Is corporate social responsibility associated with perceived financial reporting credibility

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University of Alabama Libraries

I examine the association between corporate social responsibility (CSR) and the perceived credibility of corporate financial reporting. Using the analyst forecast dispersion and the earnings response coefficient as measures of perceived financial reporting credibility, I evaluate whether market participants (analysts and investors) perceive the financial reporting of socially responsible firms (CSR firms) to be of higher credibility than that of less socially responsible firms (non-CSR firms). First, I investigate the difference of the quarterly analyst forecast dispersion between CSR and non-CSR firms. Then, I separately examine the difference of the three-day window earnings response coefficient around quarterly earnings announcements between CSR firms and non-CSR firms under positive earnings surprises and negative earnings surprises. Results documented in this study indicate that market participants perceive financial reporting of CSR firms to be of higher credibility than that of non-CSR firms by placing a higher level of reliance on CSR firm-provided financial information, resulting in CSR firms having a lower analyst forecast dispersion and a higher earnings response coefficient when earnings surprises are positive. However, when earnings surprises are negative, since the financial reporting credibility is less questionable, the earnings response coefficient of CSR firms is not different from that of non-CSR firm. This study extends a stream of research that seeks to link CSR to firm performance/value by providing empirical evidence on how CSR is related to a firm’s stock price through its perceived financial reporting credibility. By separately examining positive and negative earnings surprises, I expect to provide possible explanations to the conflicting results documented in prior research. This study also extends our understanding of market reactions to firms being socially responsible from investors’ reactions to analysts’ reactions.

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