Is CSR reporting always favorable?

Abstract

Purpose In addition to their profit maximization objective, firms are often challenged to meet environmental and social demands. The purpose of this paper is to test whether a firm’s macroeconomic environment moderates the efficiency of its social and environmental disclosures. Design/methodology/approach The study uses the Bloomberg database to collect data on the FTSE 350 listed firms for the years 2007-2012. The sample is split into crisis and post-crisis periods, to study the investor reaction to social disclosures under different economic conditions. Findings The results suggest that the effect of corporate social responsibility (CSR) disclosure on future firm performance depends on the surrounding macroeconomic environment. During tight economic situations, market participants become more self-centered and penalize firms diverting scarce resources toward non-profitable societal engagements. Moreover, the findings indicate that firms with a high participation of outside directors and low accounting profit experience negative future performance when engaging in social disclosures during times of crisis. Practical implications Corporate governance is a system of interconnected practices that is affected by various firm and environmental characteristics. The results are in line with the premise that, depending on macroeconomic changes and specific firm attributes, CSR reporting may have dissimilar implications across different situations and conditions. Social disclosures and engagements are not always favorable, and should only be utilized in non-recessionary periods by firms possessing certain characteristics in terms of board composition and accounting profitability. Originality/value This study identifies key moderating variables which present additional obstacles for firms engaging in CSR during adverse economic conditions. Outsiders’ inferior firm-specific expertise, along with the firm’s poor accounting performance, present additional financial constraints for firms engaging in CSR activities during economic downturns.