REPORTING AND TRANSPARENCY. Dr. Shahrokh M. Saudagaran Gary E. and James A. Milgard Endowed Dean

Transcription

1 REPORTING AND TRANSPARENCY Dr. Shahrokh M. Saudagaran Gary E. and James A. Milgard Endowed Dean

2 Outline Impact on Equity Cost of Capital CSR Disclosure and the Audit Function CSR Disclosure and the Analyst Forecast Accuracy Consequences of Mandatory Sustainability Reporting CSR Communication Processes Factors Impacting Disclosure Level

3 Impact on Equity Cost of Capital Dhaliwal, Li, Tsang and Yang (Accounting Review, 2011) Based on a sample of 1,190 stand alone CSR reports between 1993 and 2007, they found that firms with a high cost of equity capital in the previous year (1%) tend to initiate disclosure of CSR activities in current year (5%) and that initiating firms with superior social responsibility performance enjoy a subsequent reduction (1.77%) in the cost of equity capital. Firms exploit the benefit of a lower cost of capital associated with the initiation of CSR disclosure. Initiating firms are more likely than non-initiating firms to raise equity capital following the initiations. Among firms raising equity capital initiating firms raise a significantly larger amount than do non-initiating firms.

4 Impact on Equity Cost of Capital (continued) El Ghoul, Guedhami, Kwok and Mishra (Working Paper, 2010) For a sample of 12,915 U.S. firm year observations from 1992 to 2007, they find that firms with a better CSR score exhibit lower cost of equity capital. Moreover, they find that CSR investment in improving responsible employee relations, environmental policies, and product strategies substantially contributes to reducing firms cost of equity. They also observe that firms in two business sectors, namely, tobacco and nuclear power, face higher equity financing costs.

5 Impact on Equity Cost of Capital (continued) Plumlee, Brown and Marshall (Working Paper, 2009) Based on a sample of 692 firm years over a five-year period ( ), they study the impact of voluntary environmental disclosure and firm value. The firms examined are from five industries in three industry types: Environmentally sensitive Non-environmentally sensitive Environmentally sensitive/regulated They find that the quality of voluntary environmental disclosure is incrementally negatively associated with firms cost of equity capital. This finding was most significant for firms in environmentally sensitive industries.

6 Impact on Equity Cost of Capital (continued) Dhaliwal, Tsang and Yang (Forthcoming Accounting Review, 2011) CSR disclosure is negatively associated with firms cost of equity capital. The negative association association between the cost of equity capital and CSR disclosure is more pronounced in countries that are more stakeholder-oriented. Firm level and country level financial opaqueness are positively associated with firms cost of equity capital. However, such a positive association is weaker when firms publish standalone CSR reports, suggesting a potentially substitutive relation between CSR disclosure and financial disclosure.

7 CSR Disclosure and the Audit Function Chen, Tsang and Yu (Working Paper, 2011) Find that client firms aggregate CSR performance is significantly and negatively associated with all three aspects of auditors decision making: Auditors tend to charge lower audit fees to client firms with superior CSR performance Auditors are less likely to issue a going concern opinion to client firms with superior CSR performance Auditors are less likely to resign from client firms with superior CSR performance

8 CSR Disclosure and the Audit Function (continued) Simnett, Vanstraelen and Chua (Accounting Review, 2009) Study factors associated with decision to voluntarily purchase assurance services and the choice of the assurance provider. Find that companies seeking to enhance the credibility of their reports and build their corporate reputation are more likely to have their CSR reports audited. Companies in stakeholder oriented countries are more likely to have their CSR reports audited. Companies based in countries with weak legal environmental and social risks are more likely to choose a member of the auditing profession as their assurance provider.

9 CSR Disclosure and Analyst Forecast Accuracy Dhaliwal, Radhakrishnan, Tsang and Yang (Working Paper, 2011) They find that the presence of standalone CSR reports is associated with significantly lower analyst forecast error. Such a relationship is strong among countries that are more stakeholder-oriented. The relationship is also strong among firms and countries with more opaque financial disclosure suggesting that social disclosure complements financial transparency.

10 Consequences of Mandatory Sustainability Reporting Ioannou and Serafeim (Working Paper, 2011) Using data for 58 countries, they find that mandatory sustainability reporting effectively promotes socially responsible management practices. Companies implement more ethical practices, reduce bribery and corruption, and managerial credibility increases. These effects are larger for countries with stronger law enforcement and more widespread assurance of sustainability reports.

11 CSR Communication Processes Herremans and Nazari (Working Paper, 2011) They identify three types of communication processes: 1. Transactional -- Inform 2. Transitional -- Respond 3. Transformation -- Involve

12 CSR Communication Processes Transactional -- Inform (one way informational flow) Stakeholders Company Trade Association Communities and Land Owners

13 CSR Communication Processes Transitional -- Respond (two way asymmetrical) Company Communities Land Owners Institutional Investors Social Investors

14 CSR Communication Processes Transformation -- Involve (two way symmetrical) Land Owners Aboriginals Communities Company Social Investors NGOS Institutional Investors

15 Factors Impacting Disclosure Level Bewley and Li (Advances in Environmental Accounting & Management, 2000) Canadian manufacturing firms with more media coverage of their environmental exposure, higher pollution propensity, and more political exposure are more likely to disclose general environmental information. Disclosure of financial information about corporate environmental impact is influenced less by voluntary disclosure factors than is general disclosure. Clarkson, Li, Richardson and Vaswari (Accounting, Organizations and Society, 2007) Using a sample of 191 firms from the five most polluting industries in the U.S. they find a positive association between environmental performance and the level of discretionary environmental disclosures.

16 Factors Impacting Disclosure Level (continued) Hackston and Milne (Accounting, Auditing and Accountability Journal, 2006) Based on a study of New Zealand companies, they find that: Company size and industry are positively associated with level of environmental disclosure. NZ companies with dual (overseas) stock exchange listings are greater disclosers of social and environmental information. Li, Luo, Wang and Wu (Working Paper, 2011) Examining a large sample of Chinese listed firms, they find that: Better performing firms are more likely to disclose CSR activities and to produce higher quality CSR reports compared to their worse performing counterparts. The link between firm performance and CSR disclosure was found to be weaker among state-owned enterprises compared to non-state owned enterprises.