CSR Restatements and the Contagion Effect: An Experimental Investigation of Issue Materiality and Intent

Abstract

Investors are demanding more Corporate Social Responsibility (CSR) reporting, which has increased the prevalence of CSR disclosures. However, such disclosures are restated at high rates, leading to concerns about reliability. Using two experiments, we investigate how investors react to restatements of CSR disclosures. Results reveal that a negative CSR restatement is decision useful, whereby investors are less willing to invest in a company that corrects a significant overstatement of performance. We also find that features of the environment—the materiality of the CSR issue and the intentionality of the error—affect investors’ reactions to the restatement. Finally, our study demonstrates how CSR restatements affect investment judgments. Specifically, we provide evidence of a “contagion effect,” by which the credibility effects of a CSR restatement transfer to investors’ assessments of financial disclosures. These results inform regulators and practitioners concerned about the ramifications of errors in CSR reporting on nonprofessional investors’ judgments.

Keywords: corporate social responsibility, restatements, disclosure transparency, materiality

JEL Classification: M41