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Research Focus

Corporate Social Responsibility Reporting

By Brian White

Firms are increasingly disclosing corporate social responsibility (CSR) performance measures on websites and in annual reports. Some investors now regularly consider firms’ CSR performance along with traditional financial performance measures when making investment decisions. Approximately 12% of managed investment capital in the US during 2009 followed some socially responsible investing strategy. Thus, while many investors become familiar with the CSR performance of firms they follow, there is considerable variation in terms of whether and how explicitly they consider CSR performance as part of their overall investment strategy.

W. Brooke Elliott, Kevin E. Jackson, Mark E. Peecher and I investigated whether CSR disclosures cause an unintended change in investors’ estimates of fundamental value. We expected this unintended effect because CSR disclosures are likely to lead to emotional reactions, due to their imagery-provoking nature. Psychology theory suggests that these emotional reactions can subconsciously influence subsequent judgments. The theory further suggests that the unintended influence of emotion can be reduced if emotional reactions are explicitly attributed to their source (CSR performance, in this case). Therefore, we also tested whether incorporating an explicit assessment of CSR performance into an overall investment analysis can reduce the unintended effect of CSR performance on estimates of value.

In a controlled experiment, we found that investors who are exposed to, but do not explicitly assess, CSR performance derive higher fundamental value estimates in response to positive CSR performance, and lower fundamental value estimates in response to negative CSR performance. This effect is unintended and explicit assessment of CSR performance significantly reduces it. Our results also shed light on the consequences of these fundamental value estimates, in that investors who do not explicitly assess CSR performance rely on their unintentionally influenced estimates of fundamental value to increase the price they are willing to pay to invest in a firm with positive CSR performance.

Our results suggest that incorporating an explicit assessment of CSR performance into an overall investment analysis can reduce the unintended and subconscious effects of emotion on investment-related judgments and decisions. Thus, explicitly assessing CSR performance can have benefits for all investors; even those who do not choose to follow a CSR-related investment strategy.

Brian White, Assistant Professor of Accounting, received his BS in Foreign Services from Georgetown University, his MBA from the University of Manchester, and his Ph.D. from the University of Illinois at Urbana-Champaign. His research and teaching interests include financial and managerial accounting.

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