The Effect of Mandatory CSR Disclosure on Information Asymmetry: Evidence from a Quasi-Natural Experiment in China

Abstract

Using a quasi-natural experiment that mandates a subset of listed firms to issue corporate social responsibility (CSR) reports, this paper examines the effect of mandatory CSR disclosure on market information asymmetry in China, where we estimate information asymmetry using high frequency trade and quote data. We find that contrary to the criticism that mandatory CSR disclosure lacks credibility and relevance in emerging markets, mandatory CSR reporting firms experience a decrease in information asymmetry subsequent to the mandate. We also find that consistent with the assertion that CSR disclosure is informative about firms’ political and social prospects, the decrease in information asymmetry is more pronounced for firms with lower government ownership, weaker political connections, and smaller corporate donation. In addition, we find that analyst following increases subsequent to the mandatory CSR reporting and firms with less analyst coverage experience a greater decrease in information asymmetry subsequent to the CSR mandate.

Keywords: Mandatory CSR Disclosure, Information Asymmetry, Political/Social Risk, China

JEL Classification: G15, M14, M48