Financial Reporting Conservatism and Voluntary CSR Disclosure

Abstract

This paper examines whether a firm’s degree of conservatism in financial reporting is associated with its voluntary non-financial corporate social responsibility (CSR) disclosures and the stock price reaction to such disclosures. Theoretical and empirical studies find that the amount of voluntary disclosures and their credibility vary depending on the degree of financial reporting conservatism. We expand this line of questioning and find that firms that adopt conservative financial reporting are less likely to disclose CSR information. Further analyses show that the market reaction to a firm’s CSR disclosure is reduced when its financial reporting is more conservative. Our evidence suggests that the quantity and quality of CSR disclosures are associated with the degree of accounting conservatism. Therefore, stakeholders should consider a firm’s financial reporting policies when interpreting CSR disclosures.

Keywords: Corporate Social Responsibility (CSR); Voluntary Disclosure; Accounting Conservatism; Disclosure Credibility; Soft Information

JEL Classification: M40; M41