How Does Corporate Social Responsibility Decrease Serious Misstatement Likelihood?

• In Event: Financial Reporting Quality

Abstract

In this paper, we offer two explanations for the observed negative association between corporate social responsibility (CSR) performance and the incidence of serious misstatements. We first verify that CSR is negatively associated with the probability of engagement in a serious misstatement. We then design and test measures for the probability of serious misstatement detection and find that CSR is positively but weakly associated with the detection probability. The asymmetrical impact of CSR on the engagement probability and detection probability provides the first explanation for the lower serious misstatement likelihood in CSR firms. Second, we provide evidence that CSR indirectly affects the incidence of serious misstatements by attenuating the materiality and magnitude of misstatements. A path analysis suggests that the indirect path accounts for 33.3 percent of the total impact of CSR on serious misstatement likelihood. These findings advance our understanding of the mechanism through which CSR reduces serious misstatement likelihood.

Authors

• Yongtao Hong, North Dakota State University

• Alex Young, Hofstra University