The Role of Voluntary Corporate Social Responsibility Disclosures in Increasing Shareholder Value

Professor Paul Griffin is a leading international authority in accounting and financial information and disclosures. In this blog, he writes about how CSR Disclosures affect Shareholder Value.

Do Corporate Social Responsibility (CSR) Disclosures Increase Shareholder Value? Will the momentum for voluntary CSR disclosure satisfy all stakeholders and really change the game?

As the buzz around CSR continues to grow, companies are beginning to understand the viability of CSR not only a means of accomplishing or enhancing corporate governance, but also as a measureable and concrete way to enhance shareholder value.

The movement towards making the connection between good corporate citizenship and increased shareholder value has been facilitated as a result of the length of time the information has been available, the intensity of the information that’s been made available, and the ability to conduct research not only with voluntary disclosures, but also with mandatory disclosures in an effort to determine whether or not that link does exists too.

Recently, my work has focused on conducting research here with a team at UC Davis using data from CSR Wire. The research really relates to exploiting and understanding the way in which markets respond to voluntary CSR disclosures. Over time, I’ve been able to distill my research down to the following conclusions:

Information Asymmetry
With CSR, there are problems with informational alignment–the disconnect between certain kinds of information. Information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other—in short, it’s about what some of us we don’t know. To the extent that you reduce information asymmetry, it will lower your cost of capital and directly affect and impact shareholder value.

Off-Balance Sheet Liabilities and Assets
Off-balance sheet usually means that an asset or debt or financing activity is not on the company’s balance sheet. In relation to a the reduction of off balance sheet liabilities and increases in off-balance sheet assets, voluntary disclosure about CSR is going to do one of two things (or maybe both). The first is to reduce off-balance sheet liabilities, such as future climate change costs, and that’s going to flow right into equity. The other is to increase off-balance sheet assets such as brand intangibles, and that’s also going to flow right into equity. Ultimately, both of these effects show up in my work as explaining why CSR disclosures increase shareholder value.

Market Interpretation
In voluntary disclosures, there’s always a risk that markets will misinterpret what you have, or a fear that you’re giving away competitive information.

The answer is yes it does, because there’s every indication that when managers make the decisions to release information, they’re carefully considering the costs and benefits, and voluntary disclosures are only released to the extent that the benefits exceed the cost. This is clearly the case and the markets have to interpret that, and they apparently appear to be interpreting that information in the proper way.

Frequency of CSR
When we talk about CSR frequency, we already know that it has bearing in terms of improving shareholder value, but we also need to identify some of the factors associated with companies that are more frequent disclosers or more intense disclosers of CSR information. I’ve found that there are certain underlying factors that help explain CSR frequency. One in particular is political interests, and mostly the Democratic political interests of those within firms which contribute to various PAC committees.

CEOs that contributed to Democratic elected officials worked for companies that had a longevity and an intensity of voluntary disclosures and outperformed their peers. In other words, Democratic political interests explained the CSR frequency and the CSR frequency explained the superior market performance.

The second aspect which is newer to my work but which also is very interesting is that the CSR disclosure frequency appears to be related to social religious norms, in the sense that those in certain parts of the country that are more religious were observing that there’s less CSR disclosure frequency. This suggests that one of the things that might help us understand the trend toward additional CSR disclosures is to understand the political and religious local views of managers and stakeholders, to see whether they’re pro or con releasing additional disclosures.

There’s always a discussion about how to get people to change and move towards a world in which there’s more CSR and disclosure and more environmental disclosure. Part of that is going to be a in change people’s fundamental beliefs, and getting them to understand that to voluntarily disclose information would cause their stock to improve in value.

What we’re identifying in some of this work, which is in its early stages, is that some of these beliefs tend to be more on the political and religious versus the purely economic side. So, ultimately, it’s a question of how you get society to change and where you direct your efforts to facilitate that change.

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