Essays on the Determinants and Consequences of Corporate Social and Environmental Responsibility

ABSTRACT

Corporate social and environmental responsibility is a subject of growing interest, with investors, creditors and analysts relying on it for their decision-making processes and forecasting. This growth of importance in CSR, however, is coupled with complexities and a lack of unified CSR disclosure guidance, which has led users to express suspicion about the issues related to the reliability, comparability, materiality, completeness, relevance and transparency of CSR reporting (Bouten and Hoozée, 2015, Deegan et al., 2006, Ball et al., 2000). Consequently, this thesis extends the existing literature and attempts to bring some clarification towards the determinants and consequences of CSR in three related essays.

The first essay investigates whether the relationship between earnings management (EM) and corporate social responsibility is affected by family-controlled firms for a sample of UK listed firms in the FTSE all-share index during the period 2010 to 2017. The study argues that family-controlled firms, given the nature of its socioemotional wealth, shows an ambivalent tendency in being responsible and irresponsible at the same time. The findings suggest that firms, with lower accrual earnings management (AEM), have a better aggregate CSR rating, which supports the hypothesis of enhanced ethical behaviour. The findings also suggest that if EM comes from real activities, referred to as real activities manipulation (RAM), firms use CSR as an instrument to cover-up misconduct, which supports the hypothesis of opportunistic behaviour. When the sample is divided into family and non-family-controlled firms, family-controlled firms show a similar but stronger relationship. In addition, by splitting CSR scores into environmental, social and governance scores, the relationship between CSR and EM becomes not consistent when compared with each CSR dimension, especially in family-controlled firms. More specifically, in the case of EM, family-controlled firms pay more attention to activities related to external stakeholders (i.e. environment) than non-family-controlled firms. These findings could provide a meaningful tendency towards CSR strategy in family and non-family firms; thus, it would assist British regulations in improving corporate governance rules related to various ownership structures. For policymakers, it is important to confirm that CSR disclosers are congruent with actual activities and not used to mislead stakeholders.

In terms of the theoretical and academic implications, the findings provide supporting evidence on the double-edged sword nature of family-controlled firms, which appears in the case of such RAM and AEM. Therefore, studies of family firms should consider this issue. Moreover, it has been noticed that considering each component of CSR in a model can provide meaningful insight into management behaviour and motivations. Therefore, CSR dimensions should be considered when conducting research related to CSR.

The second essay aims to examine the link between CSR and information asymmetry in a sample of UK family and non-family-controlled firms listed on the FTSE All-Share Index during the period 2010-2017. This essay argues that CSR can play a complementary role in reducing information asymmetry. In addition, family firms, as a case of informed investors, can moderate this relationship. The results show that CSR disclosures significantly decrease the bid-ask spread, which is a proxy for information asymmetry. The findings also show that the relationship between CSR and information asymmetry is weaker in family-controlled firms that non-family counterparts. These findings could improve our understanding of CSR motivation and provide an interpretation of CSR tendency in companies that are controlled by families. Moreover, the role of family-controlled firms in mitigating or exacerbating this relationship could contribute to British regulations on improving corporate governance rules related to various ownership structures. For policymakers, it is important to show that CSR disclosures are congruent with actual activities and not merely used to mislead stakeholders.

The third essay investigates the influence of corporate environmental, social and governance (ESG) performance "strengths" and the controversies "concerns" over decisions to issue sustainability assurance reports. It also tests the influence of ESG performance and controversies on the type of assurance provider, the level of assurance and assurance scope. Building on legitimacy theory, the study suggests that not only could socially responsible companies issue sustainability assurance (SA) reports as a signal of their commitment, but also those involved in ESG controversies could use SA as a tool to gain, maintain or repair legitimacy. The study sample consists of 5784 firm-year observations from European companies listed in the STOXX Europe 600 index over the period 2011-2018. The results show that both ESG performance and controversies have a significant and positive influence on decisions to issue SA reports.

Furthermore, firms with a higher ESG performance tend to choose higher assurance scopes and levels, meaning they follow a holistic CSR strategy. These findings reveal the tendencies towards issuing SA reports and address several concerns noted in prior studies that the quality and process of SA reporting can be affected by opportunistic managerial behaviour. Therefore, future studies on CSR and SA reporting should not tacitly assume that SA reports are issued only by socially responsible companies, but also that irresponsible companies could obtain SA reports as a camouflaging strategy. Moreover, the findings of this study could also assist stakeholders and decision-makers in differentiating between such symbolic and substantial reports. For standard-setters and policymakers, it is important to pay more attention to the independence of assurance providers and to ensure that the management does not influence SA process.