How Does Financial Reporting Quality Relate to Corporate Social Responsibility Expenditures? An International Analysis

Abstract

In this study, we examine whether financial reporting quality improves corporate social responsibility (CSR) decisions. By using a sample of 3,502 observations from 18 countries, our findings show that financial reporting quality is positively (negatively) associated with CSR activities for firms that are more prone to under-invest (over-invest) in CSR. These results suggest that financial reporting quality mitigates managerial discretion in CSR activities and leads to an improvement in CSR decisions. Further, we decompose CSR into environmental and social dimensions and find that the effects of financial report quality on CSR initiatives are more pronounced for firms with a tendency to under-invest in environmental CSR.