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

Abstract

This paper develops and tests a model in which firms can make non-verifiable statements about their CSR activities, and hence may have an incentive to mislead their consumers with exaggerated claims about these activities. Firms may or may not be able to privately obtain a signal that is positively correlated to their CSR activities, but have discretion over whether to publicly disclose any signal received. Thus, depending on whether a signal is disclosed to them, and on what the signal is, consumers form beliefs about the type of firm they are facing and the truthfulness of their claim. We examine the disciplining impact of ex post signal availability on firms' ex ante reporting on their CSR activities. The key prediction of the model is a negative impact of signal availability on CSR activity claims. To test this, we exploit the UK's Companies Act of 2013, which encouraged publicly traded companies to at least obtain (and ideally disclose) verifiable measures of their greenhouse gas emissions - an event we interpret as an exogenous increase in signal availability. Consistent with our theory, we find that firms in the UK make lower CSR claims after increased signal availability, compared to firms from the other 15 European countries which did not experience mandatory disclosure requirements. We also perform a number of robustness checks and explore other predictions of the model. These empirical findings provide further support for the model.