Overselling corporate social responsibility

• Published date: 01 September 2023
• Author: Najah Attig,Wenyao Hu,Mohammad M. Rahaman,Ashraf Al Zaman
• Date: 01 September 2023
• DOI: http://doi.org/10.1111/fima.12434

DOI: 10.1111/fima.12434

ORIGINAL ARTICLE

Overselling corporate social responsibility

Najah Attig1Wenyao Hu2Mohammad M. Rahaman3

Ashraf Al Zaman3

1Faculty of Management, Dalhousie

University, Halifax, Canada

2School of Management, New YorkInstitute of

Technology,New York, USA

3Saint Mary’s University, Halifax, Canada

Correspondence

Najah Attig, Faculty of Management,

Dalhousie University,Halifax, Canada.

Email: najah.attig@dal.ca

Abstract

We show that firms hype up their corporate social responsi-

bility (CSR) narratives during the turn-of-the-year earnings

conference calls to project an overly responsible public

image of their firms. This previously unexplored phe-

nomenon does not appear to be related to past, current,

and future CSR engagements and cannot be explained by

observed time-varying firm attributes and unobserved

time-invariant firm and CEO attributes. We find that the

fourth-quarter CSR narrative hike is more pronounced

among firms that are (ex ante) expected to do more corpo-

rate good as well as firms embedded in dirty industries, but

less prevalent among firms facing elevated product-market

threats. Although elevated CSR narrative is associated with

positive short-term market reaction and lower near-term

stock price crash risk, such behavior tends to reduce finan-

cial report readability and leads to lower equity valuation

in the longer term. Our analyses suggest that CSR narrative

hike at the turn-of-the-year is a pervasive phenomenon

in the corporate landscape and may have valuation and

governance implications.

KEYWORDS

CSR window dressing, impression management, public image of

firms

Thisis an open access article under the terms of the Creative Commons Attribution- NonCommercial-NoDerivs License, which permits

use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or

adaptations are made.

© 2023 The Authors. Financial Management published by Wiley Periodicals LLC on behalf of Financial Management Association

International.

Financial Management. 2023;52:573–610. wileyonlinelibrary.com/journal/fima 573

574 ATTI G ETAL.

1INTRODUCTION

In the last 20 years, growth in corporate social responsibility (CSR) reporting among public firms in most

developed countries has been staggering, yet environmental damage and social inequality are still increasing (HBR,

2021). This raises the important question of whether firms are genuinely committed to CSR initiatives or merely pro-

viding lip service to such issues to present an overly responsible public image to various stakeholders. It is possible

that, under increased pressure to report social impacts, some firms mayresort to exaggerated claims about their social

and environmental impact to favorably influence stakeholders’perceptions (e.g., Marquis et al., 2016). Arguably, the

heterogeneity in firms’ CSR commitments and reporting practices has made it difficult for investors to distinguish

between credible CSR assertions and those that are inherently window-dressed. Since unsubstantiated CSR claims

are not de facto fraudulent (Attig, 2020), it may provide incentive to opportunistic managers to engage in CSR over-

selling. Despite the sizable CSR literature, empirical evidenceon the extent to which firms oversell their CSR footprint

remains limited. This study aims to fill that gap. We focus on firms’ CSR narratives in quarterly earnings conference

calls to investigate whether and to what the extent executivesadopt impression management practices to influence

perceptions of capital market participants about their firms’ CSR profiles.1

Quarterly earnings calls are major corporate events, allowinginvestors, analysts, and other capital market partici-

pantsto listen to firms’ management teams and to ask them about material current and future corporate developments

(Hollander et al., 2010). However,unlike other corporate disclosures (e.g., press releases, annual reports) transcripts

of quarterly earnings conference calls are unaudited, giving managers more opportunities for impression manage-

ment, which may not be easily achievable with audited annual reports (Neu et al., 1998). Conversely,the spontaneous

and unscripted nature of narratives in earnings calls is also more likely to reveal managers’ true intentions (Larcker

& Zakolyukina, 2012; Matsumoto et al., 2011).2Therefore, whether and to what extent firms use the unaudited and

semistructured nature of earnings conference calls to overselltheir CSR performances remains an empirical question.

Additionally, the presence of four earnings calls in a fiscal year and the potential variability in their narrativedisclo-

sures allow researchers to examine CSR narrativedynamics not only over time and across firms but also within a firm

in a given fiscal year,allowing for more granular analyses of CSR impression management.

Tothis end, we apply natural-language processing from computational linguistics to transcripts of earnings confer-

ence calls overthe period 2007−2020 to construct a text-based measure of the extent of CSR rhetorical and thematic

discussion. We rely on Pencle and M˘

al˘

aescu’s (2016) dictionary to measure our index of CSR/environmental discre-

tionary narrative disclosure based on the absolute and relative frequency of CSR-related words in the narratives of

the earnings conference calls. This index is relevant for the purpose of our focus since it reflects the extent of CSR

rhetorical and thematic discussion in the narratives of earningsc onferencec alls.3

We first document a sustained increase in CSR narrative disclosure overour sample period, confirming the grow-

ing importance of nonfinancial performance.4Perhaps most importantly, we uncover a novelphenomenon showing

that managers consistently increase CSR narratives during the turn-of-the-year earnings calls compared to the other

three quarters. This empirical phenomenon remains statistically and economically significant after a series of robust-

ness checks to account for unobserved heterogeneity.We further examine the sentiment and tone of communication

(Loughran& McDonald, 2011) across quarters within a fiscal year in addition to the volume of CSR narratives and find

1Impressionmanagement refers to “the behavioral strategies used by people to create desired social images or identities” (Tetlock & Manstead, 1985,p.59).

Greenwashing,for instance, is a form of impression management through which firms make misleading or unsubstantiated claims about their environmental

performanceby framing their activities as “green” (Laufer, 2003; Lyon & Maxwell, 2011).

2For instance, if firm executivesattempt to evade questions on CSR issues or potentially overstate or window dress their accomplishments, analysts and

investors on the call could easily follow up in real time and ask probing questions to establish the credibility of executives’CSR assertions, thereby making

suchnarratives less susceptible to manipulation (Sautner et al., 2023).

3Sydserff and Weetman (1999) conclude that textureindex “is potentially a powerful tool for analysis of accounting narratives and association testing” (p.

459).

4The2019 PWC Global CEO Survey shows that 64% of CEOs believe that corporate social responsibility (CSR) “is core to [their] business rather than being

astand-alone program.”

ATTI G ETAL.575

that not only do top executives use more CSR narrativein the fourth fiscal quarter but also they do this with a more

positivetone compared to other quarters of the fiscal year. Finally, we document a significant increase in CSR narrative

disclosureduring theCOVID-19pandemic, possibly to reduce corporations’ susceptibility to shocks (e.g., Albuquerque

et al., 2019) during periods of heightened economic uncertainty. To capture the discretionary portion of the CSR dis-

closure in the fourth fiscal quarter within a fiscal year,we follow Allen and Saunders (1992) and Khokhar et al. (2022)

and construct CSR hike and reversal measures and find that much of the elevated CSR narrative in the fourth fiscal

quarter is reversed in subsequent quarters. Furthermore, we show that fourth-quarter CSR narrative hike is unre-

lated to firms’ near-term actual CSR performances, suggesting that fourth-quarter elevated CSR narrativehike is akin

to window-dressing behavior.

The natural question that follows is: Why are managers likely to oversell the CSR performances of their firms at

the turn-of-the year? Hassler and Buckmaster (1975, p. 128) note that managers are expected “to makemost of their

manipulation decisions when the need is most certain—in the last quarter of the year.”Kiger (1974) also finds that the

fourth fiscal quarter reports tend to be associated with greater volatility and potentially more manipulative behavior.

In theory,managers may use the fourth-quarter CSR narrative disclosure in earnings calls to reduce information asym-

metry,alleviate external financing frictions (O. Kim & Verrecchia,1994), signal lower environmental risk, and reassure

investors during periods of heightened uncertainty (Blacconiere & Patten,1994; Cormier et al., 2009).

It is, however,important to note that fiscal year-end firm financial strength is important for shareholders, creditors,

and other stakeholders (e.g., rating agencies, among others). To show a strong financial position, firms may window-

dresstheir balance sheet in the fourth quarter by increasing sales and capital expenditures (Shin & Kim, 2002), working

capital (Frankelet al., 2017), and cash holdings (Khokhar et al., 2022), and by engaging in earnings management (Das

& Shroff, 2002).5Thus, firms may have fewer incentivesto engage in nonmarket initiatives, such as CSR narratives,

that may bear negatively on the financial constraints of firms. Furthermore, misleading CSR narratives may involve

large costs and their potential benefits are uncertain and inherently long term (Attig, 2023), which may discourage

firms from engaging in overselling CSR performances during the fourth quarter. Yet, firms have strong incentive to

“look good” at the turn-of-the-year when key stakeholders like investors,auditors, and creditors are paying height-

ened attention to fiscal-year-end reporting. Stakeholders maylook for “visible signs” (Abrahamson & Baumard, 2008,

p. 437) of CSR initiatives. This, in turn, provides incentives for firms to overselltheir social performances (rather than

engaging in actual, costly socially responsible initiatives and policies) to gain legitimacy as well as to manage stake-

holders’ impressions.6It is thus possible that firms engage in elevated CSR narrativesduring the fourth-fiscal-quarter

earnings conference calls to manage stakeholders’ impressions about their CSR performances.

Further,managers can engage in overselling their CSR performance in the fourth fiscal quarter to divert attention

from their inherently unfriendly environmental footprint or lack of real effort to curb pollution and other environ-

mental problems (Attig et al., 2021). This is plausible because CSR disclosures are largely voluntary (Cherry, 2014)

and involve several estimates, judgments, and assumptions (Goto et al., 2009). Relatedly, since corporate narratives

are largely unregulated (Merkl-Davies & Brennan, 2007), managers may favor opportunistic impression manage-

ment, which in turn can create (misleading) social capital impression among firms’ stakeholders (Godfrey, 2005).

Self-interested managers may also strategically engage in CSR narrativedisclosures to “hype” the stock and minimize

the potential turn-of-the-year adverse effect or divert attention from negative news or organizational outcomes that

are delayed until the fourth-quarter earnings announcement.

While the foregoing arguments, in essence, suggest that managers have incentives to use discretionary CSR nar-

ratives during the turn-of-the-year earnings conference calls, it is not a priori clear whether they use it to enrich the

informational environment or to manipulate public impression of firms. Toexamine this empirically, we delve deeper

5Earningsmanagement is less likely to be associated with substantive CSR initiatives. For instance, Kim et al. (2012) show that socially responsible firms are

lesslikely to manage earnings or be the subject of SEC investigations.

6Neuet al. (1998, p. 267) note that the symbolic aspects of organizational actions, which “form part of the organization’s public image [...]areoftenperipheral

tothe organization’s primary goals, methods of operation and output,” are relevant in sustaining organizational legitimacy; see also Dowling and Pfeffer (1975)

andMeyer and Rowan (1977) as cited in Neu et al. (1998).