The surprising link between social responsibility disclosure and profits

Corporations that make social responsibility disclosures beyond the norm have something else in common – a tendency to be more profitable over the long term than the competition.

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Sep 18, 2013

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Corporations that make social responsibility disclosures beyond the norm have something else in common – a tendency to be more profitable over the long term than the competition.

“Furthermore, we show the economic advantage to be greatest for firms in countries with weaker governance and weaker institutions, suggesting incentives for firms in these countries to excel in the corporate social responsibility (CSR) arena and to disclose information about their superior CSR behavior,” says co-author Debra Jeter of Vanderbilt University’s Owen Graduate School of Management in the research paper Are CSR Disclosures Value Relevant? Cross-Country Evidence.

Debra JeterThe paper-in-progress has been presented at several universities and conferences. (pictured-right: Debra Jeter)

According to Jeter, associate professor of accounting at Vanderbilt University’s Owen Graduate School of Management, and co-authors Steven Cahan of University of Auckland Business School, Vic Naiker of Monash University, Chris Van Staden of the University of Canterbury and Charl de Villiers of the University of Waikato, prior studies have already established that better CSR reporting is linked with increased sales, recruitment of superior quality employees, more favorable treatment by regulators and policy makers, and lower cost of equity capital.

CSR reporting is an accounting of a corporation’s work for the common good, including its community involvement, charitable endeavors and policies on issues such as using vendor businesses owned by minorities.

The new study differs in three ways from those done previously. First, it uses samples from 21 countries, while most others concentrated on one. The new study focuses on companies that made CSR disclosures that exceeded expectations based on legal requirements, firm characteristics, etc., instead of those that just met them (or failed to meet them). Finally, the new study relies on a rating by global auditing company KPMG of the top 100 firms in these countries rather than a self-constructed disclosure index.

Corporate-Responsibility-Art-by-iStock“Our findings suggest that firms with higher abnormal (unexpected) CSR disclosure have higher firm value across various categories of industries and firm types, suggesting that CSR concerns are persuasive and that CSR disclosures play a significant role in firm valuation,” the report reads.

“A unit increase in abnormal CSR disclosure sends a stronger signal to market participants in these countries. An alternative, though not unrelated, explanation is that superior CSR disclosure in countries with weaker governance may serve as a signal that the firm is more forthcoming in general. Thus, the market might view the voluntary CSR disclosures as indicative of financial reporting that aligns more closely with the firms’ underlying economic reality.”

Vanderbilt Owen Graduate School of Management is ranked as a top institution by BusinessWeek, the Wall Street Journal, U.S. News & World Report, Financial Times and Forbes. For more information about Owen, visit www.owen.vanderbilt.edu.