The impact of corporate social responsibility assurance on investor decisions: Chinese evidence

• Author: Hongtao Shen,Huiying Wu,Parmod Chand
• Date: 01 November 2017
• DOI: http://doi.org/10.1111/ijau.12094
• Published date: 01 November 2017

ORIGINAL ARTICLE

The impact of corporate social responsibility assurance on

investor decisions: Chinese evidence

Hongtao Shen

1

|Huiying Wu

2

|Parmod Chand

3

1

Jinan University, Guangzhou, China

2

Western Sydney University, Sydney,

Australia

3

Macquarie University, Sydney, Australia

Correspondence

Huiying Wu, School of Business, Western

Sydney University, Sydney, Australia, Locked

Bag 1797, Penrith South DC, NSW 2751,

Australia.

Email: s.wu2@westernsydney.edu.au

In this experimental study, we examine whether corporate social responsibility (CSR) reports

affect the investment decisions of non‐professional investors in China depending on whether

they are assured, the nature of CSR disclosures (positive versus negative disclosures), and the

type of assurance provider (professional accountants versus industry experts). The results

indicate that CSR assurance increases investor willingness to invest and that the credibility of

CSR information partially mediates the relationship between assurance and investment decisions.

We also note that the effect of CSR assurance on investment decisions is greater when CSR

disclosures are positive than when they are negative. However, the type of assurance provider

does not significantly influence the effect of CSR assurance on investor decision making. China’s

institutional setting features novice investors, government‐affiliated industry expert assurers, and

government‐driven CSR assurance. As a pioneering study on the effects of CSR assurance in

China, our work is a valuable supplement to previous studies, which have largely focused on

developed economies with considerably different institutional settings.

KEYWORDS

Assurance, China,credibility, CSR information, investment decisions

1|INTRODUCTION

Accounting theory defines assurance as “an engagement in which a

practitioner expresses a conclusion designed to enhance the degree

of confidence of the intended users other than the responsible party

about the outcome of the evaluation or measurement of a subject

matter against criteria”(IAASB, 2010). In the application of this

definition to the context of corporate social responsibility (CSR)

reporting, CSR assurance is expected to assist information users with

their decision making by improving the credibility of CSR reports. This

study examines the impact of CSR assurance on the investment

decisions of non‐professional investors and the mediating effect of

the credibility of CSR reports associated with CSR assurance in China.

It also examines whether the relationship between CSR assurance and

the investment decisions of non‐professional investors are influenced

by the nature of CSR disclosures (i.e., positive disclosures versus

negative disclosures), assurers with different professional affiliations

(i.e., professional accountants versus industry experts), and the

interaction between the two. In light of prior literature (Cheng, Green,

& Ko, 2015; Koonce, Williamson, & Winchel, 2010), we define non‐

professional investors as retail investors, as opposed to institutional

investors.

Over the last decade, CSR, which originated in the United States,

has been spreading as an important management concept (Holder‐

Webb, Cohen, Nath, & Wood, 2009; Matten & Moon, 2008) world-

wide, including in Asia (Chapple & Moon, 2005). In its recent survey

of corporate responsibility reporting, KPMG (2015) indicates that

CSR reporting is now standard practice, with a global average reporting

rate of 73% for the 100 largest companies in 45 countries surveyed

(4500 companies in total, referred to as N100 in the survey report).

In particular, Asia‐Pacific has become the leading region for CSR

reporting; 79% of companies in this region report on CSR. The CSR

reporting rate in China’s largest companies has also reached the aver-

age level of the region, well above the average reporting rate of 73%

across the globe. In addition, CSR assurance has been increasingly

endorsed by the global business sector. Although CSR assurance

remains voluntary in most countries, 42% of the N100 companies that

report on CSR are now opting for assurance, based on 2015 data

(KPMG, 2015). More impressively, the assurance rate for the world’s

250 largest companies that issue CSR reports has reached 63%, up

from 30% in 2005. Prior research has also documented a significant

increase in the number of CSR reports and the rapid growth of the

market for assurance on CSR reports (Cohen & Simnett, 2015; Hasan

et al., 2005; Moroney, Windsor, & Aw, 2012).

Received: 9 February 2016 Revised: 1 February 2017 Accepted: 5 February 2017

DOI: 10.1111/ijau.12094

Int J Audit. 2017;21:271–287. © 2017 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/ijau 271

The prevalence of CSR reporting has attracted considerable

research interest in the impact of CSR information. With regard to

the effect of the availability of CSR reports, prior studies have

addressed whether CSR disclosure is associated with market reaction

(Anderson & Frankle, 1980; Cormier, Aerts, Ledoux, & Magnan,

2009; Dhaliwal, Li, Tsang, & Yang, 2011; Ingram, 1978; Patten, 1990;

Richardson & Welker, 2001; Richardson, Welker, & Hutchinson,

1999), non‐professional investors’decision making (Cohen, Holder‐

Webb, Nath, & Wood, 2011), and the accuracy of analyst forecasts

(Dhaliwal, Radhakrishnan, Tsang, & Yang, 2012). Compared to the

extensive amount of research on CSR disclosure in the literature,

research on the impact of CSR assurance on the decision making of

information users is scant (Cheng et al., 2015; Coram, Monroe, &

Woodliff, 2009; Pflugrath, Roebuck, & Simnett, 2011). There are a

number of notable exceptions. Pflugrath et al. (2011) examine whether

assurance affects the assessment of the credibility of CSR reports by

financial analysts from Australia, the United States, and the United

Kingdom. They find that while assurance increases the credibility of

CSR reports in each of the three countries, the level of perceived

credibility varies depending on industry type, analysts’nationalities,

and the assurers’pro fessional affilia tions. Hodge, Subraman iam, and

Stewart (2009) document that the provision of assurance improves

the perceived reliability of environmental and social information by

non‐professional inves tors in Australia and t hat there is an

interaction effect of the level of assurance and type of assurance

practitioner on the p erceived quality of CSR disclosure. Chen g et al.

(2015) show that assurance increases the perceived importance of

CSR information for non‐professional investors in Australia and thus

increases their wil lingness to invest. Co llectively, these studies

demonstrate the importance of CSR assurance for information users.

Research on the value of CSR assurance to Chinese investors is

almost nonexistent. Our study extends this line of research, using an

experiment to examine the effects of CSR assurance on the decision

making of non‐professional investors in China. China presents a novel

and promising environment for CSR research. CSR reporting and assur-

ance are becoming increasingly important to investors because of the

Chinese government’s commitment to address social and environmen-

tal issues. Nonetheless, accounting professionals in China have been

unable to establish a leading position in the CSR assurance market, in

contrast to their counterparts elsewhere. Instead, industry experts, a

unique type of assurer, have dominated the CSR assurance market in

the past decade. In China, most socially responsible behaviors of firms

are government‐driven because of the overwhelming influence of the

government on the economy (Gao, 2009). Government influence on

CSR practices has helped industry experts with governmental or

quasi‐governmental backgrounds to establish a dominant position in

the Chinese CSR market since its inception. This dominance is likely

to increase the influence of CSR assurance provided by industry

experts on the decision making of investors, especially that of novice

investors, because the perceived credibility of industry experts is

strengthened by government endorsement. The importance of this

study is further reinforced by the fact that the vast majority of non‐

professional investors in China are unsophisticated (Ng & Wu, 2007).

These factors collectively motivate us to study the effects of CSR

assurance on the decision making of Chinese investors, with a

particular focus on whether the effect differs when assurance is pro-

vided by accounting professionals versus industry experts.

Our results show that CSR assurance increases the willingness of

non‐professional investors to invest, and that improving the credibility

of CSR information is the mechanism by which CSR assurance impacts

investment decisions. Further, informed by attribution theory, Coram

et al. (2009) show that an assurance report on voluntary nonfinancial

information significantly influences stock price estimates, but only

when the information is positive. Consistent with Coram et al.

(2009), we find that the effect of CSR assurance on investment

decisions is greater when CSR disclosures are positive than when they

are negative, suggesting that the value of CSR assurance is context‐

specific, thus providing additional support to attribution theory.

Contrary to our expectations and prior research (e.g., Pflugrath et al.,

2011) showing that the credibility of a CSR report is greater when it

is assured by an accountant, our results show that the type of assur-

ance provider used for CSR assurance does not have a significant

effect on investor decision making. There are two interrelated reasons

for this. First, although the accounting profession has earned a positive

reputation with its well‐developed body of international standards and

auditing knowledge, industry experts are more strongly established in

the heavily government‐driven CSR assurance market because of their

affiliation with the government. Government influence confers per-

ceived credibility to industry experts, largely compensating for their

poorer auditing knowledge and lower standards. Second is the naiveté

of the vast majority of investors. Because most Chinese investors do

not have sophisticated investment experience, they are likely to be

more subject to government influence. The existing literature suggests

that government intervention in particular can increase the general

level of trust from unsophisticated investors (Zingales, 2009). In the

context of government‐driven CSR in China, novice investors are likely

to have more confidence in CSR reports assured by industry experts

with a government background. Together, government influence and

the lack of expertise of most investors allow industry experts to bene-

fit from investor trust on a similar level to that of accounting

professionals.

This study contributes to the literature in a number of ways. First,

it is an important pioneering study on CSR reporting and assurance in

China. China has a unique institutional setting in which the develop-

ment of CSR practices and the CSR assurance market, including both

the demand and supply sides, are heavily influenced by the govern-

ment. Government involvement and domination largely shape how

CSR assurance is valued by Chinese investors. The results obtained

from China, an emerging economy, are a valuable supplement to previ-

ous studies, which focused largely on developed economies. Specifi-

cally, this study contributes to the research on the assurance effect

of different professional affiliations (e.g., Hodge et al., 2009; Pflugrath

et al., 2011) by providing insights into China’s unique CSR assurance

market. Unlike their counterparts elsewhere, Chinese accountants play

a minimal role in the CSR assurance market, with only about 9% market

share (based on 2013 data). Chinese accountants’major competitors

are industry experts, and they constitute a special type of assurance

provider. These experts are typically affiliated with governmental

agencies or quasi‐governmental institutions. Because the Chinese

government is often a controlling (or large) shareholder of large listed

272 SHEN ET AL.