Does CSR reporting indicate strong corporate governance?

• DOI: https://doi.org/10.1108/IJAIM-07-2020-0099
• Published date: 20 August 2020
• Pages: 27-42
• Date: 20 August 2020
• Subject Matter: Accounting & finance,Accounting/accountancy,Accounting methods/systems
• Author: Siew H. Chan,Timothy S. Creel,Qian Song,Yuliya V. Yurova

Does CSR reporting indicate

strong corporate governance?

Siew H. Chan

Department of Accounting and Law, Mike Cottrell College of Business,

University of North Georgia/Thammasat University, Dahlonega, Georgia, USA

Timothy S. Creel

Swang College of Business, Lipscomb University, Nashville, Tennessee, USA

Qian Song

Department of Finance and Accounting, Saunders College of Business,

Rochester Institute of Technology, Rochester, New York, USA, and

Yuliya V. Yurova

Department of Decision Sciences, Huizenga College of Business and Entrepreneurship,

Nova Southeastern University, Fort Lauderdale, Florida, USA

Abstract

Purpose –This study aims to investigatethe relationship between companies f‌ilingversus those not f‌iling

corporatesocial responsibility (CSR) reports and corporategovernance.

Design/methodology/approach –The websites of US publicly traded companies were examined for

commitment to CSR or sustainability reporting based on the preparation of voluntary reports. This

informationprovided the CSR measure, the key independent variable in this study. The data used to compute

discretionary accruals (based on the modif‌ied Jonesmodel) were obtained from Compustat. Data on auditor

tenure were retrieved from Audit Analytics. The number of members and f‌inancial experts on an audit

committeewere gathered from proxy reports f‌iled with the US Securities and Exchange Commission.

Findings –Companies f‌iling CSR reports have higher audit quality, higher audit committee quality,

increased auditor tenureand lower auditor dismissal compared to those not f‌iling CSR reports. The f‌indings

supportstakeholder theory.

Research limitations/implications –This study’s utilization of multiple measures of corporate

governance provides insight into the robustness of the relationship between CSR reporting and corporate

governance. Further, this research uses a different measure of CSR reporting; that is, companies that

voluntarily prepared separate CSR reports following or not following the Global Reporting Initiative (GRI)

guidelines compared to reportsprepared following the GRI guidelines. This approach increasesthe size and

diversity(i.e. industries) of the sample (Kolk, 2003; Waddock and Graves, 1997).

Practical implications –The f‌indings suggest that companies engage in CSR reporting to indicate

strong corporategovernance.

Originality/value –This study uses multiple measures of corporate governance to demonstrate the

positiverelationship between CSR behavior (measuredvia f‌iling of CSR reports) and corporate governance.

Keywords Corporate social responsibility, Corporate governance, Audit quality, Audit committee,

Auditor tenure, Auditor dismissal

Paper type Research paper

The f‌irst author would like to thank Thammasat University for supporting this research via the

Bualuang ASEAN Fellowship award.

Strong

corporate

governance

27

Received1 July 2020

Revised31 July 2020

Accepted1 August 2020

InternationalJournal of

Accounting& Information

Management

Vol.29 No. 1, 2021

pp. 27-42

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-07-2020-0099

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

1. Introduction

Previous research has examinedcorporate social responsibility (CSR) behavior with respect

to earnings quality via discretionary accruals (Kim et al., 2012;Pyo and Lee, 2013) and the

relationship between CSR and f‌inancial performance (Dhaliwal et al., 2011a;Lev et al.,2010;

Orlitzky et al.,2001). Extending prior research,this study identif‌ies companies f‌iling versus

those not f‌iling CSR reports and examines its relationship to corporate governance.

Consistent with Dhaliwal et al. (2012), this research uses standalone CSR reports as a

measure of voluntary, non-f‌inancial disclosure. This study differs from Pyo and Lee (2013)

because it focuses on US companies (instead of Korean companies) and standalone CSR

reports following or not following the Global Reporting Initiative (GRI) (instead of

standalone CSR reportsfollowing the GRI guidelines). Use of standalone CSRreports results

in a large sample of US companies in a broad range of industries and company sizes than

utilization of only CSR reports following the GRI guidelines (Kolk, 2003;Waddock and

Graves, 1997) or Kinder, Lydenberg, Domini Research & Analytics (KLD) ratings for CSR

activities (Kim et al., 2012).Further, this research provides insight into possible reasons for a

company’s engagement in CSR reporting. Specif‌ically, stakeholder theory is supported

when CSR reportingindicates strong corporate governance.

Stakeholder or legitimacy theory has been used to facilitate understanding of a

company’s engagement in CSR activities (Al Farooqueand Ahulu, 2017;Ballou et al., 2006;

Cho and Patten, 2007;Handelman and Arnold,1999;Hammami and Hendijani Zadeh, 2020).

CSR researchers have debated whether a company engages in CSR reporting to benef‌itits

stakeholders (stakeholder theory) (Jizi et al.,2014) or to hide its poor f‌inancial performance

(legitimacy theory)(Cho and Patten, 2007). Stakeholder theory emphasizes the importance of

keeping a company’s internal and external stakeholders satisf‌ied for benef‌icial outcomes

(Woller, 2007). Engagement in CSR activities benef‌its a company and its stakeholders via

improved economic performance (Al-Tuwaijri et al., 2004;Lev et al., 2010), improved

community or environmental performance (Besley and Ghatak, 2007), low cost of equity

(Dhaliwal et al., 2011a) and decreased analysts’forecast errors (Dhaliwal et al.,2012).

Stakeholder theory posits that a company engaging in CSR reporting builds goodwill with

its stakeholders (Handelman and Arnold, 1999), increases employee job satisfaction and

improves stock performance in the long-run for investors (Edmans, 2011). The positive

effect of CSR reporting on f‌inancial performance is consistent with stakeholder theory (Jo

and Harjoto, 2012). As stakeholders may be receptive toward a company’s involvement in

CSR activities (McWilliams and Siegel, 2001), companies are motivated to practice CSR to

meet the needs of their stakeholders (Ballou et al.,2006;Jizi et al.,2014). Stakeholder theory

postulates that a company engages in CSR reporting to maintain strong corporate

governance, which promotes the interests of its stakeholders (Haniffa and Cooke, 2005;

Waddock and Graves, 1997). In contrast, legitimacy theory supports the notion that a

company discloses positiveinformation about CSR activities to offset negative aspects of its

actual performance (Cho and Patten, 2007;Handelman and Arnold, 1999) to improve its

reputation.

CSR disclosure signals a company’s competitive advantages (Cannon et al., 2019;Lys

et al.,2015;Ryou et al., 2019)and indicates its f‌inancial strength. CSR reporting is associated

with strong corporate governance via improved reporting transparency (Dhaliwal et al.,

2012) and earnings quality (Kim et al.,2012;Pyo and Lee, 2013). Since corporate governance

enhances the interests of stakeholders (Lary and Taylor, 2012), this study uses multiple

measures of corporate governance such as audit quality, audit committee quality, auditor

tenure and auditor dismissal to investigate whether a positive relationship exists between

CSR reporting and corporategovernance.

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