CSR and Greenwashing: A Matter of Perception in the Search of Legitimacy

In recent decades, corporate communication has undergone significant changes in terms of channel, content and receivers. To be accountable, companies are called upon to satisfy a plurality of stakeholders who are increasingly interested in non-financial information. In addition, the type and scope of information can significantly influence the competitive advantage of the company and especially, its credibility and reputation. Today, companies are required to engage in corporate social responsibility (CSR) initiatives to give response to the call for action from their stakeholders and society. However, some companies engage in CSR initiatives with the aim of only achieving or increasing their level of legitimacy. When companies offer misleading communication and then try to influence the perceptions of their stakeholders, they incur the phenomenon known in literature as “greenwashing”. Thus, the aim of this work is to analyse the phenomenon of greenwashing, tracing its evolution in the extant literature. Greenwashing will then be analysed through the lens of the legitimacy theory and starting from Habermas’s communication theory to define and broaden the relationships between the concepts of disclosure, credibility, legitimacy, perception and greenwashing.

The Consequences of Mandatory Corporate Sustainability Reporting

A key aspect of the governance process inside organizations and markets is the measurement and disclosure of important metrics and information. In this chapter, we examine the effect of sustainability disclosure regulations on firms’ disclosure practices and valuations. Specifically, we explore the implications of regulations mandating the disclosure of environmental, social, and governance (ESG) information in China, Denmark, Malaysia, and South Africa using differences-in-differences estimation with propensity score matched samples. We find that relative to propensity score matched control firms, treated firms significantly increased disclosure following the regulations. We also find increased likelihood by treated firms of voluntarily receiving assurance to enhance disclosure credibility and increased likelihood of voluntarily adopting reporting guidelines that enhance disclosure comparability. These results suggest that even in the absence of a regulation that mandates the adoption of assurance or specific guidelines, firms seek the qualitative properties of comparability and credibility. Instrumental variables analysis suggests that increases in sustainability disclosure driven by the regulation are associated with increases in firm valuations, as reflected in Tobin’s Q. Collectively, the evidence suggest that current efforts to increase transparency around organizations’ impact on society are effective at improving disclosure quantity and quality as well as corporate value.

An Examination of Nonprofessional Investor Perceptions of Internal and External Auditor Assurance

ABSTRACT This study investigates whether assured disclosures of management's remediation of material weaknesses in internal controls affect positively unsophisticated investor perceptions of disclosure credibility and the likelihood of their investing in a firm. The results indicate that investors perceive assured material weakness remediation disclosures, whether the audit source is external or internal to the firm, to be more credible than unassured disclosures. Specifically, external assurance is seen to be more credible than the assurance provided by internal auditors but that is seen as more credible than no assurance. However, investment likelihood remains the same regardless of assurance source. Furthermore, the results indicate that investor disclosure credibility perceptions and investing likelihood are lower for internally assured pervasive material weakness remediation disclosures than internally assured account-specific remediations and all externally assured remediation disclosures. Finally, mediation results suggest that both internal and external auditor assurance increases investing likelihood indirectly through increased disclosure credibility.

Getting Caught “Sugar Coating”: The Behavioral Implications of Using a Decision Aid That Detects Linguistic Manipulations in Financial Disclosures

ABSTRACT Evidence from recent studies suggests that management strategically uses linguistic manipulations to “sugar coat” corporate narratives particularly when it is to their advantage. Research also suggests that investors are influenced by these manipulations and that they are not capable of detecting them on their own. Emerging technologies such as textual analysis software are capable of analyzing corporate narratives; however, their impact on investors' decision making remains unknown. This manuscript explores the effect of these emerging technologies a priori to their availability and investigates whether providing investors with a decision aid (DA) that is capable of detecting linguistic manipulations can be an effective tool that can be used by investors. We theorize that these DAs may have an effect on investors' judgment and decision making and that their effect may interact with other contextual factors such as management incentive to provide a more optimistic disclosure when the news is not necessarily good. More precisely, we investigate the effect of management incentive and the detection of linguistic manipulations in management's disclosures on investors' perceptions of disclosure credibility and willingness to invest, and whether the detection of linguistic manipulations moderates the impact of management incentive. Results show that both management incentive and detection of linguistic manipulations have a significant effect on investors' perceptions of disclosure credibility and willingness to invest. Therefore, these DAs can be an effective tool that investors can use to detect linguistic manipulations.

The Role of Corporate Social Responsibility (CSR) Assurance in Investors' Judgments When Managerial Pay is Explicitly Tied to CSR Performance

SUMMARY While corporate social responsibility (CSR) reports are intended to faithfully represent CSR performance, voluntarily disclosed CSR information tends to be positive, and demand is rising for both independent assurance and integrated reporting of CSR. However, the supply of CSR assurance is not widespread in the United States, and CSR performance information remains largely separated from supporting and governance information. We thus examine the role of CSR assurance when information on CSR investment level is integrated with information on whether managerial pay is explicitly tied to sustainability. While a firm may report a high level of CSR investment to indicate an authentic commitment to CSR, investors may become skeptical of reported information if managerial pay is explicitly tied to CSR performance. Such pay-for-CSR-performance provides managers with greater incentives to overinvest in CSR and thereby report strong CSR performance. In turn, investors will seek CSR assurance as a disclosure credibility signal. Accordingly, we find that, in the presence of pay-for-CSR-performance and high CSR investment level, investors' stock price assessments are greater only when CSR assurance is also present. Our findings highlight the importance of examining CSR disclosure factor interaction effects, and provide support for the expansion of CSR assurance and integrated reporting. Data Availability: Data available upon request.