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Can CSR Disclosure Protect Firm Reputation During Financial Restatements?

Lu Zhang (), Yuan George Shan () and Millicent Chang ()
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Lu Zhang: The University of Western Australia
Yuan George Shan: The University of Western Australia
Millicent Chang: University of Wollongong

Journal of Business Ethics, 2021, vol. 173, issue 1, No 9, 157-184

Abstract: Abstract We investigate the effectiveness of corporate social responsibility (CSR) disclosure in protecting corporate reputation following financial restatements. As expected under legitimacy theory, firms can signal their legitimacy via nonfinancial disclosure after the negative effects of financial restatements. Our results show that restating firms make substantial improvements to overall CSR disclosure quality by changing their standalone reports to a more conservative tone, increasing readability and report length, even though they strategically disclose less forward-looking and sustainability-related content. Such improvements are more pronounced in restating firms with prior low-quality CSR disclosure. Moreover, restating firms with CSR disclosure have smaller forecast errors than non-CSR disclosers, yet the change in CSR disclosure after restatements does not further improve analyst forecast accuracy. Finally, we find that compared with nondisclosers, restating firms with CSR disclosure suffer smaller firm value losses. Overall, the evidence supports the view that consistent CSR reporting alleviates reputational damage and plays an insurance-like or value protection role during crisis periods.

Keywords: Corporate social responsibility; Corporate reputation; Financial restatements; Nonfinancial disclosure (search for similar items in EconPapers)
JEL-codes: G14 G17 M14 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10551-020-04527-z

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