Quantifying the Reporting Bias of Corporate Social Responsibility (CSR) Disclosures

• In Event: Revenue Recognition, Valuation, and Corporate Social Responsibility

Abstract

In the USA, the voluntary nature of corporate social responsibility (CSR) reporting and lack of assurance make it a good media for firms to manage impressions. This can lead to biased reporting and cast doubts on the quality of information disclosed in CSR reports. Based on the impression management framework developed by Merkl-Davies and Brennan (2007), I investigate and quantify the magnitude of CSR reporting bias, and whether such bias is mitigated by reporting standards and external assurance. I construct two measures of reporting bias based on adjusted R2 and coefficients, respectively, and use them to quantify the magnitude of CSR reporting bias. I investigate reporting bias from three language characteristics of CSR reports: length, readability, and tone. Overall, I find that current CSR reporting practice in the USA is highly biased. Firms respond more strongly, in a systematic manner, to their strengths than to concerns. I also provide quantitative evidence regarding the effectiveness of reporting standard and external assurance in mitigating the reporting bias. Finally, I conduct a trend analysis and find that reporting bias becomes smaller and more stable over time.

Author

• Mi Zhou, Virginia Tech University