Corporate social responsibility research in accounting

Corporate social responsibility research in accounting

Journal of Accounting Literature 34 (2015) 1–16 Contents lists available at ScienceDirect Journal of Accounting Literature journal homepage: www.els...

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Journal of Accounting Literature 34 (2015) 1–16

Contents lists available at ScienceDirect

Journal of Accounting Literature journal homepage: www.elsevier.com/locate/acclit

Corporate social responsibility research in accounting Xiaobei ‘‘Beryl’’ Huang a, Luke Watson b,* a

University of International Business and Economics, Beiing, China Fisher School of Accounting, Warrington College of Business Administration, University of Florida, PO Box 117166, Gainesville, FL 32608, United States b

A R T I C L E I N F O

A B S T R A C T

Article history: Received 4 March 2015 Accepted 5 March 2015 Available online 14 March 2015

We review research on corporate social responsibility (CSR) published in 13 top accounting journals over the last decade. We begin with a brief discussion of the data that archival researchers have used to measure CSR. Next, we conduct our review in four parts: (1) determinants of CSR; (2) the relation between CSR and financial performance; (3) consequences of CSR; and (4) the roles of CSR disclosure and assurance. We summarize the accounting literature in these areas and comment on how accounting researchers can use their skill sets with regard to specific issues. Within each area, we present some suggestions for future CSR research in accounting. ß 2015 University of Florida, Fisher School of Accounting. Published by Elsevier Ltd. All rights reserved.

Keywords: Corporate social responsibility Sustainability Environmental Disclosure Assurance

1. Introduction Recently, the academic community has taken great interest in research on corporate social responsibility (CSR). A significant body of evidence across business research disciplines examines questions such as which types of firms engage in CSR, and how CSR shapes firm decisions and outcomes. Yet to our knowledge there is no recent, broad review of CSR research published in the

* Corresponding author. Tel.: +1 3522730208. E-mail addresses: [email protected] (X.&. Huang), [email protected]fl.edu (L. Watson). http://dx.doi.org/10.1016/j.acclit.2015.03.001 0737-4607/ß 2015 University of Florida, Fisher School of Accounting. Published by Elsevier Ltd. All rights reserved.

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preeminent accounting journals, despite the fact that corporate social responsibility has recently risen substantially in prominence within accounting research.1 In this paper we review recent corporate social responsibility research in accounting, focusing on studies published in 13 top accounting journals.2 We define corporate social responsibility as firms’ efforts to surpass compliance by voluntarily engaging in ‘‘actions that appear to further some social good, beyond the interests of the firm and that which is required by law’’ (McWilliams & Siegel, 2001, 2006). This means incorporating economic, legal, ethical, and philanthropic responsibilities into corporate decision making (Carroll, 1979), and it represents a potential departure from shareholder theory, in which firms strive to maximize shareholder wealth within legal constraints and basic social norms (Friedman, 1970). Shareholder theory has been a dominant assumption throughout research in economics, finance, and accounting. Corporate social responsibility is intriguing because it suggests that firms are motivated to make decisions that are not always obviously shareholder-wealth-maximizing. Under the stakeholder theory suggested by some CSR scholars, firms strike a balance between shareholder interests and the interests of other stakeholders (Carroll, 1991).3 This tension generates important questions that accounting researchers have a voice in answering. Corporate social responsibility is closely related to corporate sustainability. KPMG (2013) reports that 14% of the world’s largest 100 firms use the term ‘‘corporate responsibility,’’ 25% of firms use ‘‘corporate social responsibility,’’ and 43% of firms use ‘‘sustainability.’’ However, in the articles included in this review, ‘‘corporate social responsibility’’ is the predominant nomenclature and we use it throughout this paper.4 We also mention environmental research where we feel such research contributes to the overall CSR literature, as attention to the environment is one element of CSR. Other elements of CSR include community relations, controversial industry/product involvement, corporate governance, diversity, employee relations, human rights, and product-related issues. From this list it should be clear that CSR includes a broad spectrum of activities that can affect a wide range of stakeholders positively or negatively. This expansive definition gives rise to measurement issues that make some CSR questions challenging, an issue we discuss in greater detail in the body of this paper. Integrated reporting (IR) is another CSR-related concept that is rising in popularity, particularly given the Johannesburg Stock Exchange’s IR mandate. An integrated report ‘‘is a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium, and long term’’ (IIRC, 2013). Scholars have suggested that CSR reporting may evolve into IR (Adams & Simnett, 2011). While no published studies of IR met our search criteria (discussed in the next paragraph), Volume 27, Issue 7 of the Accounting, Auditing & Accountability Journal was dedicated to IR and contained a review of the IR literature (de Villiers, Rinaldi, & Unerman, 2014). We avoid overlapping with their review, but emphasize that IR remains an area of opportunity for accounting researchers. An important limitation to this review is that we have focused on studies published in the last decade in 13 prominent accounting journals. We identified 47 original research papers that fit these criteria, listed by research methodology, topic, journal, and year in Table 1. While the topical breakdowns are subject to judgment, the plurality of CSR research in accounting is on financial accounting-related issues. Meanwhile, there are several studies of auditing, managerial, and taxrelated issues. Of the 13 journals we searched, the most prolific outlets for CSR research have been Accounting, Organizations and Society, Auditing: A Journal of Practice & Theory, Journal of Accounting and Public Policy, Management Accounting Research, and The Accounting Review. We also direct our readers to the following four articles that review CSR research in different scopes and attempt to avoid 1 Scholars in other fields have published broad reviews of CSR research (i.e. Aguinis and Glavas, 2012). While not intended to be a review piece, Moser and Martin (2012) provide useful discussion and commentary on some CSR research in accounting. Similarly, Ramanna (2013) proposes a helpful framework for CSR research in accounting. 2 The journals include Accounting, Organizations and Society; Auditing: A Journal of Practice & Theory; Behavioral Research in Accounting; Contemporary Accounting Research; Journal of Accounting and Economics; Journal of Accounting Literature; Journal of Accounting and Public Policy; Journal of Accounting Research; Journal of the American Taxation Association; Journal of Management Accounting Research; Management Accounting Research; Review of Accounting Studies; and The Accounting Review. 3 Entire papers are devoted to CSR theory, e.g. McWilliams and Siegel (2001, 2006). 4 van Marrewijk (2003) discusses proposed distinctions between CSR and corporate sustainability.

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Table 1 Count of published papers cited. Panel A: by methodology and topical area Methodology

Topical area Financial

Auditing

Tax

Managerial

Archival Experiment Other

10 3 1

3 3 2

3

2 2 5

Environmental 8

Other

Total

2

3

26 8 13

Total

14

8

3

9

10

3

47

Panel B: by Journal Accounting, Organizations and Society Auditing: A Journal of Practice & Theory Behavioral Research in Accounting Contemporary Accounting Research Journal of Accounting and Economics Journal of Accounting Literature Journal of Accounting and Public Policy Journal of Accounting Research Journal of the American Taxation Association Journal of Management Accounting Research Management Accounting Research Review of Accounting Studies The Accounting Review Total

8 6 2 1 2 0 9 0 1 0 9 0 9 47

Panel C: by year 2004 2005–2008 2009 2010 2011 2012 2013 2014 2015/in press

1 0 2 3 5 7 16 5 8

Total

47

This table presents counts of CSR- and environment-related original research papers published in the listed journals and cited in this paper. Panel A presents the counts by topical area and methodology, while Panel B presents the counts by journal and Panel C presents the counts by year. Due to many papers overlapping in two or more topical areas, the topical area counts are approximate and reflect our discretion in classifying each paper.

significant overlap with them. First, Gray and Laughlin (2012) review CSR research in accounting but focus on a different set of journals, with Accounting, Organizations and Society being the primary overlap between their review and ours. Second, Cohen and Simnett (2015) review studies of CSR assurance, which overlaps somewhat with Section 6 of this paper. Third, Gray, Kouhy, and Lavers (1995) review earlier studies on CSR reporting. Fourth, Berthelot, Cormier, and Magnan (2003) review earlier literature on environmental disclosure. There is a natural link between CSR and accounting because the accounting profession has a general responsibility for the measurement, disclosure, and assurance of information, including CSRrelated information. As CSR became nearly ubiquitous in modern business over the last few decades (KPMG, 2013; Pederson, 2006), periodic CSR reporting became popular for larger businesses. Accounting professionals have the opportunity to participate in the creation, assurance, issuance, and analysis of CSR reports. Further, since CSR began as a form of self-regulation and in some cases even presently lacks a formal regulatory structure, responsibility for CSR reporting falls partly on accounting professionals. Thus, accounting plays an important role in corporate social responsibility.

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In the next section we briefly discuss the data that archival researchers have used in the CSR arena to help new CSR scholars understand what is available. In Sections 3–6, we organize accounting research on CSR according to four general themes. We discuss the state of the literature within each theme and discuss directions for future research. Section 3 discusses accounting research on the determinants of CSR activity. Section 4 discusses accounting research on the relation between CSR and financial performance. Section 5 discusses accounting research on the consequences of CSR. Section 6 discusses accounting research on CSR disclosure and assurance. Section 7 concludes. 2. Data Archival researchers have measured CSR using a variety of datasets and methods. The most prominent CSR dataset used in accounting literature and elsewhere is MSCI ESG STATS (formerly known as KLD). MSCI analysts rate firms using binary scores across a variety of subcategories (known as either ‘‘strengths’’ or ‘‘concerns’’) within major categories such as community, corporate governance, diversity, environment, products, and controversial industry involvement. MSCI coverage begins in 1991 with about 600 firms, rates approximately 2400 U.S. firms from 2003 onward, and has also begun rating the 2600 largest non-U.S. firms since 2013. Thomson Reuters ESG Research Data (formerly known as ASSET4) is another popular CSR dataset. This dataset began with the Russell 1000 firms in 2002 and now contains ratings for over 4000 companies globally on over 500 variables. Another broad set of CSR ratings come from the Financial Times Stock Exchange (FTSE), which rates a global set of publicly traded firms on over 300 CSR variables from 0 to 5. FTSE adds firms scoring 3.5 or higher to its FTSE4Good Index. It also applies exclusionary screens to firms that manufacture certain controversial products (FTSE, 2014). Another source of CSR data is lists of top CSR performers. Such lists include the Calvert Social Index, the FTSE4Good Index, the Dow Jones Sustainability Indices (global or by geographic region), and Innovest’s ‘‘Top 100 Leaders in Sustainability.’’ Researchers typically use a binary variable to indicate whether a sample firm is a top CSR performer according to these lists. One important issue with CSR data is that the ratings of different institutions exhibit a worrisome degree of disagreement, suggesting that the ratings have low validity. Chatterji, Durand, Levine, and Touboul (2015) compare ratings from ASSET4, Calvert, DJSI, FTSE4Good, Innovest, and MSCI and find that the mean correlations between a given index and the other indices range from 0.13 to 0.52. They find, however, that the correlations between a given US (European)-based rater’s ratings and the ratings of other US (European) raters are highly correlated, suggesting that the agreement of the ratings depends on the raters’ location. This could stem from different CSR norms in each geographic area. Chatterji et al. (2015) highlight the need for further formal validity tests of CSR ratings. Future research in accounting and other fields may provide ex post validation of these CSR measures. The granularity of CSR ratings makes this possible. For example, for firms that a CSR rater rates high on social responsibility of their tax planning, one might expect such firms to avoid unfavorable tax settlements and revelations of tax shelter involvement. Furthermore, disagreement of CSR ratings may be rooted in the difficulty that firms have in measuring CSR. Virtanen, Tuomaala, and Pentti (2013) show that underdeveloped performance indicators hamper CSR performance management. As a final note about CSR data, the limitations that archival researchers face often do not apply to researchers who conduct experiments. Experimental settings are ideal for overcoming the limitations of CSR data, and already many CSR experiments have been published. 3. Determinants of corporate social responsibility Despite the widespread popularity of CSR, there remains significant variation in the observed levels of CSR activity and disclosure both across and within industries (Cuganesan, Guthrie, & Ward, 2010). The line of research on determinants of CSR provides explanations for why such variation exists. Since the determinants of CSR range far beyond accounting, a large body of this literature exists outside of accounting. Still, accounting researchers have documented some important findings that we summarize in this section.

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3.1. Stakeholder efforts Part of managers’ motivation for CSR is intrinsic. Parker (2014) interviewed four leading industrialists in Britain and found that managers’ personal philosophical, religious, and accountability orientations can shape their firm’s CSR orientation. However, there are also important external motivations for CSR. Outside stakeholders help motivate firms to undertake CSR activities. Based on a series of interviews with key executives in a Canadian multinational firm, Rodrigue, Magnan, and Boulianne (2013) document how an organization integrated stakeholder concerns into its strategic performance measurement system. From the interviews, they find that pressure from various stakeholders has a great impact on the firm’s environmental strategy. Stakeholders such as clients and creditors request a sound environmental management system to ensure environmental sustainability while the firm remains competitive on product quality, price, and supply chain. Stakeholders’ influence on environmental strategy can further affect the firm’s choice of environmental performance indicators, which is critical in the sense that ‘‘what gets measured gets done.’’ Similarly, Pondeville, Swaen, and Ronge´ (2013) document that pressure from market, community, and organizational stakeholders has a strong influence on the development of firms’ strategy and environmental management control systems. Last, Contrafatto (2014) shows that increasing public pressure and expectations for CSR motivates firms to establish a common definition of CSR, which is a critical early step in implementing CSR reporting. Aside from pressure from outside stakeholders, managers have their own reasons to allocate resources to CSR. An increasing number of firm managers want to create value for shareholders and also become eco-efficient to bring sustainable value to stakeholders (Figge and Hahn, 2013), despite the fact that these two goals are not always congruent. Competition from peers is one motivation for managers to undertake CSR efforts because managers have a desire to be industry leaders with respect to environmental efforts and CSR performance (Rodrigue et al., 2013). 3.2. The institutionalization of CSR Gray (2010) argues that a deep understanding of CSR is required to understand how to account for it and report on it. Several other studies address the process by which CSR accounting became institutionalized. Moore (2013) conducts a case study of an Australian public sector water business over a ten-year period. He argues that the institutionalization of financial and cost accounting practices and environmental and sustainable management practices depends on the ‘‘interrelationships of competing factors such as external and internal tensions and virtual structures of signification, legitimation and domination.’’ Contrafatto (2014) conducts a longitudinal case study of an Italian multinational company in the energy sector and analyzes social and environmental reporting (SER). The study identifies a three-step process that makes SER institutionalized: common perception construction, practicalization, and reinforcement. Bouten and Hooze´e (2013) conduct interviews with managers of four Belgian companies and conclude that environmental reporting and disclosure are shaped by disturbances that occur in the natural environment, such as regulation and social pressure. However, the institutionalization of SER also faces constraints. For example, Contrafatto and Burns (2013) suggest that profit maximization limits the role of CSR concerns in business operations. This tension between CSR objectives and traditional performance objectives is an important point for CSR researchers to consider. 3.3. CSR effort and management control systems Recent literature suggests that integrating CSR elements into organizational management leads to improved control over corporate CSR objectives. Eco-control is the application of financial and strategic control methods to environmental management (Henri & Journeault, 2010). Based on a survey of Canadian manufacturing firms, Henri and Journeault (2010) find that eco-control lacks a direct influence on financial performance, but has a mediating effect on financial performance through its positive relations with environmental exposure, public visibility, environmental concern, and firm

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size. This finding implies that integrating environmental dimensions into management control systems may help firms increase both environmental performance and financial performance. Gond, Grubnic, Herzig, and Moon (2012) further study the integration of sustainability elements into organizational strategy through management control systems (MCSs) and sustainability control systems (SCSs) based on Simons’ levers of control framework (Simons, 1995). They argue that the strategy-making function of control systems can help integrate CSR into the firm’s organizational strategy; also, control systems can shape the implementation of such strategies. Similarly, Arjalie`s and Mundy (2013) use Simons’ levers of control framework to show how management control systems can be used to manage CSR strategy. They document that by mobilizing controls, MCSs can help firms identify CSR-related risks and opportunities as well as provide formal processes to guide employees to achieve CSR objectives. Finally, corporate strategy itself provides an impetus to incorporate CSR into MCSs. Using a survey of 256 Belgian manufacturing firms, Pondeville et al. (2013) find that firms with more proactive environmental strategies are more likely to develop environmental MCSs. However, they also find that perceptions of environmental uncertainty have a negative impact on the development of proactive environmental strategies, environmental information systems, and formal environmental management control systems. 3.4. Directions for future research Research on determinants of CSR is important on its own, but beyond that it is particularly intriguing for its potential to add to the dialog on the relation between CSR and financial performance. The ex ante motivation for CSR efforts could affect the relation between CSR effort and firm performance. For example, if a firm’s incentive in undertaking CSR is for the benefit of society rather than shareholders, one can predict that there is no significant relation or even a negative relation between CSR and firm future performance because CSR expropriates the firm’s resources (Moser & Martin, 2012). If instead CSR is a cost of market entry, there is also likely to be little return to CSR. Alternatively, if CSR is part of a competitive strategy (Flammer, 2015b), firms that execute the strategy effectively should experience a positive relation. Understanding what drives firms to conduct CSR can therefore add context to the relation between CSR and financial performance. We are also interested in further research on the role of accountants in driving CSR activity. As accountants help choose key CSR performance indicators, prepare CSR reports, and provide CSR assurance, their choices are likely to affect the firm’s CSR activities. This provides an avenue for accountants to directly and indirectly affect CSR. We believe this role is intriguing because it suggests an unintended influence: accountants are engaged for the preparation and assurance of reports, for example, but they are not necessarily expected to help make CSR strategy choices. To the extent that accountants influence CSR strategy, performance, and/or expenditures, there may be an unintended influence that arises through the measurement, reporting, and assurance roles that accountants play. Along similar lines, which firms hire Chief Sustainability Officers (CSOs) or equivalent officers and what effects do CSOs have? Serafeim and Miller (2015) introduce these individuals who are responsible for overseeing firms’ CSR efforts, but much more remains to be known. Researchers active in this area must be careful to mitigate the selection concerns that often accompany studies of executives as described by Tucker (2010). Additional research on the determinants of or motivation for CSR effort will help answer the question of which firms make meaningful efforts to be socially responsible and which firms are successful in developing a socially responsible reputation. Evidence on the CSR input/output relation would be beneficial in identifying which CSR efforts produce strong CSR performance, potentially helping firms identify and employ more effective CSR resource allocation decisions. Corporate altruism is a natural question that arises when considering the motivation for CSR. Is there an altruistic motive for CSR? Would CSR occur naturally, that is, apart from market demands or stakeholder demands? Which firms engage in altruistic CSR and which firms engage in CSR as a result of market or stakeholder demands? A Friedman (1970) view of CSR would likely contend that any CSR activity that yields zero or negative return is altruistic. Findings of no return or negative return to CSR, however, are not ipso facto evidence of corporate altruism, because CSR could be

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motivated by failed attempts to increase profits. Likewise, CSR could be seen as a social norm that is necessary despite its cost. Disentangling altruism from these alternative explanations is difficult because altruism is an extremely difficult concept to measure. Recently, researchers have begun to study managerial altruism and its link to CSR (Balakrishnan, Sprinkle, & Williamson, 2011; Borghesi, Houston, & Naranjo, 2014). Managerial altruism may be a useful starting point for further research in this area. A final area of CSR determinants that warrants further attention is the faction of socially irresponsible firms. While some research has studied so-called ‘‘sin’’ firms that are involved in controversial industries (Kim & Venkatachalam, 2011), equally interesting is the fact that within noncontroversial industries there is wide variation in CSR. What allows or motivates certain firms to be socially irresponsible? What factors create a different social norm for these firms, or, if there is not a different standard, what is the cost that they pay for disregarding social norms? 4. CSR and financial performance 4.1. Prior literature Shareholder theory states that managers should behave in the interest of shareholders; thus, in order to be justified, CSR must ultimately benefit shareholders. This theory seems to conflict with CSR, which is ostensibly an effort to address the needs of non-shareholders. Moreover, the costs and benefits of CSR have been difficult to identify conclusively. However, evidence suggests that the benefits of stakeholders and shareholders are not necessarily in conflict because CSR can enhance firms’ reputation, brand, and trust, attracting customers and employees and ultimately increasing profitability and firm value (Jones, 1995; Porter & Kramer, 2006, 2011). As a result, even CSR efforts that address ethical or philanthropic concerns may maximize shareholder wealth. Margolis, Elfenbein, and Walsh (2009) review 251 published papers, books, dissertations, and working papers that investigate the relation between CSR and accounting-based or market-based measures of financial performance. They conclude that there is a small positive relation between CSR and financial performance and that the size of this relation has become even smaller in recent years, which could be a real effect or merely a result of improvements in methodology. Further, the evidence is not universally supportive of this relation. For example, Elliott, Jackson, Peecher, and White (2013) use an experiment to investigate how investors value a firm’s fundamental value given its CSR performance, finding that firm value is negatively associated with CSR. However, the relation diminishes with explicit assessment of CSR performance, indicating an unintended and causal effect of CSR on firm value for investors that do not explicitly assess CSR performance. The results of the meta-analysis in Margolis et al. (2009), while informative of the overall conclusions of past literature, should be taken with caution because the individual studies analyzed therein vary widely on many key factors such as time period, measures of CSR and financial performance, and research design. We encourage consideration of individual studies with careful, clever research design such as Flammer (2015a), which uses CSR-related shareholder proposals to simulate random assignment of CSR activities and finds that CSR does indeed lead to positive stock returns and earnings performance. One key issue for studies of CSR and financial performance to consider is reverse causality; that is, CSR is a product of financial performance (Hong, Kubik, & Scheinkman, 2012). Lys, Naughton, and Wang (2014) investigate this possibility by decomposing CSR into two components to identify whether CSR is an investment or a signal. They begin by showing evidence of a positive relation between CSR and future earnings and cash flows from operations, suggesting that CSR is not mere charity. They find no statistically significant relation between CSR and stock returns. They then show that the positive relation between CSR and earnings performance is driven by deviations from expected CSR. This is consistent with managers increasing CSR to signal their private information about strong expected future financial performance, but Lys et al. (2014) argue that this effect has been misinterpreted by prior studies as evidence of a positive effect of CSR on financial performance. In other words, the link between CSR and financial performance is not causal.

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4.2. Directions for future research While there is considerable evidence about the relation of CSR and financial performance, the results are mixed, making it difficult to draw a definitive conclusion. At the heart of the issue is whether firms are successful because they are socially responsible or whether CSR is merely something that successful firms do. This issue is a classic endogeneity problem. Accounting researchers are accustomed to answering complex questions where there is endogeneity between financial performance and the construct of interest. In particular, studying earnings is a promising avenue by which to begin to answer the CSR-financial performance question because it avoids using market perceptions as performance measures as in studies that use firm value or stock returns. Even if some market participants properly value CSR, other participants may unduly value CSR (Moser & Martin, 2015), thereby distorting the relation. Careful measurement of the costs and returns to CSR is necessary for conclusive analysis of the relation between CSR and financial performance. Both of these measurements are difficult, hence the long history of the question. Accounting researchers can use their measurement expertise to provide more definitive evidence on this question and other questions that depend on precise measurement of the costs of and returns to CSR. Corporate social responsibility transfers firm resources to non-shareholder stakeholders. An important question is what the firm receives in return for this transfer. On one hand, the positive sentiment a firm gains by engaging in CSR may produce returns to shareholders in the form of increases in sales, earnings, and stock price. On the other hand, the transfer of resources away from the firm and its shareholders appears to be an expropriation of shareholder wealth. This transfer could jeopardize the firm’s longevity. To limit the negative impact of CSR expenditures, firms might conduct their CSR activities using slack resources. In this vein, Watson (2015) finds that even socially responsible firms reduce their tax payments when earnings performance is weak. This finding is consistent with the idea that socially responsible firms’ resource transfers to non-shareholders vary with resource availability; however, future research could explore this question further. Some scholars view CSR as a core expenditure rather than a discretionary one (Ballou, Casey, Grenier, & Heitger, 2012), suggesting that CSR is necessary even under scarce resources.5 A host of related questions could be interesting in exploring how firms expropriate resources while remaining viable. For example, to what extent does CSR help sustain the corporation itself versus its role as an aid to the world outside the firm? How do non-tax CSR expenditures vary with financial performance? Do creditors face increased risk as CSR efforts consume cash? These questions lead us directly into the next section in which we discuss the consequences of CSR. 5. Consequences of corporate social responsibility 5.1. Prior literature Much of the recent literature on the consequences of CSR provides evidence of mechanisms by which CSR performance relates to firm value. Cho, Lee, and Pfeiffer (2013) examine the relation between CSR performance and information asymmetry directly, demonstrating that CSR performance is negatively related to information asymmetry as proxied for by bid-ask spread. They find that both negative and positive CSR activities can reduce information asymmetry. This association only exists in firms with fewer institutional investors, suggesting that informed investors will act upon information ˜ oz (2013) examine the relation pertaining to CSR performance. Matsumura, Prakash, and Vera-Mun between carbon emissions and firm value. They find that firm value decreases by $212,000 for every thousand metric tons of carbon emissions. In addition, when firms do not disclose carbon emissions, firm value decreases by more than that of disclosing firms. Kim, Park, and Wier (2012) show a positive relation between CSR and earnings quality. Specifically, strong CSR performers are less likely to manage earnings through discretionary accruals, less likely to manipulate real operating activities, and less likely to be subject to SEC investigations. Barton, Kirk, 5

This hints at the need for additional research on CSR cost behavior, which we discuss in Section 5.2.

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Reppenhagen, and Thayer (2015) add depth to this conclusion with evidence that socially responsible firms manage earnings in an attempt to meet analysts’ forecasts and reduce financing and tax costs, as opposed to rent extraction. This evidence is consistent with socially responsible firms exhibiting more responsible motives for earnings management. Another mechanism by which CSR can improve financial performance is by bolstering the firm’s reputation. For instance, CSR can repair reputational damage following earnings restatements (Chakravarthy, deHaan, & Rajgopal, 2014). Along similar lines, Guiral (2012) finds that positive CSR activities improve auditors’ perceptions of firms’ internal control systems, though negative CSR activities do not affect such perceptions. These reputational effects may be linked to the ethical standards that exist in firms that care about CSR. Gao, Lisic, and Zhang (2014) show that insiders of CSR-conscious firms are less likely to engage in insider trading, consistent with CSR-conscious firm insiders adhering to a stricter code of ethics than non-CSR-conscious insiders. The relation between CSR and tax avoidance has drawn considerable interest because both CSR and tax payments distribute resources to non-shareholders and involve some notion of corporate citizenship. Hoi, Wu, and Zhang (2013) find that negative CSR activities are associated with tax avoidance. In apparent contrast, Davis, Guenther, Krull, and Williams (2013) find that socially responsible firms are associated with tax avoidance, suggesting that managers do not view tax as part of CSR. Watson (2015) provides some degree of reconciliation for these findings by showing that the link between CSR and tax avoidance depends on earnings performance: both socially responsible and socially irresponsible firms avoid more tax when earnings performance is poor, but these effects weaken and in most cases disappear when earnings performance is strong. In a somewhat related question, Balakrishnan et al. (2011) use an experiment to investigate the effect of non-shareholder distributions on internal stakeholders. They find that an employer’s corporate charitable giving increases altruistic employee contributions to their employer, despite reducing the amount that the employer can share with its employees. This effect attenuates only at very high levels of corporate giving. It is interesting evidence of employee altruism arising as a product of corporate altruism. 5.2. Directions for future research Beyond the consequences of CSR for financial performance discussed in Section 4, there are several other avenues for future research on the consequences of CSR. Aside from the positive effects of CSR, a reputation for social responsibility can increase the cost of actions that are inconsistent with the firm’s socially responsible image. There is little known evidence of such costs, perhaps because they do not exist or perhaps as a result of confirmation bias in which individuals who believe a firm is socially responsible ignore information that is inconsistent with their belief and seek out information that reinforces their belief. A similar story could be true for firms that individuals perceive as socially irresponsible. Carefully documenting the existence and extent of confirmation bias is another area where accounting researchers can contribute to the CSR and psychology literatures. Accounting researchers have documented some important benefits to CSR, as described above, but what are the costs associated with CSR? Future research on the consequences of CSR should continue to improve measurement of CSR expenditures. Collaboration with industry would be helpful in identifying how firms track their CSR-related costs and benefits (e.g. Ballou et al., 2012; Trotman & Trotman, 2015). A field study and/or survey would be appropriate for this type of research question. Further investigation of the cost behavior of CSR expenditures would be interesting. Accounting researchers who understand cost behavior could use their skills to make great improvements in this area, ultimately helping answer the question of what firms are spending on their CSR projects. CSR projects are often long-lived and may be difficult to cancel once the firm has announced its commitment. Therefore, CSR-related expenditures are likely to be highly sticky. Future research documenting CSR cost stickiness and explaining its implications could be insightful. Another CSR consequences question is the deadweight loss of CSR. If CSR expenditures distort corporate decisions in a way that produces a deadweight loss, research on the size and incidence of this loss would be valuable. Dutta, Lawson, and Marcinko (2013) present a helpful framework for variance analysis of costs and benefits related to CSR activities. Finally, we would like to see more evidence on the indirect

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costs of CSR. Resources that are spent on CSR could presumably be put to other productive uses. What is the opportunity cost of CSR? 6. CSR disclosure and assurance 6.1. Prevalence and regulation The disclosure literature suggests that voluntary forecasts can reduce information asymmetry, helping firms reduce their cost of capital, avoid negative shocks to stock price, and aid analyst forecasting (e.g. Healy & Palepu, 2001; Hirst, Koonce, & Venkataraman, 2008). As another key source of private information, CSR disclosure has the potential to play a similar role in capital markets. Firms are eager to discuss and disclose their CSR efforts to the public because there is an obvious marketing element to CSR. Nearly every corporate website now contains a page dedicated to the firm’s CSR or sustainability efforts, and KPMG (2013) reports that 71% of 4100 large firms worldwide prepare CSR reports, including 93% of the largest 250 firms. Accounting researchers are interested in various forms of CSR reporting and disclosure because the reports contain material information. While CSR activities are often considered a form of self-regulation, government- and stock exchange-driven regulations are formalizing CSR disclosure for many firms. The European Union (EU) recently adopted a Directive requiring large companies listed on EU-regulated markets to make disclosures relating to environmental, employee, human rights, corruption, and diversity matters (European Commission, 2014). The EU joins China, Malaysia, South Africa, and Taiwan in requiring some form of CSR reporting. Currently, there is no CSR reporting mandate in the United States, although US-based companies may be affected by mandates in other markets if they fall subject to other jurisdictions’ rules.6 Further, the United Nations (UN) has engaged itself in the CSR arena, raising questions about the scope of its influence. The United Nations Global Compact (UNGC) is the UN’s CSR initiative for development, implementation, and disclosure of CSR activities. As the entities above require some form of reporting, the question of how and what to report has arisen. Some organizations, such as the EU, list explicitly what is required, thereby creating their own de facto reporting standards. Meanwhile, third parties also promote their own reporting standards. The Global Reporting Initiative (GRI, with a global focus) and Sustainability Accounting Standards Board (SASB, with a United States focus) are among the most prominent of these organizations. In effect, these organizations and countries create CSR reporting standards similarly to how the FASB creates US GAAP for financial reporting. Just as financial reports are subject to external assurance, there is external assurance of CSR reports (GRI, 2013). CSR assurance is not mandatory in the United States nor in most other countries. Nonetheless, KPMG reports that 59% of the world’s largest 250 companies obtain CSR assurance, with two-thirds of companies engaging accounting firms for this purpose. We continue our discussion of CSR disclosure and assurance in the next section. 6.2. Prior literature Early research by Anderson and Frankle (1980) demonstrated that the disclosure of social information can increase the firm’s stock price, suggesting that such disclosures have information content. Plumlee, Brown, Hayes, and Marshall (2015) and Al-Tuwaijri, Christensen, and Hughes (2004) indicate that voluntary environmental disclosures are associated with higher firm value after controlling for accounting performance. Griffin and Sun (2013) find that the stock market reacts positively to voluntary CSR disclosure. CSR disclosures also affect analyst and investor behavior. Dhaliwal, Li, Tsang, and Yang (2011), Dhaliwal, Radhakrishnan, Tsang, and Yang (2012) show that CSR disclosures can attract more analysts and institutional investors and reduce analyst forecast error, prompting a reduction in the cost of equity capital. They suggest that CSR disclosures can be viewed as a substitute for financial disclosures in terms of improving a firm’s information environment (Dhaliwal, Li, Tsang, & Yang, 2014). Lanis and 6

For example, U.S. firms whose stock is traded on European exchanges are subject to the EU Directive.

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Richardson (2012) show that higher levels of CSR disclosure are associated with lower tax avoidance, suggesting increased transparency. However, Cohen, Holder-Webb, Nath, and Wood (2011) conduct a survey of retail investors and find that these users do not place great value on CSR information relative to economic and governance information. In related work, Cheng, Green, and Ko (2015) show that investors value CSR only when its measurement pertains closely to the firm’s core strategy. Clarkson, Fang, Li, and Richardson (2013) show that voluntary environmental disclosures can increase firm value. They argue that voluntary environmental disclosures can provide incremental information about the firm’s competitiveness and expected future firm performance. Thus, environmental disclosures can be seen as a ‘‘signal’’ to investors as in Lys et al. (2014). Clarkson et al. (2013), however, do not find an association between environmental disclosures and the cost of capital. The difference in findings between Clarkson et al. (2013) and Dhaliwal et al. (2011, 2012) suggests that CSR disclosure affects cost of capital in a way that environmental disclosure alone does not. Recent evidence implies that CSR disclosure mediates the relation between CSR performance and financial performance. Dhaliwal et al. (2011) document that the effect of CSR disclosures on the cost of equity capital exists only in firms with strong CSR performance. Matsumura et al. (2013) provide evidence that the decrease in firm value due to carbon emissions is smaller in firms with carbon disclosure than in non-disclosing firms. Taken together, the results of these studies indicate that CSR disclosure rewards firms for good CSR performance while mitigating the penalty to firms with poor CSR performance. This observation is consistent with stakeholders viewing CSR disclosure as a commitment to social investment, thereby improving the firm’s reputation (Brown, Guidry, & Patten, 2010; Cho, Guidry, Hageman, & Patten, 2012; Lanis & Richardson, 2012). Legitimacy theory contends that the mediating role of CSR disclosure may encourage firms to use CSR disclosure as a tool to mask poor CSR performance. Cho et al. (2012) argue that poor environmental performers manage users’ impressions using biased language and tone in their environmental disclosures. Cho et al. (2012) find that firms with poor CSR performance are more willing to disclose environmental information because voluntary disclosure of such information can help improve their environmental reputation despite their environmental performance. Cho et al. (2012) highlight a concern that CSR evaluators (i.e. DJSI in particular) may overweight CSR disclosure relative to CSR performance, which would ‘‘hinder[s] improved future corporate environmental performance,’’ contrary to DJSI’s stated objective of creating measurable benchmarks for social and environmental considerations. Along similar lines, Brown-Liburd and Zamora (2015) find that CSR assurance is required for investors to value CSR investments when managers are compensated for their firm’s CSR performance. Compared to research on the existence or quantity of CSR disclosure, research on CSR disclosure quality is quite limited. Plumlee et al. (2015) use a modified version of the GRI Content Index as an indicator of the quality of firms’ voluntary environmental disclosure and find that environmental disclosure quality is positively related to firm value. Aerts and Cormier (2009) indicate that the quality of annual report environmental disclosures can positively affect environmental legitimacy. There is little evidence on the determinants of CSR disclosure quality, but two studies provide determinants of environmental disclosure quality. Cho, Roberts, and Patten (2010) show that poor environmental performers tend to use optimistic and uncertain tone in their environmental disclosures. They do not investigate how such tone might affect the relation between environmental disclosure and performance. Rupley, Brown, and Marshall (2012) demonstrate that environmental media coverage and sound corporate governance have positive effects on environmental disclosure quality. Accountants have become primary providers of CSR assurance. Trotman and Trotman (2015) conduct a set of interviews to provide a unique perspective on the role of internal auditors in the environmental reporting realm. In terms of public accounting, O’Dwyer (2011) discusses the process by which accounting firms have shaped CSR assurance. Independent assurance of CSR reporting has gained only modest popularity in the United States compared to its global popularity (Simnett, Vanstraelen, & Chua, 2009). Simnett et al. (2009) provide evidence consistent with firms choosing CSR assurance to enhance their credibility. Casey and Grenier (2015) attribute the relative lack of CSR assurance in the U.S. to high levels of regulatory oversight substituting for CSR assurance. Still, they

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document potential benefits to CSR assurance available to U.S. firms, including lower cost of equity capital, analyst forecast errors, and dispersion. Interestingly, they find that these effects are most pronounced when CSR report assurance is provided by accounting firms, which highlights the magnitude of the opportunity for CSR assurance by accountants. Pflugrath, Roebuck, and Simnett (2011) provide experimental evidence that CSR information is more credible when it is assured. They find that in the United States this assurance is most valuable when it is performed by professional accountants, while in the UK or Australia the provider’s certification is not as important. Finally, Peters and Romi (2015) find that firms employing Chief Sustainability Officers are more likely to obtain CSR assurance, but opt to engage consultants for the service, while firms with environmental committees on their boards of directors are more likely to engage accounting professionals. Further, Peters and Romi (2015) suggest that the value-relevance of CSR assurance is increasing over time. 6.3. Directions for future research Compared to the long history of voluntary forecast research, CSR disclosure is a relatively new topic. Voluntary disclosure researchers are mainly interested in the material information disclosed in CSR reports that may be relevant to, but not present in, financial reports. Further, most firms’ annual (financial) reports contain much CSR-related information that is found outside of the 10-K, strictly speaking. For example, in 2013 GE produced a 16-page standalone sustainability report and dedicated a significant portion of the first 32 pages of its annual report (outside of its 10-K) to sustainabilityrelated information. Much of this information is financial and may be useful in evaluating the firm’s financial results and prospects. Still, CSR differs from voluntarily disclosed financial information in at least three ways. First, CSR activities address the demands of a broader group of stakeholders beyond shareholders (Moser & Martin, 2012). Most of the accounting literature on the consequences of CSR disclosures is shareholder oriented. While the shareholder effects are interesting, a broader group of stakeholders benefits from CSR and these parties can use CSR disclosure to identify how firms address their concerns. Thus, additional research on how non-shareholders use and benefit from CSR disclosure is warranted. Second, the information provided by CSR disclosure may affect financial performance in several future accounting periods. Researchers should consider whether information users understand the long-term nature of CSR information, particularly whether it has long-term information content pertaining to financial performance. Third, the qualitative and nonfinancial nature of CSR performance makes it more difficult to evaluate the credibility of CSR disclosures than it is to evaluate the credibility of financial disclosures, prompting great interest and need for research in CSR report assurance. Assurance is important because the data used to measure CSR performance must be of high quality to be reliable and relevant for decision making (GRI, 2013), creating an enormous opportunity for accounting professionals who have valuable assurance skills that are transferable to CSR reports. For accounting researchers, many natural questions follow. How do non-assured reports compare to assured reports? What are the specific benefits of assurance to report users? Also, beyond Trotman and Trotman (2015) there is little evidence of companies’ internal efforts to ensure high-quality CSR disclosures, so more questions remain. Even more research opportunities lie in areas that are familiar to accounting researchers. What are the costs of CSR disclosure and assurance? The current literature seems to focus on its benefits. However, if a firm uses CSR disclosure to promote a socially responsible image without a meaningful commitment to actual CSR activities, who bears the cost of the firm’s ‘‘greenwashing’’? Also, as Moser and Martin (2012) point out, some CSR activities come at the expense of shareholders, at least in the short run. Along these lines, Peters and Romi (2013) present evidence that compliance with mandatory environmental disclosure rules depends on firms’ reporting incentives. Who benefits and who incurs a cost if firms fail to report negative CSR issues? How does the fiduciary duty to shareholders interact with the disclosure of activities that may not benefit shareholders? This line of questions ties in closely with research on the relation between CSR performance and financial performance.

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Accounting researchers are also familiar with comparing different accounting standards. Much like research on varying financial accounting standards or tax accounting rules, the CSR reporting standards (e.g. those of GRI and SASB) compete with each other and various stakeholders will be affected by differences between the standards. Future CSR research on the differences in these standards will be informative as to the viability of the standards. 7. Final thoughts The academic accounting literature on CSR has expanded just as CSR rose to prominence in practice in recent decades. Accounting researchers have documented important findings about the determinants and consequences of CSR, the relation between CSR and financial performance, and the roles of CSR disclosure and assurance. Still, CSR is a relatively new field in accounting research. We expect CSR research to continue to grow in popularity, mirroring the expansion of CSR in practice. With the ever-increasing popularity of CSR, though, come new questions. Will the role of CSR change as it becomes universal? Will CSR reports and disclosure cease to have meaningful effects if all firms participate in CSR reporting and disclosure, or will they take on an even more important role as it becomes more difficult to separate cheap talk from real decisions? These and the other suggestions for future research in this article are just examples of the many important questions yet to be answered. Accounting researchers can provide insights into these questions because they are experts in many areas that directly apply to CSR research. First, accounting researchers are experts in analyzing financial performance, which is helpful in deepening our understanding of the CSR-financial performance relation. Second, accounting researchers have expertise in measuring cost behavior, which can help them uncover insights into CSR-related expenditures and the motivation for CSR-related activities. Third, accounting researchers are familiar with disclosure research, which has gained importance as firms seek to spread information about their CSR activities. Fourth, accounting researchers have experience with assurance, which is critical as assurance of CSR-related reporting gains popularity and in many cases becomes standardized. These are all critical areas of the future of CSR research. At the same time, there are many challenges to CSR research. For example, it is difficult to measure the cost of CSR, creating a fundamental roadblock to many different areas of CSR research. Fortunately, accounting researchers have the skills and capabilities to overcome these challenges and capitalize upon the multitude of opportunities that await them in CSR research. We look forward to witnessing and participating in future CSR research. Acknowledgements We thank Jonathan Grenier, Patrick Martin, David Reppenhagen, Andrea Romi, and Jennifer Wu Tucker for helpful comments. We thank Wayne Losano for proofreading. Huang is grateful for the financial support of the University of International Business and Economics. Watson is grateful for the financial support of the Fisher School of Accounting at the University of Florida. References Adams, S., & Simnett, R. (2011). Integrated reporting: An opportunity for Australia’s not-for-profit sector. Australian Accounting Review, 21(3), 292–301. Aerts, W., & Cormier, D. (2009). Media legitimacy and corporate environmental communication. Accounting, Organizations and Society, 34(1), 1–27. Aguinis, H., & Glavas, A. (2012). What we know and don’t know about corporate social responsibility: A review and research agenda. Journal of Management, 38(4), 932–968. Al-Tuwaijri, S., Christensen, T., & Hughes, K. (2004). The relations among environmental disclosure, environmental performance, and economic performance: A simultaneous equations approach. Accounting, Organizations and Society, 29(5–6), 447–471. Anderson, J., & Frankle, A. (1980). Voluntary social reporting: An iso-beta portfolio analysis. The Accounting Review, 55(3), 467–479. Arjalie`s, D., & Mundy, J. (2013). The use of management control systems to manage CSR strategy: A levers of control perspective. Management Accounting Research, 24(4), 284–300. Balakrishnan, R., Sprinkle, G., & Williamson, M. (2011). Contracting benefits of corporate giving: An experimental investigation. The Accounting Review, 86(6), 1887–1907. Ballou, B., Casey, R., Grenier, J., & Heitger, D. (2012). Exploring the perceived effectiveness of sustainability incentives: Opportunities for accounting research. Accounting Horizons, 26(2), 265–288.

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