CSR performance and annual report readability: evidence from France

Abstract

Purpose This study aims to examine the relationship between the corporate social responsibility (CSR) performance and the readability of annual report. The shareholder theory suggests that CSR firms will provide more transparent disclosures because this reflects a socially and environmentally responsible behavior and a firm’s commitment to high ethical standards. In the same time, the agency theory offers an opposite view. It predicts that opportunistic managers use CSR as an entrenchment strategy and hide their maneuvers through complex textual financial disclosures. Design/methodology/approach Based on a sample of 100 listed firms on the French CACAll-shares index over the period from 2013 to 2016, the authors use a panel regression analysis and run other estimation methods (IV-2SLS) and simultaneous equation model to address the endogeneity issues. They assess the readability of annual reports using the Gunning-Fog Index and the Flesch Index derived from the computational linguistics literature. Findings The results show a significant positive relationship between CSR performance and the readability of annual report. Firms engaging in CSR practices are more likely to provide transparent disclosures with higher readability because this reflects a socially responsible behavior and a firm’s commitment to high ethical standards. This result supports the stakeholder theory and the corporate reputational view. The finding is also robust to alternative readability measurements and to endogeneity bias. Practical implications This study helps all market participants to more comprehensively evaluate the CSR performance disclosed on annual report. It encourages managers to consider CSR as a means to prevent the opacity risk through improved information quality. It also drives French authorities to better regulate the narrative disclosure of CSR firms and change the way companies design their reporting practices. Moreover, it encourages CSR rating agencies to become the dominant definition of CSR evaluation by granting more importance to the quality of disclosed information. Originality/value This study extends previous research on the potential impact of CSR on information quality measured by annual report readability in the French context. Unlike prior studies on the impact of CSR on information quality, that focus exclusively on earnings management and adopt qualitative approaches to assess the SCR score, the authors use simultaneously the Gunning–Fog Index and the Flesch Index to assess the information quality and extract the CSR score from the CSRHub database of companies’ social, environmental and governance performance.