The Information Content of FinanciallyMaterial Corporate Social Responsibility Report Text
Abstract:
Corporate social responsibility (CSR) reports have become ubiquitous for large public companies around the world, but relatively little is known about the information content of CSR report text. This study conjectures financially material CSR content, defined as discussion pertaining to CSR topics that are more likely to have a material impact on the financial condition of the firm, is a necessary attribute of informative reports because it signals financially relevant disclosure. Using materiality guidance provided by a prominent sustainability standards-setting board (SASB) and a topic modeling algorithm (LDA), I develop a measure that estimates financially material CSR content. I use this measure to identify reports with more financially relevant disclosure and find significant differences in decision usefulness. Specifically, I find that positive tone predicts future profitability and longer reports decrease mean absolute analyst forecast errors, but only when reports contain more financially material content. Interestingly, I find opposite results when reports contain less financially material content, which suggests these reports contain misleading information. These findings contribute to the CSR literature by providing a new measure of financially material CSR content and documenting that variation in financially material content has a significant impact on the decision usefulness of CSR report text.
Lost in Translation: The Information Barriers to Global Investment
Abstract:
We use textual analysis to examine information asymmetries caused by language barriers. Using supervised Latent Dirichlet Allocation (sLDA), we measure translation differences between the Chinese and English versions of the annual reports of Chinese firms by measuring differences in the topics covered in different translations of the same report. We demonstrate that our measure varies predictably with firm characteristics: firms have fewer translation differences when they are large (greater resources and desire to appeal to international investors) and when both versions are legally binding. Further, we demonstrate that firms which receive subsidies from the Chinese government have larger translation differences, consistent with a governance approach in China which places a greater emphasis on non-shareholder stakeholders. Lastly, we show that firms with large translation differences experience significantly lower liquidity around the release of their annual reports, consistent with translation differences leading to information asymmetries between Chinese-speaking and non-Chinese-speaking investors. Our results have implications for global investment in general, where language barriers are increasingly relevant as more and more investors invest abroad, and are important in the context of China in particular, which is growing in prominence as a target for foreign capital.
Trust in the SEC and Debt Contract Design
Abstract:
This paper examines the impact of trust on debt contract design by examining the relationship between public trust in an accounting regulator and use of financial covenants in syndicated loan contracts. Prior literature finds regulatory enforcement can increase the debt contracting value of accounting by increasing financial reporting quality. Building on these findings, I conjecture the perceived debt contracting value of accounting is contingent on perceptions of regulator competence. Using negative media articles to identify periods of low trust in the SEC and the amount of penalties and fines to identify periods of high SEC enforcement, I find that periods of high enforcement have greater use of accounting-based financial covenants but only when there is also high trust in the SEC. When there is low trust in the SEC, periods of high enforcement have, on average, less use of accounting-based financial covenants relative to periods of low enforcement. Collectively, these results suggest the debt contracting value of accounting depends on not only regulatory enforcement but also trust in the regulator.