Nothing but the Truth? Private Information and Reporting on Corporate Social Responsibility

Abstract

We develop and test a model in which firms can make non-verifiable statements about their CSR engagement, and hence may have incentives to mislead markets with exaggerated CSR claims. Firms may privately receive a signal correlated with their CSR engagement - e.g. a measure of greenhouse gas emissions - and have discretion over whether to publicly disclose it. Based on whether a signal is disclosed to them, and on what the signal is, markets form beliefs about the firm's CSR activities and the truthfulness of its claims. The model illustrates the disciplining effect of ex post private signal availability on firms' ex ante reporting on their CSR engagement. We test the model using a difference-in-differences approach that exploits special features of the introduction of the UK Companies Act of 2013, and find evidence supporting the model's predictions.

Keywords: Corporate Social Responsibility Reporting; ESG; Signal Availability; Greenwashing; Greenhouse Gas Emissions; UK Companies Act of 2013

JEL Classification: M14, D82, G38