Quality choices in corporate social responsibility reporting under heterogeneous investor preferences

Abstract

Corporate social responsibility (CSR) disclosure practices vary widely across firms, prompting the need to elucidate the theoretical foundation determining the quality of firms' CSR reporting. This study develops a model of quality choice in CSR reporting under heterogeneous investor preferences by directly extending the model of Friedman and Heinle (2016). In the model of this study, a firm determines the quality of CSR reporting by incurring costs and disseminates CSR information to investors. The model demonstrates that when CSR reporting quality is endogenized, the firm's choice of CSR reporting quality reflects the firm's targeted information users in a market with heterogeneous investor preferences. The firm targeting socially responsible (SR) investors chooses high-quality CSR reporting to incorporate SR investors' valuation of its CSR performance into its share price. The study's findings indicate that firms' incentives for strategic shareholder composition undermine the effectiveness of CSR regulations and standard-setting.