The Value Relevance of Corporate Social Responsibility (CSR) Assurance

This dissertation examines the association between corporate social responsibility (CSR) assurance and firm value. This study contributes to the understanding of the economic benefits inherent in CSR assurance by investigating the incremental value added to firms by assurance. This study also explores CSR assurance quality in both Australia and New Zealand, two countries that are rarely examined. The research adopts a signalling theory view of CSR assurance, where assurance acts as a signal of disclosure quality. The quality of assurance statements has been examined using a content analysis approach. Content analysis generates quality scores that enable quantitative analysis of the effects of CSR assurance quality on firm value. The results show that CSR assurance is value-relevant, but assurance quality is not. Results remained true even after controlling for CSR performance, country and industry effects. The current study also finds that CSR assurance quality is lower when produced by an accountant, and that better governance mechanisms increase assurance statement quality. In addition to the CSR assurance quality score, scholars associate several other attributes with assurance quality. These attributes include the level of assurance and the type of assurance provider. The level of assurance and the type of assurance provider constitute signals about CSR assurance quality. These attributes are also examined to determine their effect on firm value. The results do not show any significant effect of CSR assurance quality on firm value, either from the overall assurance quality score or from the attributes of quality. This research has implications for companies, standard setters and assurance providers. Companies may benefit from adopting CSR assurance. Since the quality of assurance does not THE VALUE RELEVANCE OF CSR ASSURANCE 10 communicate any effective signal, it may be important for companies, standard setters and assurance providers to collaborate to improve assurance standards to achieve higher quality, in order to minimise the possibility of falsified signalling through substandard reporting and poor assurance quality. There are many opportunities for future research on the economic benefits of CSR assurance. Future research should look into conducting a longitudinal study on CSR assurance quality. Future research should also examine the effect of assurance and its quality on firm value at different points of time and with various types of CSR disclosure. THE VALUE RELEVANCE OF CSR ASSURANCE 11 The Value Relevance of Corporate Social Responsibility (CSR) Assurance Chapter One: Introduction 1.1 Overview of CSR Assurance The increase in corporate social responsibility (CSR) reporting and the publication of social and environmental reports have been accompanied by an increasing interest in the credibility and reliability of these reports. Hence, external assurance has emerged as a way of providing independent verification of the information presented in CSR reports. The literature on CSR disclosure is voluminous and diverse. Several studies document an association between companies’ financial performance and their environmental and social performance (e.g., Clarkson, Li, Richardson, & Vasvari, 2008; Van der Laan, Van Ees, & Van Witteloostuijn, 2008). CSR performance and disclosure can influence the perceptions of investors about the firm’s value. Specifically, positive CSR performance can affect investors’ judgements and can increase their willingness to pay more for the equity of the firm (BrownLiburd, Cohen, & Zamora, 2012; Brown-Liburd & Zamora, 2015). If this willingness to spend more spreads to more investors, then it is likely to reduce the cost of equity capital (Elliott, Jackson, Peecher, & White, 2014), which is consistent with findings from studies that utilise archival information (e.g., Dhaliwal, Li, Tsang, & Yang, 2011; Plumlee, Brown, Hayes, & Marshall, 2015). Dhaliwal et al. (2011) found that firms practicing regular CSR disclosure are attractive to institutional investors and raise more equity capital. Plumlee et al. (2015) found that the quality of environmental disclosure is associated with firm value, resulting in increased cash flows and reduced cost of equity capital. The credibility of CSR information has been criticised. CSR assurance plays an important role in boosting report users’ (investors’) confidence. Hodge, Subramaniam, and Stewart (2009) found that CSR assurance improved perceptions of the credibility and reliability of information contained in sustainability reports. Indeed, benefits of voluntary assurance on THE VALUE RELEVANCE OF CSR ASSURANCE 12 non-financial disclosures include reducing information asymmetry between the company and the stakeholders (Blackwell, Noland, & Winters, 1998; Dhaliwal et al., 2011; Dhaliwal, Li, Tsang, & Yang, 2014), greater credibility and better reliability of information (Hodge et al., 2009) and lower analyst forecast error (Dhaliwal, Radhakrishnan, Tsang, & Yang, 2012). CSR assurance, from a firm’s perspective, allows the organisation to identify material issues and to design a framework to manage non-financial risk (AccountAbility, 2008a, 2008b). From the investor’s perspective, assurance can also mitigate concerns that the firm is engaged in “greenwashing” and “impression management” (Brown-Liburd et al., 2012). Cheng, Green, and Ko (2015) considered the signalling role of CSR assurance, based on signalling theory. Empirical evidence from the financial literature shows how companies aim to signal information to the market, and academic literature about CSR disclosure reveals similar findings in relation to market signalling (Cheng, et al., 2015). The reporting of environmental, social and governance (ESG) indicators sends signals about environmental and social corporate image and the reputation of the firm (Cheng, et al., 2015) Therefore, companies with higher quality disclosure have the potential to differentiate themselves from companies that produce lower quality disclosures; companies producing high-quality information will aim to signal this high quality (Clarkson, Fang, Li, & Richardson, 2013). In fact, signalling high-quality disclosures can be interpreted as an attempt to counteract potentially negative perceptions that the company has been tempted to report positive news only and to engage in greenwashing. Indeed, high-quality disclosures promote information credibility and confidence (Clarkson, et al., 2013). Furthermore, Mock, Strohm, and Swartz (2007) argued that in the absence of assurance, CSR reporting acts as an advertisement for the company, but does not constitute any signals about the firm’s future value. Therefore, CSR assurance is needed to guarantee higher quality disclosure. Clearly, assurance plays an important role in improving THE VALUE RELEVANCE OF CSR ASSURANCE 13 the quality of CSR disclosures (Moroney, Windsor, & Aw, 2012). In support of this view, Cheng et al. (2015) argued that although CSR assurance is voluntary, it sends signals about the reported information’s importance. Furthermore, Brown-Liburd et al. (2012) found evidence that assurance effects on CSR disclosure are associated with higher share price assessments by investors, which suggests that the assurance signal is captured by changes in the company’s share price. The mounting evidence suggests that assurance seems to add an incremental value to CSR disclosure and could affect the overall value of the firm. Simnett, Vanstraelen, and Chua (2009) proposed that assurance is value-relevant; they also argued that since assurance is voluntary, it is expected that firms choosing to get their CSR reports assured are likely to believe that the benefits of obtaining assurance exceed the costs. Those benefits include increasing stakeholders’ confidence in the quality of the information provided, as well as increasing trust in the firm’s commitment to sustainable practices (Simnett et al., 2009). However, the incremental value from assurance on CSR disclosure has been questioned and assurance is not seen as an independent inquiry (Ball et al., 2000; Hodge et al., 2009; O'Dwyer & Owen, 2005; Pinsker & Wheeler, 2009), because it is normally conducted under rigid restrictions imposed on the assurance provider by the firm’s management (Ball et al., 2000; O'Dwyer & Owen, 2005; Pinsker & Wheeler, 2009). Therefore, an assurance engagement conducted under these conditions is unlikely to add value. CSR assurance practice is also criticised because of the wide variability in format and content. This variability hinders the value of assurance to enhance disclosure credibility, and it suggests the need for standardisation of assurance practices and guidelines (Hodge et al., 2009). The issues of independence and the variability in content and format emphasise the need to investigate the quality of assurance statements, as well as the effect of CSR assurance quality on firm value. THE VALUE RELEVANCE OF CSR ASSURANCE 14 Overall, CSR disclosures appear to be value-relevant and complementary to the financial performance of firms. Furthermore, CSR assurance enhances the credibility of CSR information and amplifies the benefits of CSR reporting, thereby enhancing firm value. The need for credibility and confidence in CSR information is the driver of value in this study. The terms “sustainability report”, “CSR report” and “social and environmental report” are used interchangeably in this dissertation. In addition, the term “assurance” refers to assurance on CSR or sustainability disclosures. 1.2 Definition of CSR Assurance Although sustainability reporting and assurance on sustainability are generally considered to lack specific guidance, there are two set of standards that appear to be used globally, which are: 1) the Accountability Assurance Standards (AA1000 AS), which are specifically designed to meet the needs of the providers of sustainability and CSR reports, which a