CSR DISCLOSURES: PREDISPOSITIONS AND CONSEQUENCES
Charl de Villiers*
The University of Waikato, New Zealand
and University of Pretoria
cdev@waikato.ac.nz
Ana Marques
Nova School of Business and Economics
ana_marques@novasbe.pt
January 2013
Acknowledgements: The authors appreciate the valuable feedback and suggestions
provided by Dan Dhaliwal, Vic Naiker, Joana Story, Marna de Klerk, and workshop
participants at the University of Waikato. Ana Marques gratefully acknowledges the
financial support of Nova Forum. The authors appreciate the research assistance of Luís
Araújo.
*Corresponding author:
Professor Charl de Villiers
Department of Accounting
The University of Waikato
Private Bag 3105
Hamilton 3240
New Zealand
Telephone: +64 21 0715 703
Email: cdev@waikato.ac.nz
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CSR DISCLOSURES: PREDISPOSITIONS AND CONSEQUENCES
Abstract
Corporate social responsibility (CSR) disclosures are becoming more prevalent among
firms. We investigate the predisposition of firms to disclose CSR information and find that
firms are likely to disclose more in countries with: better investor protection, higher levels
of democracy, more effective government services, higher quality regulations, more press
freedom, and a lower commitment to environmental policies. We also find that CSR
disclosures are associated with higher share prices. In addition, we find this relationship to
be stronger in countries with more democracy, more government effectiveness, better
regulatory quality, and more press freedom. These results imply that market participants
find CSR disclosures more informative in countries where investors are in a better position
to voice their concerns (through democratic mechanisms and through the media), and
where opportunities to voice concerns have resulted in better regulation and more effective
government implementation of regulations.
Keywords: corporate social responsibility, global reporting initiative, voluntary disclosure
1
INTRODUCTION
Firms increasingly disclose social and environmental information, otherwise known
as Corporate Social Responsibility (CSR) information. Whereas financial disclosures are
highly regulated, CSR information is mostly disclosed on a voluntary basis. Firms do this
for two main reasons: 1) to conform to societal expectations and thereby ensure continued
access to resources, such as capital, customer support, etc., and 2) to provide additional
information that allows capital market participants to more accurately assess firms’
financial prospects and risk profiles, potentially leading to higher share prices and higher
firm values. We are interested in this second reason. Voluntary disclosures in general are
used by managers to pursue positive economic outcomes (Healy and Palepu [2001]), and
voluntary disclosures have been shown to be associated with, among other economic
measures, lower cost of capital (Francis, Nanda, and Olsson [2008]), and higher market
prices (Healy, Hutton, and Palepu [1999]).
Capital market participants pay specific attention to CSR disclosures as evidenced by
a recent survey that shows 1) investors and analysts use CSR information, and 2) they
prefer corporate disclosures as the source for such information (Radley Yeldar [2012]).
Empirical evidence also links CSR disclosure with positive economic outcomes, such as
reduced cost of equity capital (Dhaliwal, Li, Tsang, and Yang [2011]), and increased
analyst forecast accuracy (Dhaliwal, Radhakrishnan, Tsang, and Yang [2012]). However,
the prior research does not consistently report a positive relation between CSR disclosure
and economic outcomes. For example, Hassel, Nilsson, and Nyquist [2005] report a
negative correlation with share prices, and Gietl, Göttsche, Habisch, Roloff, and Schauer
[2012] find a negative correlation with Tobin’s Q. These counterintuitive findings suggest a
2
need for further study to gain a better understanding of the conditions where CSR
disclosures are linked with positive economic performance, as well as the characteristics of
an appropriate measure to proxy CSR disclosures.
We examine the predispositions towards, and the consequences of, CSR disclosures
by the top 500 European firms during the period 2007 to 2010, using the Global Reporting
Initiative (GRI) guideline’s level of CSR disclosure as our measure of CSR disclosure. We
provide more information on the GRI and our measure in the next section of the paper. By
way of predispositions, we identify both country level variables and firm level variables
that predispose firms towards CSR disclosures. We then examine whether CSR disclosures
are associated with higher share prices. Finally, we document the type of country where
CSR disclosures and positive economic outcomes are more closely linked.
We focus on share prices, because share prices incorporate the market’s assessment
both of firms’ future cash flows and of an appropriate discount rate that reflect the risk
inherent in the expected cash flows (i.e. cost of capital). Therefore, share prices provide
wide-ranging market information in a single measure, incorporating more information
content than cost of capital. CSR initiatives themselves and any potential benefits
associated with CSR initiatives tend to be long-term in nature (De Villiers, Naiker, and Van
Staden [2011]) and therefore we choose a measure (share price) that incorporates the
market’s view of all future prospects.
An improved understanding of the predispositions towards and consequences of CSR
disclosures is of interest to capital market participants (because it can inform their
investment decision making), managers (because they will be interested in any apparent
advantages that emanate from voluntary CSR disclosure), regulators (because if there are
opportunities for managers to act opportunistically, they may want to consider
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implementing CSR disclosure regulation), and social and environmental activists (because
our findings may assist them in forming opinions on firms’ CSR activities based on CSR
disclosure).
This paper represents several advances on the prior literature. Prior research has
shown that managers’ incentives are shaped by the unique legal and economic conditions
found in each country, which in turn, affects financial reporting practices (Ball, Robin, and
Wu [2003], Burgstahler, Hail, and Leuz [2006]). There is no reason to expect CSR
disclosure practices to be any different, and, in fact, some evidence is provided by the fact
that more than 90% of the top 100 companies in the UK disclose CSR information,
compared to only 20% in India (KPMG [2011]). Thus, in contrast with single country CSR
studies like Dhaliwal et al. [2011] and Hassel et al. [2005], a multi-country approach is
called for. Prior multi-country CSR studies typically use two country level measures,
namely a continuous “rule of law” measure and a “code law/common law” dummy variable
(e.g. Simnett, Vanstraelen, and Chua [2009], Dhaliwal et al. [2012]).1 These variables,
because of their broad nature, do not facilitate an understanding of the more specific
underlying mechanisms at work. We identify and use several new country level measures
that provide better understandings of the multiple driving forces behind CSR disclosures,
such as investor protection mechanisms, democratic institutions, press freedom, and the
prioritization of environmental policy goals. We explain the causal mechanisms at work in
the literature review and hypotheses development. We use these more explicatory country
1
We are aware of a working paper, Cahan, De Villiers, Jeter, Naiker, and Van Staden [2012], that use more
country level disclosures in a multi country CSR study, but this study uses a different CSR disclosure measure
(composed of several sub-measures), examine disclosure in a single year, and do not focus exclusively on
European firms.
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measures to document the kinds of jurisdictions (related to regulation and freedoms to
voice concerns) where this link is stronger.
In another advance on the prior literature, we choose a relatively homogeneous group
of countries, namely European countries, in order to avoid the possibility that our results
may be driven by outlier values in the country measures used. For example, additional
analyses show that one of the major results of Simnett et al. [2009] (around code/common
law) was entirely driven by the US firms in the sample. European countries are relatively
similar in terms of factors like economic development. However, there are still differences
among European countries in terms of the relative levels of investor protection, democracy,
government efficiency, regulatory quality, press freedom, and emphasis on environmental
policies. In this paper, we investigate how these factors influence the relationship between
CSR disclosure and firm value.
A final major advance on the prior literature is based on the characteristics of our
CSR disclosure measure, which is superior by 1) encompassing disclosures in all media, 2)
not being a simple dummy variable that ignores the actual content of CSR disclosures, but
incorporating a level of disclosure, 3) providing greater variation, 4) not being based on a
self-constructed disclosure index incorporating potential bias, 5) being less open to
incorrect coding, and 6) being less labor intensive to collect, potentially allowing for a
larger sample size.2 With our CSR disclosure measure, we are able to show that it is not
2
Firms use different disclosure media for CSR information and prior CSR studies typically focus on only one
of these, e.g., annual reports (Ingram and Frazier [1980]); 10K reports (Cho and Patten [2007]); websites
(Clarkson et al. [2008]); and stand-alone reports (Dhaliwal et al. [2011], Simnett, Vanstraelen, and Chua
[2009]); whilst ignoring the information provided in the others. Most of these studies hand collect a disclosure
score composed of several individual items disclosed in one of these media. This method entails the risks of
misinterpretation and miscoding. A superior method of assessing CSR disclosures would be to use a measure
that encompasses all disclosure media, without the need for hand collecting individual data items. The GRI
publishes and promotes a framework and guideline for CSR disclosure. Many firms throughout the world
subscribe to the GRI guideline and disclose the fact. GRI is the most popular CSR framework and is
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only the initiation of a separate CSR report that is associated with positive market related
outcomes (as shown by e.g. Dhaliwal et al. [2011]), but also that the level of CSR
disclosure is associated with firm value.
In terms of predisposition, we find that firms are likely to disclose more CSR
information in countries with: better investor protection, higher levels of democracy, more
effective government services, higher quality regulations, more press freedom, and a lower
commitment to environmental policies. In addition, we find firms are likely to disclose
more CSR information if they: are bigger, are more profitable, have a higher book to
market ratio, have higher leverage, have older assets, have higher capital expenditure, and
operate in environmentally sensitive industries.
In terms of consequences, we find that higher levels of CSR disclosures are
associated with higher share prices. In economic terms, ceteris paribus, the European firms
in our sample have a share price that is, on average, 2.89 Euro higher for each higher GRI
application level they choose to disclose at, e.g., firms using GRI guidelines and disclosing
at the highest of the three GRI disclosure levels, have a share price that is on average 2.89
Euro higher than firms disclosing at the second highest GRI disclosure level.
When combining country level predispositions with our consequences analysis, we
find these positive share price consequences to be stronger in countries with stronger
governance structures, i.e., in countries with more democracy, more government
effectiveness, better regulatory quality, and more press freedom, share prices are more
strongly associated with CSR disclosure levels. These results imply that market participants
find CSR disclosures more informative in countries where investors are in a better position
especially popular among European firms (KPMG [2008], KPMG [2011]). An additional advantage of GRI is
that it allows firms to choose among three levels of compliance with GRI.
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to voice their concerns (through democratic mechanisms and through the media), and
where these opportunities to voice concerns have resulted in better regulation and more
effective government implementation of regulations.
LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT
The Global Reporting Initiative (GRI)
The Global Reporting Initiative (GRI) is a non-profit organization that promotes
economic, environmental and social sustainability by providing a comprehensive
sustainability reporting framework in cooperation with global business, governments, civil
society, labor, academic and professional institutions (GRI [2012]).
According to KPMG [2011] 80% of the world’s 250 largest companies and 69% of
the top 100 countries in the 34 countries their report covers adhere to GRI reporting
guidelines. Indeed, KPMG [2011] refers to GRI as the global de facto CSR disclosure
standard. CSR disclosure is high among European firms, especially in the countries that
represent a large share of our sample of Euro top 500 firms. Table 1 shows that eight
countries account for 76% of our firm-year observations and these countries all rate highly
in the KPMG [2011] report in terms of quality of CSR disclosure, with the percentage of
the top 100 firms in each of the 8 countries disclosing CSR information being 100% in the
UK, 94% in France, 62% in Germany, 64% in Switzerland, 72% in Sweden, 82% in the
Netherlands, 88% in Spain, and 74% in Italy (KPMG [2011]). This shows a very high
likelihood that firms in our sample disclose CSR information; a high likelihood that they
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use the GRI guidelines; and because of the high uptake of CSR disclosures, a need to use a
disclosure measure that indicates the level of CSR disclosure.3
Shadewitz and Niskala [2010], De Klerk and De Villiers [2012], and De Klerk, De
Villiers, and Van Staden [2012] use a GRI-based disclosure measure to examine the value
relevance of CSR disclosures in, respectively, Finland, South Africa, and the UK. We
elaborate on these studies in the “consequences” section below.
The only multi-country study we are aware of that use a GRI-based disclosure
measure, uses a Tobin’s Q analysis to assess firm value (Gietl et al. [2012]). However, this
study has two major shortcomings, namely that it ignores country differences (and only
include firm level control variables), and that the CSR disclosure measure used in this study
considers a combination of the GRI level of disclosure and whether the GRI level is
validated by a third party. This combination is not helpful, as the relationship between these
two different aspects and any economic consequences are potentially in opposite directions,
as will become clear in our hypotheses development and results.4
Predispositions of CSR disclosure: Country level and firm level expectations
Prior multi-country research tends to use a code law/common law country-level
dummy variable in an attempt to explain cross-country variation in their variable of interest
(e.g., Simnett et al. [2009], Dhaliwal et al. [2012]). They argue that common law countries
3
Note that the percentage of firms that disclose CSR is high, because the KPMG [2011] study includes all
firms disclosing some form of social or environmental information. The percentage of firms disclosing CSR
using the GRI guidelines is much lower, because it only includes firms that disclose information on a range of
social and environmental issues, and disclose this information in accordance with GRI guidelines.
4
The potentially confounding disclosure measure used in Gietl et al. [2012] could explain their main finding,
namely that disclosure at the GRI A level, validated by a third party, is associated with a lower Tobin’s Q.
The study reports that the relation with the similarly defined GRI B and GRI C levels of validated disclosure
is not significantly related to Tobin’s Q.
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(e.g. the US and the UK) are more investor oriented compared to code law countries (e.g.
France) that tend to be more stakeholder oriented (Simnett et al. [2009]). A stakeholder
orientation suggests a greater emphasis on corporate responsibilities towards all
stakeholders (in contrast with an emphasis on investor needs) and therefore a greater
propensity to provide CSR information. These social expectations can drive firm behavior.
However, given the countries represented in our sample, using a code/common law dummy
variable is not adequate. This is because only the UK has a common law system, while all
the other countries use code law. The problem is compounded by the fact that the UK
happens to be one of the countries where CSR disclosure is particularly popular, whereas
following the argument in the prior research would lead you to believe that a common law
country would be shareholder oriented and therefore firms in common law countries would
be likely to disclose less CSR information.
An alternative country level measure, used by both Simnett et al. [2009] and Dhaliwal
et al. [2012], is the World Bank’s ‘rule of law’ index. This index provides an indication of
the confidence citizens have in the ability of the country’s laws, law enforcement, and
judicial system, to ensure a fair outcome for all. The index is also an indication of the
likelihood of crime and violence. It is argued that firms will be motivated to disclose more
CSR information in relatively law abiding countries or, alternatively, that investors and
other stakeholders are able to demand higher levels of CSR disclosure in these countries
(Simnett et al. [2009]). Therefore, we expect higher levels of CSR disclosure in more law
abiding countries. However, the World Bank rule of law index provides a measure of the
overall rule of law within a country, including issues not directly related to corporate affairs
and investor protection measures. We use a different, more sophisticated measure dealing
with the rule of law in the matters of specific interest to firms, namely an anti-self-dealing
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score, based on Djankov, La Porta, Lopes-de-Silanes, and Shleifer [2008]. This country
level index considers the incidence of (1) vote by mail; (2) shares not blocked or deposited;
(3) cumulative voting; (4) oppressed minority; (5) pre-emptive rights; and (6) capital to call
meeting.
In the same annual document where the World Bank publishes their ‘rule of law’
index, they also publish several other country level measures. Three of these measures
seem to be ideal predictors of the propensity to voluntarily disclose CSR information,
namely ‘voice and accountability’, a measure of democracy and freedoms; ‘government
effectiveness’, a measure of the quality of public services; and ‘regulatory quality’, a
measure of soundness of policy to protect investors and others. As far as we are aware, no
prior published CSR study use these World Bank measures.5 We expect CSR disclosures to
be higher in countries where these indexes are higher, i.e. where citizens can influence by
having democracy and freedoms; where public services, such as investor protection
services, are more effective; and where regulation provides more protection.
Prior research has shown the ability of the press to influence CSR disclosures (e.g.
Clarkson, Li, Richardson, and Vasvari [2008], Brown and Deegan [1998]). These were
single country studies. In our cross-country setting where media coverage shows variation,
the firm-level measures these prior studies employ would not be appropriate. However, we
are able to control for the general level of press freedom associated with each country in
our sample. We identify the Reporters without Borders organization’s ‘freedom of press’
index as an appropriate measure. The aim of Reporters without Borders is to promote press
freedom and reporter safety throughout the world by drawing attention to countries and
incidents where violations of press freedom occur. In line with prior research that generally
5
A conference paper, Cahan et al. [2012] also uses these World Bank measures.
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find that higher levels of press coverage correlate with higher levels of CSR disclosure we
expect firms in countries with higher levels of press freedom to disclose more CSR
information.
In recent years, sustainability, environmental issues, climate change, and greenhouse
gas emissions have featured high on the public agenda in many countries. We use a country
level measure that measures the importance of this item, namely Yale Law School’s
environmental performance index, which emphasizes law, policy and scientific issues.
Firms in countries that show a greater commitment to an environmental agenda could be
more likely to disclose more CSR information to reflect the local social concerns and to
respond to higher levels of stakeholder pressure to provide information. However, in more
environmentally committed countries, CSR related issues are more likely to lead to
negative financial consequences and managers may fear that additional CSR disclosure will
play into the hand of potential litigants. For example, the 2010 Gulf of Mexico oil spill cost
BP billions of dollars. Fear of litigation would make managers less likely to disclose CSR
information. Based on these opposing arguments, we form no prior expectation regarding
the direction of the association between this particular environmental commitment variable
and the level of CSR disclosure.
The above discussion regarding predisposition to CSR disclosure at the country level
leads to the following hypothesis, stated in alternate form:
H1: Firms are likely to disclose higher levels of CSR information in countries with
less corporate self-dealing, more democratic rights for citizens, more effective government
administration, better regulatory quality, more press freedom, and less/more commitment
to an environmental agenda.
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Prior CSR research has consistently found size to be an important predictor of CSR
disclosure levels (e.g. De Villiers and Van Staden [2011]). Other firm level characteristics
that the prior research typically used to control for the level of CSR disclosures are
profitability, whether the firm needed additional finance from capital markets, book to
market value of equity, leverage, riskiness measured by volatility of share price, newness of
the firms’ assets, capital expenditure, and whether the firm operates in an environmentally
sensitive industry (Clarkson et al. [2008], Cho and Patten [2007], De Villiers and Van
Staden [2011]). In addition, in our multi-country setting, firms with international dealings
are more likely to be exposed to pressure to disclose CSR information from an international
audience. Therefore, we control for the percentage of sales outside of the country where the
firm has its headquarters.
Bigger firms and more profitable firms have more resources to devote to CSR
disclosures. Big, profitable firms are also more likely to attract public and regulatory
attention and are thus more likely to use CSR disclosure to appease activists and regulators.
Firms that need to access the capital markets for additional funding are more likely to
disclose CSR information in order to allay fears that there may be potential liability
associated with CSR issues. Firms with a higher book to market value of equity ratio are in
a situation of relatively low growth and such firms are more likely to attempt to find
competitive advantage in areas such as additional CSR disclosure. Firms with higher
leverage are more likely to come under scrutiny from the providers of external finance and
are therefore likely to disclose more CSR information to satisfy their demands (e.g.,
Leftwich, Watts, and Zimmerman [1981]). Firms with a greater percentage of cross-border
sales are more likely to face diverse CSR demands and are therefore likely to disclose more
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CSR information. We are not certain of the direction of the correlation to expect between
CSR disclosure and Volat and thus do not form an ex ante expectation. Firms with older
assets do not have access to the latest, cleanest technologies, increasing the likelihood that
they will experience pressure and incentivizing them to disclose more CSR information to
explain their operations. The same line of argument can be applied to firms with higher
capital expenditure and those operating in environmentally sensitive industries, because
such firms will be pressured into explaining their operations, via CSR disclosures. Firms in
environmentally sensitive industries are more likely to come under pressure to provide
transparency and explanations through CSR disclosures. Given the importance of these firm
level measures in predisposing firms to disclose CSR information, we control for them in
our analyses.
Consequences of CSR disclosure: Share price, firm value, other
Prior studies link better CSR performance (not assessing CSR disclosure) with
benefits that could lead to improved financial performance, e.g. increased sales (Lev,
Petrovits, and Radhakrishnan [2010]), attracting better quality employees (Edmans [2011]),
and more favorable treatment by regulators and policy makers (Brown, Helland, and Smith
[2006]). In a meta-analysis of 52 studies, Orlitzky, Schmidt, and Rynes [2003] find
evidence of a positive relationship between CSR performance (not disclosure) and financial
performance. Survey results show that market participants prefer to obtain CSR information
from corporate sources, i.e. CSR disclosures (Radley Yeldar [2012]). Therefore, a positive
link between CSR disclosure and financial performance is plausible.
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Two recent articles focus on standalone CSR reports and their financial
consequences, namely Dhaliwal et al. [2011] and Dhaliwal et al. [2012]. Dhaliwal et al.
[2011] examine the effect of publishing a standalone CSR report on the cost of equity
capital and vice versa. They find that firms with a high cost of equity capital are more likely
to publish a standalone CSR report for the first time. Furthermore, they find that such a
first-time publication leads to a reduction in the lagged cost of equity capital for firms with
superior CSR performance. The authors use a CSR disclosure dummy to indicate the
presence of a standalone CSR report without considering the level (or amount) of
disclosure. Dhaliwal et al. [2012] find that firms in stakeholder (code law) countries are
more likely to publish a standalone CSR report. They also find that analysts in stakeholder
(code law) countries find CSR disclosures more informative, i.e. standalone CSR reports
are associated with greater analyst forecast accuracy. These findings can be interpreted to
indicate that there is a greater expectation of, a greater provision of, and a greater practical
use for CSR disclosures in stakeholder (code law) countries.
We build on these two papers by further examining the voluntary CSR disclosure
phenomenon, but with a stronger CSR disclosure measure that allows for more variation. In
addition, we extend the investigation of consequences by focusing on share prices instead
of cost of equity capital (e.g. Dhaliwal et al. [2011]) or analyst forecast accuracy (e.g.
Dhaliwal et al. [2012]).
Prior research on the value relevance of CSR disclosure using an Olhson [1995] type
model examines different countries and provides inconsistent results. Some of the studies
focus on one aspect of CSR, namely environmental issues. One example is Hassel, Nilsson,
and Nyquist [2005] who find published environmental performance information (not firm
voluntary disclosure) to be associated with lower market values in Sweden. They explain
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this by stating that bad environmental performance may reveal the need for remedial
spending. Moneva and Cuellar [2009] find financial environmental disclosure by Spanish
companies to be value relevant, and associated with higher share prices. However,
according to Moneva and Cuellar [2009], non-financial environmental disclosure has no
value relevance. Two working papers, Clarkson, Fang, Li, and Richardson [2010] and
Plumlee, Brown, Hayes, and Marshall [2010], find voluntary environmental disclosure by
US companies to be value relevant in such a way that more disclosure correlate with
positive economic outcomes. Shadewitz and Niskala [2010], De Klerk and De Villiers
[2012], and De Klerk et al. [2012] examine the value relevance of all CSR disclosures (not
just environmental disclosures). All three studies use a GRI guideline based measure of
CSR disclosure. The three studies all find CSR disclosure to be value relevant in the
positive direction. Shadewitz and Niskala [2010] examine Finnish firms, De Klerk and De
Villiers [2012] study South African firms, and De Klerk et al. [2012] investigate UK firms.
Shadewitz and Niskala [2010] use a simple GRI dummy variable, whereas the other two
studies use a dummy and a complicated ordinal measure that assumes that third party
validation of the GRI application level provides added value. Neither of these GRI-based
measures extracts the optimum amount of information. The dummy variable, because it
ignores the levels of disclosure. The levels combined with validation measure, because of
the potentially confounding effect of combining both. In our study, we use an ordinal
variable that represent the GRI application level and a separate dummy variable to indicate
whether the application level was independently validated.
Ignoring for the moment the shortcomings in disclosure measure of these three
studies, they all suggest that CSR disclosures are value relevant (associated with higher
share prices) and that the combined effect of CSR disclosure with financial accounting
15
information provides a better explanation of market attributes than financial accounting
information alone. Overall, CSR disclosures have been found to be associated with higher
share prices in some countries, but also with lower share prices. Therefore, there is still a
need to further examine this relation. CSR disclosures and how markets interpret them are
influenced by country specific issues, such as local laws that affect the relationships
between CSR issues and direct economic consequences.
Our arguments above lead to the following hypothesis, stated in alternate form:
H2: Firms that disclose higher levels of CSR information are likely to have higher
share prices.
We are also interested in examining the effect of country governance measures on the
relationship between CSR disclosure and firm value. Stronger governance mechanisms
could reduce the ability of managers to disclose CSR information opportunistically, making
CSR disclosures more credible, and thus increasing the weight capital market participants
put on these disclosures. This would suggest a stronger link between CSR disclosures and
firm value in stronger governance countries. However, financial disclosures themselves
may be more opaque in weaker governance countries. Dhaliwal et al. [2012] find the
positive relation between CSR disclosure and better analyst forecast accuracy to be stronger
in countries with greater financial opaqueness. They ascribe this finding to the fact that
opaque financial disclosure increases the value of alternative sources of information, such
as CSR disclosures, for financial market participants to form a complete picture of a firm’s
prospects. If these arguments hold, this would suggest a stronger link between CSR
disclosure and share price in countries with weaker governance. To investigate this relation
16
we add country measures and interaction terms to our basic model. In this exploratory
analysis we focus on the most promising country level measures, as indicated by the results
of the tests of our first hypothesis.
METHOD
Sample
We begin our sample selection with the 500 largest European firms, as defined by the
Financial Times in its 2010 rankings. We next exclude 84 financial firms, due to their
unique financial ratio characteristics, rendering comparison with firms in other industries
senseless. We also drop 23 firms, for which we cannot find financial data on Datastream.
This leaves us with an initial sample of 393 firms.
Our first step in hand-collecting the level of GRI information disclosed by firms is to
examine the CSR reports of these firms in each of four years, namely 2007 to 2010. Not all
firms have such a report. When such a report does not exist, we examine the annual report
of the firm. With these documents we first establish whether these firms disclose a GRI
score in that year. As a second step, when a GRI score is disclosed, we record the level of
the firm’s GRI compliance (A, B, or C) and whether the GRI compliance level was
independently validated in that year.
From our potential sample of 1,572 observations (393 firms * 4 years) we lose some
observations due to missing data on some of the variables collected from Datastream. We
keep the number of observations stable at 1,227 for all analyses related to the
predispositions for CSR disclosure. However, for the consequences analyses, we allow the
17
number of observations to vary from estimation to estimation, in order to maximize the
number of observations used in each analysis.
Research design: predispositions
In order to test hypothesis 1, which analyzes the predispositions for CSR disclosure,
we estimate the following general model:
CSR Disclosure = α0 + α1Country Institutional Variables + α2Firm Level Variables + ε
(1)
Given that our CSR disclosure measure is not continuous, but indicates levels of
disclosure, we use an ordered logit model. Annex 1 provides a summary of the variables
included to facilitate referencing.
CSR disclosure measure. We use firms’ GRI disclosure level as a proxy for their
CSR disclosure. Under the GRI G3 guidelines, in force during the 2007-2010 period, firms
can choose to disclose a limited number of CSR items for a C-rated GRI application level,
increase their disclosures for a B-rated level, or disclose the full ambit of GRI guideline
CSR disclosures for an A-rated level. We convert this GRI application level to GRI_Score
as follows: A=3, B=2, C=1. We attribute a score of 0 to all firms that do not follow GRI.
Country institutional variables. We use six country level variables that generally
represent the level of investor protection, level of individual freedom of expression, and
societal concern with CSR issues.
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We follow Djankov et al. [2008] by using their anti-self-dealing measure, an index
that reflects a specific part of corporate governance and considers (1) vote by mail; (2)
shares not blocked or deposited; (3) cumulative voting; (4) oppressed minority; (5) preemptive rights; and (6) capital to call meeting. This measure, LAW, can range between 0
and 5, with higher numbers representing less self-dealing or better governance.
We also use three World Bank measures, namely (1) citizens’ ability to select a
government and voice their concerns (Voice), (2) public service and policy quality and
effectiveness (Gov_Eff), and (3) sound regulatory quality (Reg_Qual).6 The values of these
measures range between -2.5 to 2.5, where higher values reflect higher citizen participation
(Voice), more effective governments (Gov_Eff), and higher regulatory quality (Reg_Qual).
Reporters Without Borders publish an index reflecting the degree of freedom of
journalists and the media in more than 170 countries.7 Values range from 0 to 112.5, with
lower values reflecting higher freedom of the press. Therefore, lower values of this
measure, Press, indicate higher level of press freedom.
Our final measure is the environmental performance index of created by The Yale
Center for Environmental Law and Policy and the Center for International Earth Science
Information Network at Columbia University. This index covers more than 150 countries
and is released every second year (Env_Perf).8 Values can range between 0 to 100, higher
values indicating countries that strongly pursue environmental policy goals.
Firm level variables. One of the most consistent determinants of environmental
disclosure is industry. We use an environmentally sensitive industry dummy variable
(Ind_Sens), which identifies the forestry, metals mining, coal mining, oil and gas
6
See http://info.worldbank.org/governance/wgi/mc_countries.asp
See http://en.rsf.org/
8
See http://epi.yale.edu/; we used the 2008 data for 2007 and the mean of 2008 and 2010 for 2009.
7
19
exploration, paper and pulp, chemicals, pharmaceuticals and plastics, iron and steel,
electricity, gas and waste water industries as specified in De Villiers et al. [2011].9 In
addition, we identify from the prior literature, nine firm level variables to control for the
level of CSR disclosures (e.g., Clarkson et al. [2008], De Villiers and Van Staden [2011]).
These variables are size (Size), profitability (ROA), need of additional finance (Fin), bookto-market value of equity (B_M), leverage (Lev), level of international trade (Internat),
share price volatility (Volat), age of assets (New), and capital expenditure (Capex). We
have already discussed the expected direction of the association between these variables
and CSR disclosure in the literature review section.
Research design: consequences
We examine the influence of CSR disclosure level on share prices (hypothesis 2) with
the use of a modified Ohlson [1995] research design, where share price is assumed to be
determined by earnings, book value, the variables of interest, and control variables.10 Our
model is as follows:
Share_Price = β0 + β1EPS + β2BV_pS + β3GRI_Score + β4GRI_Validation + β5Size +
β6Ind_Sens + year dummies + country dummies + ε
(2)
Where GRI_Score is coded the same as before, namely 3 for firms with a GRI
application level of A, 2 for B, 1 for C, and 0 for firms that do not follow GRI; and where
9
Sensitive industries are defined as in De Villiers et al. [2011] as those with SIC codes between 800-899
(Forestry), 1000-1099 (Metal Mining), 1200-1399 (Coal Mining and Oil and Gas Exploration), 2600-2699
(Paper and Pulp Mills), 2800-3099 (Chemicals, Pharmaceutical and Plastics Manufacturing), 3300-3399 (Iron
and Steel Manufacturing), and 4900-4999 (Electricity, Gas and Waste Water).
10
Note that earnings and book value replace dividends in valuation, according to the clean surplus relation.
20
GRI_Validation is a dummy variable coded 1 for firms that use an external party to validate
or certify the firm’s GRI application level. We expect GRI_Score to be positively and
significantly related to Share_Price. Managers choose to get third party validation of the
firm’s GRI application level on a voluntary basis. Voluntary CSR assurance is obtained to
increase the credibility of CSR disclosures and is usually obtained when there are preexisting credibility issues (Simnett et al. [2009]). In this case, investors can observe the
disclosure level themselves and thus external validation of the GRI application level may
have a limited effect on investors’ valuation decisions. If such an effect exists, there are two
possible scenarios namely that both CSR disclosures and GRI_Validation are positively
priced, or alternatively that GRI_Validation is chosen only by managers of firms with
negative CSR issues and thus GRI_Validation could be negatively priced. Therefore, we
form no prior expectation for the direction of the relationship between GRI_Validation and
share prices.
In the Ohlson [1995] model it is assumed that market price per share is positively
associated with book value per share as well as with the value of earnings per share, as
these are indicative of future dividends. Therefore, we expect to find positive coefficients
for these two independent variables. Aboody, Barth, and Kasznik [2004] add analyst
growth forecast to their modified Ohlson [1995] model; Hann, Lu, and Subramanyam
[2007] add growth in sales, R&D expense and number of employees. In following these
prior examples of adding additional controls appropriate to the issue under investigation,
we identify two additional firm level control variables, namely size and industry. These
controls are appropriate, because the relationship between CSR disclosure and firm value
may be quite different for firms in sensitive industries, compared to other industries; and
the same applies to larger firms that are potentially more exposed to political cost, due to
21
their increased visibility. We include year dummies to control for any effects specific to a
particular year. Finally, because we know from our ‘predispositions’ discussion that
country specific issues influence CSR disclosure, we suspect that country specific effects
may be at work in the relationship between CSR disclosure and market values. Therefore,
we include country dummies to account for country sources of heterogeneity and we follow
Aggarwal, Erel, Stulz, and Williamson [2009] in their multi-country approach by clustering
residuals at the country level.
FINDINGS
Descriptive statistics
Table 1 shows descriptive statistics, with Panel A providing disclosure information
per country, Panel B providing information regarding the frequencies of our CSR
disclosure measures, and Panel C providing information for all variables used. Panel A
shows that our sample covers 22 European countries. Nineteen of these countries have at
least 12 observations. Most of our observations represent, in order, UK firms (246), French
(202), German (149), Swiss (92), and Swedish firms (79). This panel also shows that the
use of GRI is widespread among large European firms and not confined to a limited
number of countries, e.g. note that the mean for GRI_Score is 1.0 or above for eight of the
countries in our sample. Panel B shows that nearly one third of the firms in our sample
disclose that they use GRI guidelines for their CSR disclosures, with more than 16%
following the GRI guidelines fully (A application level), over 11% following them to the B
22
application level, and more than 3% following GRI to the C application level.11 Almost
79% of the firms that follow GRI get external validation that they comply with the relevant
GRI application level. Panel C shows descriptive statistics for all variables, e.g., the firms
in our sample have a mean return on assets of 7.1% and a mean book to market value of
equity of 55.4%. Ind_Sens shows that about one third of our firm-year observations are
from firms in environmentally sensitive industries.
<<<Table 1 about here>>>
Correlations
Table 2 shows the correlations between our dependent variable, country variables,
and firm level variables. Panel A reveals that a number of country variables are highly
correlated, especially among the three measures derived from the World Bank (Voice,
Gov_Eff, and Reg_Qual) and the press freedom measure, Press. Law and Env_Perf are
correlated with other country level measures in the range from 0.3 to 0.34. These high
correlations suggest the need for care in regression specification. Except between country
level variables, none of the correlations among the variables used in equation 1
(predispositions) are above 0.4.
<<<Table 2 about here>>>
11
The fact that about a third of the firms in our sample use GRI may seem low, but note that Gietl et al.
[2012], using a sample of Eurostoxx 600 firms over the same time period (2007-2010), report that only 240 of
1686 firms, or 14%, use GRI.
23
Predispositions
Table 3 shows the result of ordered logit regression estimations. This model is more
appropriate for our analysis (than correlations) because our dependent variable, GRI_Score,
is not a continuous measure, but provides discrete levels of CSR disclosure based on the
number of GRI categories disclosed by firms. Panel A shows the results of ordered logit
estimations with only one independent variable each, i.e. each of our country-level and
firm-level measures in turn. As can be expected, these regressions yield qualitatively
similar results to the correlation table results. The reason we show these, is that given the
nature of the dependent variable, an ordered logit regression is the theoretically correct
method. The results show Law, and Gov_Eff to be significant at the 10% level; Env_Perf at
the 5% level; and the other three country level measures, Voice, Reg_Qual, and Press to be
significant at the 1% level. These findings should be interpreted with caution, as these are
univariate results without proper control for issues such as firm size, industry, etc. The
direction of the correlations indicates that higher levels of CSR disclosure are associated
with more investor protection (anti-self-dealing), higher levels of democracy, more efficient
government, better regulatory quality, and more press freedom. These associations are
consistent with our expectations. Note that the country measure we had no prior expectation
for, Env_Perf, is negatively correlated with CSR disclosure level, suggesting a lower level
of disclosure among firms in countries that demonstrate a higher level of commitment to
the environment through policy and laws. This can be explained by firms shying away from
CSR disclosure in countries with a higher environmental commitment, because of a fear
that such commitment increases the likelihood of disclosure related litigation and liability.
24
Still referring to Table 3, Panel A, all our firm level control variables show significant
correlations with CSR disclosure levels (GRI_Score) on the basis of individual variable
ordered logit regressions, except profitability (ROA). New is significant at the 10% level;
Fin, Lev, Internat, Volat, and Capex are significant at the 5% level; and the rest at the 1%
level, i.e. Size, B_M, and Ind_Sens. It is important to note that these results do not include
proper controls for all relevant variables. This may explain why ROA is not statistically
associated with CSR_Score. The rest of the significant firm level variables are all in the
predicted direction. The fact that these variables are significant highlights the need to
control for these factors in the regression analyses to follow.
We know from the correlation statistics in Table 2 that some of the country variables
we use are highly correlated and this raises the issue of multicollinearity should we use
these variables in the same model. If multicollinearity is present among variables used
together in the same equation, we may not be able to rely on the coefficients or significance
levels estimated to draw conclusions regarding each individual variable. To test whether
multicollinearity is a concern, we estimate an ordinary least squares regression that includes
all our country level variables, as well as all our firm level variables, to inspect the variance
inflation factors (VIFs). Two of the country level variables have VIFs above the standard
benchmark of 10, indicating the presence of multicollinearity issues. We deal with this
problem in two ways. We first estimate separate ordered logit models for each country level
variable including, in each case, all the firm level control variables. Next, we use principal
component analysis on the country level variables to construct components that can be used
together in a regression.
25
Table 3, Panel B shows the results of ordered logit estimations for each country level
measure in turn combined with all the firm level measures. For example, the first column
shows that Law is positively and significantly related to GRI_Score at the 5% level when
firm level variables are included. In similar fashion, Voice, Gov_Eff, Reg_Qual, and Press,
are related to GRI_Score at the 1% level of significance and in the expected directions.
Env_Perf is negatively related to GRI_Score at the 5% level. The directions of these
associations are all consistent with the correlation table results (Table 2) and with the
individual ordered logit results (Table 3, Panel A). Our results suggest that firms disclose
higher levels of GRI information in countries with better investor protection (less anti-selfdealing), a greater ability to choose your own government, greater government efficiency,
better regulatory quality, more press freedom, and less government commitment to
environmental policy and law. These results provide evidence in support of our first
hypothesis. The only one of these six measures mentioned in hypothesis 1 we did not form
a prior expectation on the direction for, deals with countries’ environmental commitment.
You may recall that we argued that firms in countries committed to an environmental
agenda could, on the one hand, be expected to come under pressure to disclose more CSR
information, but on the other hand, management could fear the likelihood of increased
environment-related litigation and liability. Fear of litigation appears to be a stronger
motivation, resulting in less CSR disclosure in countries that demonstrate a higher
commitment to environmental issues.
Turning to firm level variables, a scan of all six regression results shows that most of
these variables are significantly associated with GRI_Score. The exceptions, i.e., the
variables which are that are not significantly associated with the dependent variable, are
26
Fin, Internat, and Volat. It is not uncommon for some control variables to be found to be
not significant, e.g., Clarkson et al. [2008] found Volat to be not significantly associated
with CSR disclosure, as did De Villiers and Van Staden [2011] with Fin. Neither of these
two studies had Internat, because they included only US firms. It may be that in our
European setting, where countries are close to each other and barriers to international trade
are low, that international trade is not a very important determinant of CSR disclosures.
However, we could not predict that result ex ante. The results in Table 3, Panel B can
therefore be taken to suggest that firms are likely to disclose higher levels of CSR
information if they: are larger, are more profitable, have high book to market firms, are
more leveraged, use older equipment, spend more on capital, and operate in
environmentally sensitive industries. However, we do not find support for an association
between CSR disclosures and firms anticipating the need for additional finance, being
exposed to international trade, or share price volatility.
<<<Table 3 about here>>>
We now turn to our second method of dealing with the multicollinearity issue due to
the high correlation between the country level measures. This time we consider all six
measures at the same time to learn more about the way that country variables interact to
provide an indication of the predisposition of different firms to provide different levels of
CSR disclosure. We follow Li [2010] by doing a principle component analysis of all
variables together and including the resulting factors into a regression model. Table 4
provides information about this analysis. We use the first two components, because they
have Eigenvalues above 1 (Panel A). Panel B shows the factor loadings and reveals that
component 1 is determined mostly by Voice, Gov_Eff, Reg_Qual, and Press. Given that
27
Voice and Press both relate to citizens’ and investors’ ability to voice their concerns, and
that Gov_Eff and Reg_Qual both relate to the resultant regulation and the implementation
of these regulations, we label it Country_Voice&Reg; whereas component 2 is determined
mostly by Law and thus we call it Country_Law. When these components are used in the
ordered logit regression, Country_Voice&Reg is highly significant in the predicted
direction, as shown in Panel C. Country_Law is marginally significantly related to
GRI_Score (at the 10% level). All the firm level variables correlate in the same directions
as before and the same three (Fin, Volat, and Internat) are not significant. Table 4, Panel C
therefore provides additional evidence in support of the country level hypothesis (H1)
(relating to Law, Voice, Gov_Eff, Reg_Qual, and Press); and our firm level expectations
(relating to size, profitability, book to market, leverage, age of equipment, capital
expenditure, and sensitivity of industry).
<<<Table 4 about here>>>
We have now established that each of our six country level variables, as well as the
combined variable, Country_Voice&Reg, are significantly associated with the level of CSR
disclosures. Most of our firm level variables are also significantly associated with CSR
disclosure. We now proceed to examine whether CSR disclosures are associated with
positive economic outcomes. We will do this first in general terms and then examine
whether any positive economic outcomes are more pronounced in certain country types as
measured by our country measures, individually and combined.
28
Consequences
In order to assess whether the CSR disclosure level of a firm has value relevance we
use an Ohlson [1995] type model in a per share specification with additional control
variables – see Table 5. We further include year dummies and country dummies and show
the results after removing outliers.12 Country dummies control for any country effects here,
because we do not (yet) include any country variables in the model. The disclosure
measures we include as independent variables are GRI_Score and GRI_Validation. Table 5,
Panel A shows the coefficient for GRI_Score to be positive and significant at the 1% level.
This indicates that CSR disclosures are value relevant to investors in such a way that firms
with higher levels of CSR disclosure are associated with higher share prices after
controlling for several accounting measures. The coefficient for GRI_Validation is negative
and significant, at the 5% level. This suggests that firms that have their GRI disclosure
level validated by a third party are associated with lower share prices. Managers will not
knowingly indulge in a voluntary activity that lowers share prices. A plausible explanation
for this result is that firms with pre-existing credibility issues are more likely to seek
external validation.
In addition, we perform an F-test, which indicates GRI_Score and GRI_Validation are
not statistically equal to zero (p = 0.05), showing these variables add explanatory value to
the equation.
<<<Table 5 about here>>>
12
Following Belsley, Kuh, and Welsch [2004] we remove the observations where either Rstudent or Dfitts
have an absolute value in excess of 2. This results in the elimination of 16 observations (1% of the initial
sample of 1,418 observations) in the basic model in Panel A.
29
There is potentially a self-selection bias when we include our disclosure measure as
an independent variable, as firms can choose whether they disclose that they use the GRI
for CSR disclosure. We therefore perform the Heckman procedure to re-estimate our base
model, using all the determinants (or predispositions) used in Table 3 to estimate an
indicator variable coded as one when a GRI score is disclosed and zero otherwise, in order
to assess whether we have a self-selection problem. Self-selection does not appear to be a
significant concern, because lambda of the Mills ratio has a p-value of 0.09, being only
marginally significant. Nevertheless, following Chiburis and Lokshin [2007], we next
estimate a Heckman procedure where the selection model is an ordered probit (oHeckman),
allowing us to consider all four possible levels of our GRI_Score variable. We find that the
four estimated lambdas are not statistically significant (with p-values of 0.362, 0.662,
0.594, and 0.147). Therefore, we do not use a two-step estimation when obtaining our next
set of results.
Consequences by country governance strength
The results in the first column of Table 5, Panel A show that higher levels of CSR
disclosures are associated with higher share prices. This analysis includes appropriate
control variables, including country dummies to account for any country effects. However,
we are interested in knowing whether there are more general country effects at work. If this
is the case, we can report in which types of countries it is more likely for positive economic
outcomes to be related to higher levels of CSR disclosure.
30
We examine the influence of country variables on economic consequences of CSR
disclosure by adding the composite country variable we calculated in Table 4 and that was
highly significant in the Table 4 regression, Country_Voice&Reg, as well as an interaction
term with GRI_Score to the basic consequences equation, i.e. equation 2. The variable of
interest is the interaction term, GRI* Country_Voice&Reg. We expect CSR disclosures to
be more likely to lead to positive economic outcomes in countries with a higher
Country_Voice&Reg score, i.e. countries with more democracy, more effective
government, better regulation, and more press freedom. The results are shown in the final
column of Table 5, Panel A. The interaction term is significant, showing that share prices
and CSR disclosures are more positively correlated in countries with better governance as
measured by Country_Voice&Reg. Note that GRI_Score remains significant, although at a
lower level.
To confirm whether this result holds for each of the main constituent parts of the
composite measure, Country_Voice&Reg, we estimate four separate regressions where we
substitute Voice, Gov_Eff, Reg_Qual, and Press for Country_Voice&Reg in turn. The
results, in Table 5, Panel B are in each case consistent with our results and interpretation
above therein that the interaction terms between GRI_Score and the four country variables
are in each case significant in the predicted direction. GRI_Score, not the variable of
interest here, losses significance in most of these estimations.
To summarize, higher levels of CSR disclosure appear to be more likely to be
rewarded with positive economic outcomes in countries with higher levels of democracy,
more effective government, better quality regulation and more press freedom.
31
Additional tests
Table 6 shows that our result in the basic model, i.e. that more CSR disclosure (as
measured by GRI_Score) is associated with higher share prices, hold in three of the four
years in our sample, namely 2007, 2009, and 2010. During 2008, the turbulence in the
financial markets as a consequence of the so-called global financial crisis may have
influenced the general relationship we identify in our main analysis (Table 5).
<<<Table 6 about here>>>
Our measure of CSR disclosure is based on companies’ disclosing the level to which
they follow the GRI guidelines. Although GRI is the most popular CSR guideline,
especially among European firms (KPMG [2011]), there is a possibility that some firms in
our sample disclose high levels of CSR information without indicating that they follow GRI
guidelines. We would have coded such firms’ GRI_Score as “0”, thereby reducing the
likelihood of getting our predicted results. We next perform tests to assess whether our
results were diminished by this decision. Specifically, we ignore all firm-years where
GRI_Score equals zero and re-estimate all the equations reported in both panels of Table 5.
The results, shown in Table 7, are all consistent with the main results in Table 5, providing
additional evidence in support of our hypotheses and findings that higher levels of CSR
disclosure is associated with higher share prices; and that this association is stronger in
countries with more democratic institutions, more effective governments, better quality
regulations, and more press freedom.
We also confirm that our results hold when we use a simplified modified Ohlson
[1995] model specification. Specifically, we estimate the two equations in Table 5, but
32
without the additional control variables (Size and Ind_Sens). Focusing on the variables of
interest only, the untabulated results are that the estimated coefficient for GRI_Score is
positive and significant at the 5% level in the first equation and GRI*Country_Voice&Reg
is positive and significant at the 5% level in the second equation. We also use this
simplified model to re-estimate all the models reported in the rest of Table 5, as well as
Tables 6 and 7. The variable of interest is significant and in the predicted direction in each
case, except for the sample with only the observations from 2010, where GRI_Score loses
significance.
<<<Tables 7 and 8 about here>>>
In order to test for the existence of positive economic consequences to the disclosure
of GRI, we perform a Tobin’s Q analysis, testing whether CSR disclosures are associated
with higher firm values measured by Tobin’s Q (market value to book value of firm assets).
We follow Aggarwal et al. [2009] in their multi-country approach, clustering errors by
country. We further draw on Jiao [2011], Coles, Daniel, and Naveen [2008], and Roll,
Schwartz, and Subrahmanyam [2009] in identifying control variables (i.e. Size, ROA,
Capex, Long term debt, and Internat) and add our CSR disclosure measures (GRI_Score
and GRI_Validation). We also include year and country dummies. Outliers were removed
by following the same procedure as in the main analyses.13 The results in the first column
of Table 8 show that the coefficient for GRI_Score is positive and highly significant, and
the coefficient for GRI_Validation is not statistically different from zero. These results are
indicative that firms with higher levels of CSR disclosure are associated with higher market
13
Following Belsley et al. [2004] we remove the observations where either Rstudent or Dfitts have an
absolute value in excess of 2. This results in the elimination of 43 observations (3% of the initial sample of
1,324 observations) in the basic model.
33
values of assets (scaled by book values) and getting these GRI disclosure levels validated
by a third party do not affect firm value measured in this way. You may recall that Gietl et
al. [2012] perform Tobin’s Q analyses using a CSR disclosure measure that includes both
the GRI level and whether it was validated by a third party. Our results in Table 8
demonstrate the superiority of our disclosure measures, i.e. keeping the GRI disclosure
level separate from an indicator of whether the GRI level was validated by a third party.
In the second column of Table 8, the results of the expanded model including
Country_Voice&Reg and its interaction GRI_Score are similar to the results in Table 5, i.e.
the interaction term is significant (p-value=0.017), suggesting that the association between
the market to book ratio and CSR disclosure is higher in countries with a combination of
more democracy, more effective government, better quality regulation, and more press
freedom. GRI_Score and Country_Voice&Reg are not statistically significant in this
equation.
CONCLUSION
We examine the CSR disclosures of the top 500 European firms during a recent four
year period (2007-2010). We hand collect the GRI application level firms use to disclose
CSR as a measure of the extent of their CSR disclosure. About one third of the firms in our
sample disclose their GRI application level.
We find evidence to support our hypothesis that there is a higher likelihood to
disclose higher levels of CSR among firms in countries with: greater investor protection
measures, higher levels of democracy, more government effectiveness, higher quality
34
regulations, more press freedom, and a lesser commitment to environmental policies. At the
firm level, we find that firms are more likely to disclose higher levels of CSR if they are
larger, more profitable, have higher book to market ratios, are more highly leveraged, have
older assets, spend more on capital, and operate in environmentally sensitive industries.
We also find evidence that higher levels of CSR disclosure are associated with higher
share prices. As such, CSR disclosures can be said to embody information that is value
relevant to investors. We find strong evidence to support the view that this positive
economic association is more pronounced in countries with higher levels of democracy,
government effectiveness, regulatory quality and press freedom. This implies that market
participants find CSR disclosures more informative in countries where investors are in a
better position to voice their concerns (through democratic mechanisms and through the
media), and where opportunities to voice concerns have resulted in better regulation and
more effective government implementation of regulations.
Our results may be limited by the fact that some firms who do not disclose a GRI
application level may also provide a relatively high level of CSR disclosures. However, if
this was the case, then our results would be weaker. We also repeat our tests with the
subsample of firms that disclose a GRI application level and find similar results. As another
way of measuring positive economic consequences, we show that higher levels of CSR
disclosure are associated with higher Tobin’s Q and find preliminary evidence to suggest
that this association is stronger in countries with more democracy, more government
effectiveness, higher regulatory quality and press freedom. We suggest a full Tobin’s Q
analysis as an avenue for future CSR research.
35
Annex 1 – Variable definitions
Disclosure Variables
GRI_Score
Coded 3 for firms disclosing GRI at the A level, 2 for GRI B level disclosure, 1 for
GRI C level disclosure, 0 for not reporting using the GRI disclosure framework
GRI_Validation
Indicator variable coded one when GRI score is validated by an independent firm and
zero otherwise, in cases where there is a GRI score
Country-level variables
Law
Anti-self-dealing score, based on Djankov et al. [2008]. The index considers (1) vote
by mail; (2) shares not blocked or deposited; (3) cumulative voting; (4) oppressed
minority; (5) pre-emptive rights; and (6) capital to call meeting
Voice
Voice and accountability, measured by Worldbank, reported in Kaufman et al. [2010]
Gov_Eff
Government effectiveness, measured by Worldbank, reported in Kaufman et al. [2010]
Reg_Qual
Regulatory quality, measured by Worldbank, reported in Kaufman et al. [2010]
Press
Freedom of the press, as measured by Reporters without borders
Env_Perf
Environmental performance index, Yale Centre for environmental law and policy
Firm-level variables
Size
Size, measured as logarithm of total assets
ROA
Net income (before extraordinary items and preferred dividends) / beginning total
assets
Fin
Financing, measured as (sales less purchases) of common and preferred shares plus
change in long term debt
B_M
Book to market value of equity ratio
Lev
Leverage ratio, calculated as total debt divided by total assets
Internat
International trade, calculated as the percentage of sales made in countries other than
the firms’ headquarters firm
Volat
Share price volatility
New
Firms’ asset newness, measured as net property plant and equipment (PPE)/ gross PPE
Capex
Capital expenditure, measured as capital expenditures / sales
Ind_Sens
Industry sensitivity, an indicator variables coded one for firms operating in
environmentally sensitive industries, and zero otherwise. Sensitive industries are
identified by the SIC codes described in De Villiers et al. [2011] – see footnote for
SIC codes
Share_Price
Closing market value per share, three months after fiscal year end
EPS
Earnings per share
BV_pS
Book value per share, taken at the end of the fiscal year
36
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41
TABLE 1
Descriptive statistics
Panel A – Descriptive statistics for CSR disclosure measures by country
Country
Frequency
Percent of total
Mean of
GRI_Score
Mean of
GRI_Validation
Austria
13
1.06
1.85
1.00
Belgium
32
2.61
0.56
0.75
Czech Republic
4
0.33
0.00
0.00
Denmark
40
3.26
0.45
0.67
Finland
40
3.26
1.23
1.00
France
202
16.46
0.29
0.79
Germany
149
12.14
0.85
0.73
Greece
13
1.06
0.85
0.40
Hungary
12
0.98
1.00
1.00
Ireland
24
1.96
0.50
1.00
Italy
48
3.91
1.27
1.00
Luxemburg
3
0.24
0.33
1.00
Netherlands
65
5.30
1.02
0.69
Norway
21
1.71
0.90
0.88
Poland
4
0.33
1.00
1.00
Portugal
21
1.71
1.38
1.00
Russia
43
3.50
0.21
0.60
Spain
54
4.40
1.70
1.00
Sweden
79
6.44
0.85
0.48
Switzerland
92
7.50
0.91
0.62
Turkey
22
1.79
0.05
0.00
United Kingdom
246
20.05
0.66
0.84
1,227
100.00
Total
0.75
0.79
GRI_Score measures the level of corporate social responsibility disclosure and takes a value of 3 for firms
disclosing GRI at the A level, 2 for GRI B level disclosure, 1 for GRI C level disclosure, 0 for not reporting
using the GRI disclosure framework. GRI_Validation is a dummy variable coded 1 when the GRI disclosure
level is validated by an independent firm, and zero otherwise.
42
Panel B – Descriptive statistics for CSR disclosure frequencies
GRI_Score
GRI_Validation
Variable value
Frequency (%)
Frequency (%)
0
845 (68.87)
81 (21.20)
1
42 (3.42)
301 (78.80)
2
138 (11.25)
3
202 (16.46)
Total
1,227 (100)
382 (100)
GRI_Score measures the level of corporate social responsibility disclosure and takes a value of 3 for firms
disclosing GRI at the A level, 2 for GRI B level disclosure, 1 for GRI C level disclosure, 0 for not reporting
using the GRI disclosure framework. GRI_Validation is a dummy variable coded 1 when the GRI disclosure
level is validated by an independent firm, and zero otherwise.
43
Panel C – Descriptive statistics for country and firm-level variables
Variable
Mean
Std. Dev.
Min
Max
Law
3.480
1.023
1.000
5.000
Voice
1.243
0.488
-0.986
1.618
Gov_Eff
1.481
0.555
-0.425
2.338
Reg_Qual
1.430
0.465
-0.453
1.924
Press
7.796
10.479
0.000
60.880
81.682
7.806
58.100
95.500
Size
16.144
1.273
12.585
19.385
ROA
0.071
0.075
-0.339
0.631
Fin (millions)
0.414
2.891
0.000
45.800
B_M
0.554
0.442
-0.454
4.687
Lev
0.264
0.161
0.0000
1.197
Internat
0.572
0.311
0.0000
1.536
Volat
26.760
8.488
11.990
73.880
New
0.512
0.153
0.135
1.000
Capex
0.102
0.203
0.000
3.786
Ind_Sens
0.334
0.472
0.000
1.000
60.602
366.757
0.020
7,810.670
3.968
34.025
-224.977
813.341
34.596
280.892
-0.566
5,581.547
Country level measures
Env_Perf
Firm level measures
Share_Price
EPS
BV_pS
N = 1,227, the number of observations with no missing data for all variables in this table.
Law is an anti-self-dealing score, based on Djankov et al. [2008]. The index considers (1) vote by mail; (2)
shares not blocked or deposited; (3) cumulative voting; (4) oppressed minority; (5) pre-emptive rights; and (6)
capital to call meeting. Voice, Gov_Eff, and Reg_Qual are the following Worldbank measures as reported by
Kaufman et al. [2010]: Voice and Accountability, Government effectiveness, and Regulatory quality. Press is
freedom of the press, as measured by Reporters without borders. Env_Perf is the environmental performance
index of the Yale Centre for environmental law and policy. Size is measured as logarithm of total assets. ROA
is net income (beipd) / beginning total assets. Fin is financing, measured as (sales less purchases) of common
and preferred shares plus change in long term debt. B_M is book to market value of equity ratio. Lev is the
leverage ratio, calculated as total debt divided by total assets. Internat is a measure of international trade,
calculated as the percentage of sales made in countries other than the firms’ headquarters firm. Volat is share
price volatility. New is firms’ asset newness, measured as net property plant and equipment (PPE)/ gross PPE.
Capex is capital expenditure, measured as capital expenditures / sales. Ind_Sens is industry sensitivity, an
indicator variables coded one for firms operating in environmentally sensitive industries, and zero otherwise.
Sensitive industries are identified by the SIC codes described in De Villiers et al. [2011]. Share_Price is the
closing market value per share, three months after fiscal year end. EPS is earnings per share. BV_pS is book
value per share, taken at the end of the fiscal year.
44
TABLE 2
Correlation tables
Panel A – Correlations between GRI_Score and country variables
GRI_Score
GRI_Score
Law
Voice
Gov_Eff
Reg_Qual
Press
Env_Perf
1
Law
0.044
1
Voice
0.104
-0.044
1
Gov_Eff
0.029
-0.038
0.875
1
Reg_Qual
0.069
0.136
0.916
0.902
1
Press
-0.119
0.060
-0.965
-0.822
-0.886
1
Env_Perf
-0.059
0.046
0.383
0.443
0.315
-0.352
1
The correlations in bold are statistically significant at the 5% level.
GRI_Score measures the level of corporate social responsibility disclosure and takes a value of 3 for firms disclosing GRI at the A level, 2 for GRI B level disclosure, 1 for
GRI C level disclosure, 0 for not reporting using the GRI disclosure framework. Law is an anti-self-dealing score, based on Djankov et al. [2008]. The index considers (1)
vote by mail; (2) shares not blocked or deposited; (3) cumulative voting; (4) oppressed minority; (5) pre-emptive rights; and (6) capital to call meeting. Voice, Gov_Eff, and
Reg_Qual are the following Worldbank measures as reported by Kaufman et al. [2010]: Voice and Accountability, Government effectiveness, and Regulatory quality. Press is
freedom of the press, as measured by Reporters without borders. Env_Perf is the environmental performance index of the Yale Centre for environmental law and policy.
45
Panel B – Correlations between GRI_Score and firm-level variables
GRI_Score
Size
ROA
FIN
B_M
LEV
Internat Volat
New
Size
0.305
1
ROA
-0.032
-0.303
1
FIN
0.078
0.187
-0.005
1
B_M
0.094
0.248
-0.289
0.009
1
LEV
0.072
0.219
-0.332
0.131
-0.009
Internat
0.056
0.121
-0.039
0.006
-0.071 -0.161
Volat
-0.066
-0.187 -0.118 -0.071
0.224
-0.123
0.063
1
New
-0.046
0.023
0.028
0.093
0.104
0.178
-0.134
0.088
Capex
0.056
0.013
-0.061
0.043
0.021
0.224
-0.088 -0.014
0.391
1
Ind_Sens
0.170
0.128
0.000
0.101
0.128
-0.068
0.044
0.044
0.165
0.082
1
Share_Price
-0.033
0.034
0.019
-0.012
0.021
-0.002 -0.003 -0.010
0.022
0.003
-0.011
1
EPS
-0.023
0.041
0.047
-0.019
0.010
-0.000
0.014
-0.013
0.016
0.015
-0.013
0.851
1
BV_pS
-0.017
0.072
-0.023 -0.009
0.062
0.015
-0.012
0.001
0.037
0.011
-0.026
0.939
0.771
Capex
Ind_Sens
Price
EPS
BV_pS
1
1
1
1
The correlations in bold are statistically significant at the 5% level.
GRI_Score measures the level of corporate social responsibility disclosure and takes a value of 3 for firms disclosing GRI at the A level, 2 for GRI B level disclosure, 1 for
GRI C level disclosure, 0 for not reporting using the GRI disclosure framework. Size is measured as logarithm of total assets. ROA is net income (beipd) / beginning total
assets. Fin is financing, measured as (sales less purchases) of common and preferred shares plus change in long term debt. B_M is book to market value of equity ratio. Lev is
the leverage ratio, calculated as total debt divided by total assets. Internat is a measure of international trade, calculated as the percentage of sales made in countries other than
the firms’ headquarters firm. Volat is share price volatility. New is firms’ asset newness, measured as net property plant and equipment (PPE)/ gross PPE. Capex is capital
expenditure, measured as capital expenditures / sales. Ind_Sens is industry sensitivity, an indicator variables coded one for firms operating in environmentally sensitive.
46
industries, and zero otherwise. Sensitive industries are identified by the SIC codes described in De Villiers et al. [2011]. Share_Price is the closing market value per share,
three months after fiscal year end. EPS is earnings per share. BV_pS is book value per share, taken at the end of the fiscal year.
47
TABLE 3
Predisposition towards CSR disclosures (Ordered Logit models)
Panel A – Individual tests of significance of each country-level and firm-level variable using an ordered logit model
GRI_Score
Country-level measures
Firm-level measures
Law
Expected
sign
+
Voice
+
Gov_Eff
+
Reg_Qual
+
Press
-
Env_Perf
?
Size
+
ROA
+
Fin
+
B_M
+
Lev
+
Internat
+
Volat
?
New
-
Capex
+
Ind_Sens
+
Coef
(P-value)
0.083
(0.082)
Coef
(P-value)
Coef
(P-value)
Coef
(P-value)
Coef
(P-value)
Coef
(P-value)
Coef
(P-value)
Coef
(P-value)
Coef
(P-value)
Coef
(P-value)
0.593
(0.000)
0.156
(0.082)
0.371
(0.005)
-0.032
(0.000)
-0.016
(0.029)
0.503
(0.000)
-0.754
(0.177)
0.000
(0.016)
0.419
(0.001)
0.840
(0.013)
0.428
(0.015)
-0.016
(0.036)
-0.657
(0.053)
0.510
(0.025)
0.755
(0.000)
48
N = 1,227.
The table reports the results of ordered logit regressions for each variable individually with GRI_Score as the dependent variable.
P-values are one-tailed for variables with predicted signs.
GRI_Score is the dependent variable and measures the level of corporate social responsibility disclosure and takes a value of 3 for firms disclosing GRI at the A level, 2 for
GRI B level disclosure, 1 for GRI C level disclosure, 0 for not reporting using the GRI disclosure framework. Law is an anti-self-dealing score, based on Djankov et al.
[2008]. The index considers (1) vote by mail; (2) shares not blocked or deposited; (3) cumulative voting; (4) oppressed minority; (5) pre-emptive rights; and (6) capital to call
meeting. Voice, Gov_Eff, and Reg_Qual are the following Worldbank measures as reported by Kaufman et al. [2010]: Voice and Accountability, Government effectiveness,
and Regulatory quality. Press is freedom of the press, as measured by Reporters without borders. Env_Perf is the environmental performance index of the Yale Centre for
environmental law and policy. Size is measured as logarithm of total assets. ROA is net income (beipd) / beginning total assets. Fin is financing, measured as (sales less
purchases) of common and preferred shares plus change in long term debt. B_M is book to market value of equity ratio. Lev is the leverage ratio, calculated as total debt
divided by total assets. Internat is a measure of international trade, calculated as the percentage of sales made in countries other than the firms’ headquarters firm. Volat is
share price volatility. New is firms’ asset newness, measured as net property plant and equipment (PPE)/ gross PPE. Capex is capital expenditure, measured as capital
expenditures / sales. Ind_Sens is industry sensitivity, an indicator variables coded one for firms operating in environmentally sensitive industries, and zero otherwise.
Sensitive industries are identified by the SIC codes described in De Villiers et al. [2011].
49
Panel B – Testing each country-level variable together with all firm-level variables using ordered logit models
GRI_Score
Expected
sign
Law
Coef.
0.137
P-value
0.020
Voice
Coef.
P-value
Gov_Eff
Coef.
P-value
Reg_Qual
Coef.
P-value
Press
Coef.
P-value
Law
+
Voice
+
Gov_Eff
+
Reg_Qual
+
Press
-
Env_Perf
?
Size
+
0.499
0.000
0.527
0.000
0.521
0.000
0.530
0.000
0.543
ROA
+
3.174
0.001
3.989
0.000
3.504
0.001
3.754
0.000
Fin
+
0.000
0.450
0.000
0.500
0.000
0.478
0.000
B_M
+
0.291
0.026
0.403
0.005
0.314
0.018
Lev
+
1.003
0.017
1.104
0.010
1.121
Internat
+
0.261
0.118
-0.010
0.483
Volat
?
0.001
0.864
0.009
New
-
-2.254
0.000
Capex
+
0.920
Ind_Sens
+
0.735
0.893
Env_Perf
Coef.
P-value
0.000
0.361
0.004
0.713
0.000
-0.048
0.000
-0.016
0.049
0.000
0.500
0.000
4.059
0.000
3.155
0.001
0.466
0.000
0.469
0.000
0.457
0.387
0.006
0.433
0.004
0.216
0.079
0.009
1.075
0.012
1.081
0.012
0.992
0.018
0.120
0.300
-0.019
0.467
-0.038
0.435
0.314
0.076
0.316
0.003
0.706
0.005
0.553
0.008
0.359
-0.001
0.866
-1.618
0.001
-1.821
0.000
-1.910
0.000
-1.575
0.001
-2.058
0.000
0.002
0.847
0.003
0.934
0.002
0.900
0.002
0.841
0.003
0.936
0.002
0.000
0.810
0.000
0.761
0.000
0.787
0.000
0.789
0.000
0.720
0.000
N
1,227
1,227
1,227
1,227
1,227
1,227
Prob > chi2
0.000
0.000
0.000
0.000
0.000
0.000
The table reports the results of ordered logit regressions with errors clustered by country.
P-values are one-tailed for variables with predicted signs.
GRI_Score measures the level of corporate social responsibility disclosure and takes a value of 3 for firms disclosing GRI at the A level, 2 for GRI B level disclosure, 1 for
GRI C level disclosure, 0 for not reporting using the GRI disclosure framework. Law is an anti-self-dealing score, based on Djankov et al. [2008]. The index considers (1)
vote by mail; (2) shares not blocked or deposited; (3) cumulative voting; (4) oppressed minority; (5) pre-emptive rights; and (6) capital to call meeting. Voice, Gov_Eff, and
Reg_Qual are the following Worldbank measures as reported by Kaufman et al. [2010]: Voice and Accountability, Government effectiveness, and Regulatory quality. Press
50
is freedom of the press, as measured by Reporters without borders. Env_Perf is the environmental performance index of the Yale Centre for environmental law and policy.
Size is measured as logarithm of total assets. ROA is net income (beipd) / beginning total assets. Fin is financing, measured as (sales less purchases) of common and preferred
shares plus change in long term debt. B_M is book to market value of equity ratio. Lev is the leverage ratio, calculated as total debt divided by total assets. Internat is a
measure of international trade, calculated as the percentage of sales made in countries other than the firms’ headquarters firm. Volat is share price volatility. New is firms’
asset newness, measured as net property plant and equipment (PPE)/ gross PPE. Capex is capital expenditure, measured as capital expenditures / sales. Ind_Sens is industry
sensitivity, an indicator variables coded one for firms operating in environmentally sensitive industries, and zero otherwise. Sensitive industries are identified by the SIC
codes described in De Villiers et al. [2011].
51
TABLE 4
Principal components analysis of predisposition towards CSR disclosures
Panel A – Eigenvalues of the correlation matrix
Principal
Variance explained
Cumulative
(%)
variance (%)
Eigenvalue
components
PC1
3.877
64.62
64.62
PC2
1.033
17.22
81.83
PC3
0.816
13.60
95.43
PC4
0.196
3.26
98.69
PC5
0.050
0.83
99.52
PC6
0.029
0.48
100.00
N=1,227
Panel B – Weights of the two country factors
Variable
PC1
PC2
Law
0.003
0.974
0.019
Voice
0.494
-0.068
0.050
Gov_Eff
0.478
-0.039
0.114
Reg_Qual
0.483
0.112
0.083
-0.481
0.090
0.093
0.251
0.154
0.731
Press
Env_Perf
Unexplained
Law is an anti-self-dealing score, based on Djankov et al. [2008]. The index considers (1) vote by mail; (2)
shares not blocked or deposited; (3) cumulative voting; (4) oppressed minority; (5) pre-emptive rights; and (6)
capital to call meeting. Voice, Gov_Eff, and Reg_Qual are the following Worldbank measures as reported by
Kaufman et al. [2010]: Voice and Accountability, Government effectiveness, and Regulatory quality. Press is
freedom of the press, as measured by Reporters without borders. Env_Perf is the environmental performance
index of the Yale Centre for environmental law and policy.
52
Panel C – Ordered logit with 2 country factors and firm-level variables
GRI_Score
Expected sign
Coef.
P-value
Country_Voice&Reg
+
0.166
0.000
Country_Law
+
0.092
0.086
Size
+
0.528
0.000
ROA
+
3.740
0.000
Fin
+
0.000
0.477
B_M
+
0.405
0.005
Lev
+
1.094
0.011
Internat
+
0.013
0.478
Volat
?
0.007
0.419
New
-
-1.904
0.000
Capex
+
0.885
0.003
Ind_Sens
+
0.789
0.000
/ cut1
9.783
/ cut2
9.970
/ cut 3
10.730
N
1,227
Prob > chi2
0.000
The table reports the results of an ordered logit regression with errors clustered by country
P-values are one-tailed for variables with predicted signs.
GRI_Score measures the level of corporate social responsibility disclosure and takes a value of 3 for firms
disclosing GRI at the A level, 2 for GRI B level disclosure, 1 for GRI C level disclosure, 0 for not reporting
using the GRI disclosure framework. Country_Voice&Reg is PC1 calculated in Table 4, Panel B. Country_Law
is PC2 calculated in Table 4, Panel B. Size is measured as logarithm of total assets. ROA is net income (beipd) /
beginning total assets. Fin is financing, measured as (sales less purchases) of common and preferred shares plus
change in long term debt. B_M is book to market value of equity ratio. Lev is the leverage ratio, calculated as
total debt divided by total assets. Internat is a measure of international trade, calculated as the percentage of
sales made in countries other than the firms’ headquarters firm. Volat is share price volatility. New is firms’
asset newness, measured as net property plant and equipment (PPE)/ gross PPE. Capex is capital expenditure,
measured as capital expenditures / sales. Ind_Sens is industry sensitivity, an indicator variables coded one for
firms operating in environmentally sensitive industries, and zero otherwise. Sensitive industries are identified by
the SIC codes described in De Villiers et al. [2011].
53
TABLE 5
Consequences of CSR disclosures (Share price valuation models)
Panel A – Basic model and including Country_Voice&Reg
Market price per share
Expected
Basic model
With Country_Voice&Reg
sign
Coef.
P-value
Coef.
P-value
EPS
+
1.550
0.000
1.574
0.000
BV_pS
+
0.790
0.000
0.793
0.000
GRI_Score
+
2.889
0.009
3.664
0.072
GRI_Validation
?
-7.312
0.027
-12.871
0.072
Country_Voice&Reg
+
1.138
0.110
GRI*Country_Voice&Reg
+
0.843
0.026
Size
?
-4.104
0.004
-3.129
0.010
Ind_Sens
?
5.558
0.102
5.533
0.072
77.871
0.002
65.974
0.005
Constant
Dummies for years
Included
Dummies for countries
Included
Included
Adjusted R2
0.984
0.980
N
1,521
1,516
The table reports the results of ordinary least squares regressions with errors clustered by country.
P-values are one-tailed for variables with predicted signs.
The dependent variable is the market price per share, Share_Price. EPS is earnings per share. BV_pS is book
value per share, taken at the end of the fiscal year. GRI_Score measures the level of corporate social
responsibility disclosure and takes a value of 3 for firms disclosing GRI at the A level, 2 for GRI B level
disclosure, 1 for GRI C level disclosure, 0 for not reporting using the GRI disclosure framework.
GRI_Validation is a dummy variable coded 1 when the GRI disclosure level is validated by an independent
firm, and zero otherwise. Country_Voice&Reg is PC1 calculated in Table 4, Panel B and represent mainly
Voice, Gov_Eff, Reg_Qual and Press. Voice, Gov_Eff, and Reg_Qual are the following Worldbank measures as
reported by Kaufman et al. [2010]: Voice and Accountability, Government effectiveness, and Regulatory
quality. Press is freedom of the press, as measured by Reporters without borders. GRI*Country_Voice&Reg is
an interaction term between GRI_Score and Country_Voice&Reg. Size is measured as logarithm of total assets.
Ind_Sens is industry sensitivity, an indicator variables coded one for firms operating in environmentally
sensitive industries, and zero otherwise. Sensitive industries are identified by the SIC codes described in De
Villiers et al. [2011].
54
Panel B – Share price analysis with Country_Voice&Reg decomposed into four main parts
Voice
Market price per
Gov_Eff
Reg_Qual
Press
Expected
Coef.
P-value
Coef.
P-value
P-value
Coef.
P-value
+
1.574
0.000
1.575
0.000
1.575
0.000
1.575
0.000
BV_pS
+
0.793
0.000
0.792
0.000
0.793
0.000
0.793
0.000
GRI_Score
+
0.859
0.350
1.742
0.243
0.348
0.454
4.829
0.055
GRI_Validation
?
-13.432
0.072
-12.651
0.075
-13.663
0.082
-13.717
0.076
Voice
+
4.330
0.082
GRI * Voice
+
2.465
0.059
Gov_Eff
+
5.102
0.086
GRI * Gov_Eff
+
1.476
0.066
Reg_Qual
+
2.251
0.264
GRI * Reg_Qual
+
2.719
0.016
Press
-
-0.158
0.108
GRI * Press
-
-0.103
0.043
Size
?
-3.250
0.008
-3.145
0.008
-3.147
0.007
-3.179
0.007
Ind_Sens
?
5.808
0.028
5.695
0.060
4.911
0.082
5.396
0.066
62.369
0.002
58.801
0.001
63.202
0.001
67.950
0.004
share
sign
EPS
Constant
Dummies for
years
Coef.
Included
Included
Included
Included
Adj. R2
0.980
0.980
0.980
0.980
N
1,521
1,521
1,521
1,520
The table reports the results of ordinary least squares regressions with errors clustered by country.
P-values are one-tailed for variables with predicted signs.
The dependent variable is the market price per share, Share_Price. EPS is earnings per share. BV_pS is book value per share,
taken at the end of the fiscal year. GRI_Score measures the level of corporate social responsibility disclosure and takes a
value of 3 for firms disclosing GRI at the A level, 2 for GRI B level disclosure, 1 for GRI C level disclosure, 0 for not
reporting using the GRI disclosure framework. GRI_Validation is a dummy variable coded 1 when the GRI disclosure level
is validated by an independent firm, and zero otherwise. Voice, Gov_Eff, and Reg_Qual are the following Worldbank
measures as reported by Kaufman et al. [2010]: Voice and Accountability, Government effectiveness, and Regulatory
quality. Press is freedom of the press, as measured by Reporters without borders. GRI * denotes interaction terms between
GRI_Score and the country level measure indicated. Size is measured as logarithm of total assets. Ind_Sens is industry
sensitivity, an indicator variables coded one for firms operating in environmentally sensitive industries, and zero otherwise.
Sensitive industries are identified by the SIC codes described in De Villiers et al. [2011].
55
TABLE 6
Consequences of CSR disclosures (Basic model decomposed by year)
2007
Market price
per share
2008
2009
2010
Expected
Coef.
P-value
Coef.
P-value
Coef.
P-value
Coef.
P-value
sign
EPS
+
0.703
0.294
3.340
0.000
4.875
0.000
5.964
0.006
BV_pS
+
1.635
0.000
0.649
0.000
0.962
0.000
0.139
0.332
GRI_Score
+
4.142
0.018
-0.089
0.472
4.165
0.020
2.215
0.065
GRI_Validation
?
-10.004
0.107
-1.641
0.506
-10.543
0.005
-2.777
0.329
Size
?
-5.093
0.011
-2.178
0.004
-4.889
0.010
-4.366
0.002
Ind_Sens
?
3.983
0.338
3.552
0.050
3.998
0.257
3.599
0.113
79.074
0.011
18.399
0.126
86.392
0.000
77.467
0.001
Constant
Dummies for
Included
Included
Included
Included
0.996
0.869
0.989
0.995
371
380
375
379
countries
Adj. R2
N
The table reports the results of ordinary least squares regressions with errors clustered by country.
P-values are one-tailed for variables with predicted signs.
The dependent variable is the market price per share, Share_Price. EPS is earnings per share. BV_pS is book
value per share, taken at the end of the fiscal year. GRI_Score measures the level of corporate social
responsibility disclosure and takes a value of 3 for firms disclosing GRI at the A level, 2 for GRI B level
disclosure, 1 for GRI C level disclosure, 0 for not reporting using the GRI disclosure framework.
GRI_Validation is a dummy variable coded 1 when the GRI disclosure level is validated by an independent
firm, and zero otherwise. Size is measured as logarithm of total assets. Ind_Sens is industry sensitivity, an
indicator variables coded one for firms operating in environmentally sensitive industries, and zero otherwise.
Sensitive industries are identified by the SIC codes described in De Villiers et al. [2011].
56
TABLE 7
Consequences of CSR disclosures (Share price valuation models excluding firms with no GRI_Score)
Panel A – Basic model and including Country_Voice&Reg (Sample excluding firms with no GRI_Score)
Basic model
Market price per share
With Country_Voice&Reg
Expected
Coef.
P-value
Coef.
P-value
sign
EPS
+
3.465
0.001
2.786
0.001
BV_pS
+
0.504
0.001
0.605
0.000
GRI_Score
+
3.518
0.034
3.042
0.021
GRI_Validation
?
-5.990
0.018
-7.921
0.017
Country_Voice&Reg
+
-0.934
0.152
GRI*Country_Voice&Reg
+
1.116
0.025
Size
?
-1.999
0.018
-0.759
0.351
Ind_Sens
?
3.630
0.248
3.586
0.099
35.372
0.004
23.148
0.058
Constant
Dummies for years
Included
Dummies for countries
Included
Adjusted R2
N
Included
0.998
0.998
431
430
The table reports the results of ordinary least squares regressions with errors clustered by country.
P-values are one-tailed for variables with predicted signs.
The dependent variable is the market price per share, Share_Price. EPS is earnings per share. BV_pS is book
value per share, taken at the end of the fiscal year. GRI_Score measures the level of corporate social
responsibility disclosure and takes a value of 3 for firms disclosing GRI at the A level, 2 for GRI B level
disclosure, 1 for GRI C level disclosure, 0 for not reporting using the GRI disclosure framework.
GRI_Validation is a dummy variable coded 1 when the GRI disclosure level is validated by an independent
firm, and zero otherwise. Country_Voice&Reg is PC1 calculated in Table 4, Panel B and represent mainly
Voice, Gov_Eff, Reg_Qual and Press. Voice, Gov_Eff, and Reg_Qual are the following Worldbank measures as
reported by Kaufman et al. [2010]: Voice and Accountability, Government effectiveness, and Regulatory
quality. Press is freedom of the press, as measured by Reporters without borders. GRI*Country_Voice&Reg is
an interaction term between GRI_Score and Country_Voice&Reg. Size is measured as logarithm of total assets.
Ind_Sens is industry sensitivity, an indicator variables coded one for firms operating in environmentally
sensitive industries, and zero otherwise. Sensitive industries are identified by the SIC codes described in De
Villiers et al. [2011].
57
Panel B – Interactions with Country_Voice&Reg decomposed into four main parts (Sample excl. firms with no
GRI_Score)
Voice
Market price per
share
Expected
sign
Coef.
Pvalue
EPS
+
2.771
0.001
BV_pS
+
0.607
GRI_Score
+
GRI_Validation
Gov_Eff
Reg_Qual
Press
Pvalue
Coef.
Pvalue
Coef.
P-value
2.835
0.000
2.497
0.000
2.478
0.000
0.000
0.598
0.000
0.647
0.000
0.650
0.000
-1.804
0.240
-1.915
0.145
-3.922
0.122
3.695
0.016
?
-8.105
0.016
-7.563
0.021
-8.038
0.019
-8.219
0.018
Voice
+
-2.374
0.239
GRI * Voice
+
3.797
0.050
Gov_Eff
+
-2.611
0.205
GRI * Gov_Eff
+
3.470
0.013
Reg_Qual
+
-5.152
0.135
GRI * Reg_Qual
+
4.728
0.016
Press
-
0.057
0.289
GRI * Press
-
-0.125
0.033
Size
?
-0.822
0.319
-0.706
0.377
-1.033
0.252
-0.958
0.294
Ind_Sens
?
3.738
0.093
3.177
0.128
2.674
0.121
3.136
0.093
27.523
0.030
25.928
0.020
26.260
0.098
17.055
0.265
Constant
Dummies for
years
Adj. R2
N
Coef.
Included
Included
Included
Included
0.998
0.998
0.998
0.998
430
430
428
428
The table reports the results of ordinary least squares regressions with errors clustered by country.
P-values are one-tailed for variables with predicted signs.
The dependent variable is the market price per share, Share_Price. EPS is earnings per share. BV_pS is book value per share,
taken at the end of the fiscal year. GRI_Score measures the level of corporate social responsibility disclosure and takes a
value of 3 for firms disclosing GRI at the A level, 2 for GRI B level disclosure, 1 for GRI C level disclosure, 0 for not
reporting using the GRI disclosure framework. GRI_Validation is a dummy variable coded 1 when the GRI disclosure level
is validated by an independent firm, and zero otherwise. Voice, Gov_Eff, and Reg_Qual are the following Worldbank
measures as reported by Kaufman et al. [2010]: Voice and Accountability, Government effectiveness, and Regulatory
quality. Press is freedom of the press, as measured by Reporters without borders. GRI * denotes interaction terms between
GRI_Score and the country level measure indicated. Size is measured as logarithm of total assets. Ind_Sens is industry
sensitivity, an indicator variables coded one for firms operating in environmentally sensitive industries, and zero otherwise.
Sensitive industries are identified by the SIC codes described in De Villiers et al. [2011].
58
TABLE 8
Consequences of CSR disclosures (Alternative model – Tobin’s Q)
Basic model
With Country_Voice&Reg
Tobin’s Q
Expected sign
Coef.
P-value
Coef.
P-value
GRI_Score
+
0.045
0.013
0.027
0.125
GRI_Validation
?
-0.079
0.321
-0.104
0.290
Country_Voice&Reg
+
0.032
0.006
GRI* Country_Voice&Reg
+
0.014
0.017
Size
?
-0.217
0.000
-0.201
0.000
ROA
?
5.435
0.000
5.521
0.000
Capex
?
-0.206
0.016
-0.085
0.113
LT_debt
?
0.128
0.463
0.135
0.445
Internat
?
-0.028
0.426
0.003
0.939
3.879
0.000
4.371
0.000
Constant
Dummies for years
Included
Dummies for countries
Included
Included
R2
0.595
0.556
N
1,281
1,275
The table reports the results of ordinary least squares regressions with errors clustered by country.
P-values are one-tailed for variables with predicted signs.
The dependent variable is Tobin’s Q. GRI_Score measures the level of corporate social responsibility disclosure
and takes a value of 3 for firms disclosing GRI at the A level, 2 for GRI B level disclosure, 1 for GRI C level
disclosure, 0 for not reporting using the GRI disclosure framework. GRI_Validation is a dummy variable coded
1 when the GRI disclosure level is validated by an independent firm, and zero otherwise. Country_Voice&Reg
is PC1 calculated in Table 4, Panel B and represent mainly Voice, Gov_Eff, Reg_Qual and Press. Voice,
Gov_Eff, and Reg_Qual are the following Worldbank measures as reported by Kaufman et al. [2010]: Voice
and Accountability, Government effectiveness, and Regulatory quality. Press is freedom of the press, as
measured by Reporters without borders. GRI*Country_Voice&Reg is an interaction term between GRI_Score
and Country_Voice&Reg. Size is measured as logarithm of total assets. ROA is net income (beipd) / beginning
total assets. Capex is capital expenditure, measured as capital expenditures / sales. LT_debt is long term debt
scaled by total assets. Internat is a measure of international trade, calculated as the percentage of sales made in
countries other than the firms’ headquarters firm.
59