FIRMAGE	=	The natural log of the number of firms since the firm has been listed in the Compustat database;
MARANK	=	Decile ranks of managerial ability scores by Demerjian et al. (2012);
VOLATILITY	=	Volatility of sales (SALE);
SPEITEM	=	Special items (SPI) scaled by total assets (AT);
MER_ACQ	=	An indicator variable that equals one if a firm engages in merger & acquisition transactions and zero otherwise;
ACCRUALS	=	The absolute value of discretionary accruals using performance-matched modified Jones model;
LOSS	=	An indicator variable that equals one if a firm reports a loss and zero otherwise;
SEGMENT	=	The natural log of the number of business segments;
BIG4	=	An indicator variable that equals one if a firm uses a Big 4 accounting firm and zero otherwise;
FSZIE	=	The natural log of the gross file size of 10-K reports by Loughran and McDonald (2011);
FOG	=	The Fog Index of reading difficulty;
HCSR	=	An indicator variable that equals one if an observation’s net CSR score (CSR_NET) is greater than zero and zero otherwise;
CSR_ALT	=	Total strengths of Community Relations, Diversity, Employee Relations, Environment, and Product – Total concerns of Community Relations, Diversity, Employee Relations, Environment, and Product;
ΔREAD_DIFF	=	READ_DIFF in year t – READ_DIFF in year t − 1;
ΔCSR_NET	=	CSR_NET in year t – CSR_NET in year t − 1;
ΔSIZE	=	SIZE in year t—SIZE in year t − 1;
ΔLEV	=	LEV in year t—LEV in year t − 1;
ΔROA	=	ROA in year t—ROA in year t − 1;
ΔMTB	=	MTB in year t—MTB in year t − 1;
ΔCFO	=	CFO in year t—CFO in year t − 1;
ΔCAPINT	=	CAPINT in year t—CAPINT in year t − 1;
ΔFIRMAGE	=	FIRMAGE in year t—FIRMAGE in year t − 1;
ΔMARANK	=	MARANK in year t – MARANK in year t − 1;
ΔVOLATILITY	=	VOLALITITY in year t – VOLALITITY in year t − 1;
ΔSPEITEM	=	SPEITEM in year t – SPEITEM in year t − 1;
ΔMER_ACQ	=	MER_ACQ in year t – MER_ACQ in year t − 1;
ΔEARNINGS	=	EARNINGS in year t—EARINGS in year t − 1;
ΔACCRUALS	=	ACCRUALS in year t—ACCRUALS in year t − 1;
ΔLOSS	=	LOSS in year t—LOSS in year t − 1;
ΔSEGMENT	=	SEGMENT in year t—SEGMENT in year t − 1;
ΔBIG4	=	BIG4 in year t – BIG4 in year t − 1;
BOND RATING	=	The bond credit ratings from S&P’s;
GOVERNANCE	=	The entrenchment index;
CSR_COMMUNITY	=	Total strengths of Community Relations – Total concerns of Community Relations;
CSR_GOVERNANCE	=	Total strengths of Corporate Governance – Total concerns of Corporate Governance;
CSR_DIVERSITY	=	Total strengths of Diversity – Total concerns of Diversity;
CSR_EMPLOYEE	=	Total strengths of Employee Relations – Total concerns of Employee Relations;
CSR_ENVIRONMENT	=	Total strengths of Environment – Total concerns of Environment;
CSR_HUMAN RIGHTS	=	Total strengths of Human Rights – Total concerns of Human Rights;
CSR_PRODUCT	=	Total strengths of Product – Total concerns of Product;