The relationship between the quality of CSR disclosure and unethical corporate reporting behavior

Abstract

This study investigates the relationship between the quality of CSR disclosure and two types of unethical corporate reporting behavior, i.e. earnings management and tax avoidance. Signaling theory and legitimacy theory provide partly competing views regarding this relationship. To examine this relationship, data on 862 firms based in 36 countries in the period 2013-2017 was derived from the GRI database and Orbis. Consistent with signaling theory, the results illustrate that firms which disclose high quality CSR information are less likely to be involved in unethical corporate reporting behavior, i.e. earnings management and tax avoidance. Furthermore, in line with legitimacy theory, the results indicate that firms which disclose low quality CSR information are more likely to be involved in unethical corporate reporting behavior. These firms use low quality CSR disclosure as a smokescreen to divert attention from their unethical corporate reporting behavior and lower the risk of a close monitoring of their financial statements. Moreover, the results show a negative relationship between the quality of CSR disclosure and a country’s level of investor protection. However, the results do not indicate that the relationship between the quality of CSR disclosure and unethical corporate reporting behavior varies with a country’s level of investor protection.