The Role of Corporate Social Responsibility (CSR) Assurance in Investors’ Judgments When Managerial Pay is Explicitly Tied to CSR Performance

Abstract

While corporate social responsibility (CSR) reports are intended to faithfully represent CSR performance, voluntarily disclosed CSR information tends to be positive, and demand is rising for both independent assurance and integrated reporting of CSR. However, the supply of CSR assurance is not widespread in the United States, and CSR performance information remains largely separated from supporting and governance information. We thus examine the role of CSR assurance when information on CSR investment level is integrated with information on whether managerial pay is explicitly tied to sustainability. While a firm may report a high level of CSR investment to indicate an authentic commitment to CSR, investors may become skeptical of reported information if managerial pay is explicitly tied to CSR performance. Such pay-for-CSR-performance provides managers with greater incentives to overinvest in CSR and thereby report strong CSR performance. In turn, investors will seek CSR assurance as a disclosure credibility signal. Accordingly, we find that in the presence of pay-for-CSR-performance and high CSR investment level, investors’ stock price assessments are greater only when CSR assurance is also present. Our findings highlight the importance of examining CSR disclosure factor interaction effects, and provide support for the expansion of CSR assurance and integrated reporting.

Keywords: Corporate social responsibility; pay-for-performance, assurance services; investor judgments