The effect of corporate social responsibility reporting quality
disclosure on long-term orientation of managers
Name: Ersin Piri
Student number: 11394382
Thesis supervisor: Sanjay Bissessur Date: June 25, 2018
Word count: 12054
MSc Accountancy & Control, specialization Control
Statement of Originality
This document is written by student Ersin Piri who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Abstract
This study examines the effect of corporate social responsibility (CSR) reporting quality on the long-term orientation of managers. More specifically, the long-term orientation of managers is examined with the research and development (R&D) investments and the managerial stock option grants. Corporate short-term thinking has been the subject of ongoing debate among leaders in business, government, and academia for over 30 years. Recent corporate developments suggest that short-term thinking keeps companies stuck in crisis. It appeals that CSR is a trend that change the business’ orientation from short-term to long-term goals and from maximum to optimum profit. Therefore, this study proposes that the quality of the CSR report is positively related with R&D investments. Furthermore, it is hypothesized that the quality of CSR report is negatively related with the managerial stock option grants. To evaluate these propositions, a quantitative database research study was performed amongst companies in North America. The sample for R&D investments consist of 1259 observations and the managerial stock options consist of 338 observations. A multiple linear regression analysis shows a negative insignificant relationship between CSR reporting quality and R&D investments and a negative significant relationship between CSR reporting quality and managerial stock options grants. The results of this study shed light on the CSR reporting quality as a tool to incentivize managers for long-term orientation and align the interests of the manager and the stakeholders. The study provides interesting gaps for future research and several implications for theory and practice.
Keywords: Corporate social responsibility (CSR), CSR reporting, CSR reporting quality, long-term orientation (LTO), short-termism, research and development (R&D) investments, stock option
Contents
1 Introduction ... 5
2 Theory and Hypothesis Development ... 7
2.1 Corporate social responsibility ... 7
2.2 Corporate social responsibility reporting quality ... 8
2.3 Long-term orientation ... 9
2.4 Research and development investments ... 10
2.5 Long term incentive plans ... 11
2.6 Agency theory ... 13
2.7 Enlightened stakeholder theory ... 13
2.8 Hypothesis development ... 14
3 Research Methodology ... 16
3.1 Empirical Approach and methodology of research ... 16
3.2 Sample ... 17
3.3 Data Collection and measurement of variables ... 19
3.4 Overview of variables ... 22 4 Results ... 23 4.1 Descriptive statistics ... 23 4.2 Hypothesis testing ... 26 5 Discussion ... 29 5.1 Academic relevance ... 29 5.2 Managerial implications ... 29
5.3 Limitations and suggestions for future research ... 30
6 Conclusion ... 31
1 Introduction
The purpose of my thesis is to examine the relation between the quality of the corporate social responsibility (CSR) report and the long term orientation of companies in North America. Recent corporate developments suggest that short-term thinking keeps companies stuck in crisis (Alexander, 2017). Recently, the scandal that took place in Volkswagen, had a big impact on the society (Krall & Peng, 2015; Tanaka, Lund, Aamaas, & Berntsen, 2018). Pressure from the public to satisfy each set of responsibilities, to shareholders and stakeholders continues to increase. Thus, the value of CSR reporting is increasing and it is clear that it is here to stay. By reporting on its environmental, economic and social impact on the community, a company is able to engage with stakeholders and maintain a meaningful dialogue on the long-term direction of the business. CSR reports are often regarded as additional-financial information by investors when forming their investment decisions (Yeldar, 2013). Investors and analysts want quality data over quantity data that supports comparison and benchmarking.
It is difficult to measure the extent that companies have a focus on long-term orientation (LTO), given that there is a variety of factors that could lead to long-term thinking of companies (Souder, Reilly, & Ranucci, 2015). Long-term thinking takes place via a wide range of managerial choices in different activities throughout the business. While researchers have long focused on the research and development (R&D) spending as a default measure for long-term orientation, (Laverty, 1996)argued that this focus only captures only one of many future-oriented activities. Companies frequently structure their corporate strategies to focus on the maximization of short-term returns while underestimating longer-term impacts. Short-termism remains a serious and growing problem in both business and government (Bair, 2011). Hence, (Barton, 2011) stresses that long-term thinking must be more fully embraced and incorporated into modern business practice and emphasizes how commerce and industry must shift away from ‘quarterly capitalism’ towards ‘long-term capitalism’.
Senge (in Barnett, Bowes, White, & Zaib, 2017), however advocates that short-term thinking and long-term strategic thinking, can and must, work as two components of the same corporate unit. For example, Coca-Cola extracted catchment water for soft-drink production in India, but focused solely on production efficiencies and profitability while failing to foresee how local communities would be detrimentally impacted by reduced water availability resulting in reputational damage and costs. Thus, Senge (2008) concluded that a
component of LTO is essential – “there can be no fishing industry without fish, nor a drinks industry without water”.
Previous studies show that much has been researched about the value relevance of CSR information, how it impacts the financial performance and the reputation of the firm. But, to the best of my knowledge there is limited research done about the linkage between R&D investments, executives’ stock options and CSR reporting quality. In this thesis long-term orientation is operationalized by measuring the R&D investments and managerial stock option compensation. Specifically, this study will investigate the relationship between CSR report quality, the R&D investment and stock option compensation of executives. This leads to the following research question:
Research question: does the quality of corporate social responsibility reporting have an impact on the long-term orientation of managers?
With a sample of 1259 North American firms, during the period 2005 to 2012, the results provide evidence that firms with a high CSR reporting quality have a lower R&D investment and lower managerial stock options compensation.
Providing an answer for this question is important, because CSR is a trend that appeals to change the business orientation from short-term to long-term goals. By providing this relationship I will contribute to the existing CSR literature. From an academic perspective, I aim to contribute to the literature on the determinants of R&D expenditure and managerial compensation. The practical perspective can be relevant for stakeholders and managers which issue an CSR report.
This thesis comprises of six chapters. In the next chapter the theoretical framework is outlined which contains the agency theory and enlightened stakeholder theory followed by the conceptual model and the hypothesis development. This chapter contains the CSR reporting concept and the long-term orientation components. In chapter 3, the research methodology is described which address the research question. The fourth chapter provides the statistical analysis. Chapter 5 is the discussion and gives suggestions for future research. Finally, chapter 6 summarizes the findings and provides concluding remarks.
2 Theory and Hypothesis Development
In the theory the definition and the relevance of corporate social responsibility and the quality of the disclosure is explained. Further, the definition of long-term orientation is given with the R&D expenditures and stock option compensations. After that I explain the agency theory and enlightened stakeholder theory which is used to explain the relationship between the CSR disclosure quality and long-term orientation of organizations. After explaining the relationship, the hypothesis is developed.
2.1 Corporate social responsibility
The concept of corporate social responsibility (CSR) is evolving since the 1930s (Carroll, 1979). Over the last decades, the concept of CSR has continued to grow in importance and significance (Carroll & Shabana, 2010). However, CSR is still not an universally adopted concept as the definition is understood differentially despite increasing pressures for its incorporation in business practices (Freeman & Hasnaoui, 2011). With many different definitions, CSR still lacks of a clear definition and is complicated by the use of ambiguous terms, like corporate responsibility, corporate citizenship, sustainability, and corporate social performance (Freeman & Hasnaoui, 2011). The most often cited definition is of Carroll, (1979) which proposed for a definition to fully address the obligations a business has to the society which embodies economic, legal, ethical and discretionary categories of business performance. The economic responsibility is producing goods and services that the society wants for a profit. Second, the legal responsibility is about fulfilling its operations within the laws and regulations. Third, the ethical responsibility are the expectations the society has of the business to morally follow the correct path. Lastly, the discretionary responsibility is the highest level of expectation that a society has of an organization which comes after the economic, legal and ethical responsibilities. This discretionary responsibility is left for individual judgement and choice and are purely voluntary. The definition for CSR that can be stated is:
“The social responsibility of business encompasses the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point of time (Carroll,
1979, p. 500).”
Later, Carroll (1991) introduced these four responsibilities or components of corporate social responsibility in a pyramid which provides a skeletal outline of the nature of CSR. This helps
to see that there are different types of obligations that are in a dynamically tension with one another. Furthermore, according to McWilliams & Siegel (2001)) corporate social responsibility are actions that appear to further some social good, beyond the interests of the firm and that which is required by law. This definition underscores that CSR means that it goes beyond obeying the law.
Prior research has been directed to the exploration of the benefits of CSR. By furthering social good and going beyond legal requirements, CSR activities helps creating business value, develop strategic resources, and insure against potential risks (Wang & Bansal, 2012), creates reputation benefits (Orlitzky & Swanson, 2012), increase employee loyalty, morale and motivation (Burke & Logsdon, 1996; Kim & Scullion, 2013), and build competitive advantage (Porter & Kramer, 2007). Earlier studies focus on the relevance of corporate social responsibility and how this affects long-term and short-term company performance, looking at the operating cash flow and reduced-costs in long-term (Purnamasari, Hastuti, & Chrismastuti, 2015).
2.2 Corporate social responsibility reporting quality
The demand for reliable information and transparency from organizations has increased over the last few years (Tagesson et al., 2009). Stakeholders, including investors, suppliers, employees and customers require additional information regarding the social and environmental activities of the companies. In the literature, the first encompassing definition of CSR disclosure is defined by Gray et al. 1987 (in Russo-Spena, Tregua, & Chiara, 2016) which is “the process of communicating the social and environmental effects of
organizations’ economic actions to particular interest groups within society and to society at large”. Despite the increase in the number of CSR reports, their quality is different (Hąbek &
Wolniak, 2016). The CSR reports do not always provide information that readers desire, which in turn intensifies the problem with the comparison and evaluation of the organization’s results achieved in this scope. According to the study of Hąbek & Wolniak (2016) the legal obligation of CSR data disclosure has a positive effect on the quality of CSR reports. Yet, CSR reporting is not mandatory and represents a free choice for managers to justify their existence as moral agents (Gössling & Vocht, 2007) and to maintain a positive corporate image (Zhao, Zhao, Davidson, & Zuo, 2012). Other research of Mahoney, Thorne, Cecil, & LaGore (2013) provide insight into the motivations behind the voluntary issuance of standalone CSR reports in U.S firms. They find that firms that voluntary issue a CSR report
generally have higher CSR performance scores, which indicates that firms are using voluntary CSR reports to publicize stronger social and environmental records to stakeholders.
According to Ching, Gerab, & Toste (2017), a good CSR report is directly related to the good content in the social, economic and environmental dimensions. However, research that is conducted on CSR reporting disclosure, points that there is an increasing lack of completeness and decreasing amount of credibility in the information that is reported and also on the overall reporting practices (Michelon, Pilonato, & Ricceri, 2015). They investigated three CSR reporting practices: stand-alone reports, assurance and reporting guidance (GRI) and used disclosure proxies that include the content of the information that is disclosed (what and how much is disclosed), the type of information that is used to describe and discuss CSR issues (how it is disclosed), and the managerial orientation (the corporate approach to CSR). They found that on average, companies that use these practices do not provide a higher quality of information. This indicates that companies use these practices as a symbolic tool.
Other research has shown the link between CSR and corporate governance quality (Chan, Watson, & Woodliff, 2014). These researchers found that firms providing more CSR information, have better corporate governance ratings, are larger, belong to higher profile industries, and are more highly leveraged.
2.3 Long-term orientation
The notion of long-term orientation (LTO) is linked with the concept of intertemporal choice (Block, 2009). Intertemporal choice refers to decisions that are made with a time dimension (Lumpkin & Brigham, 2011). Problems of intertemporal choice occur when the benefits and costs of a particular decision fall into different time periods (Block, 2009). Management decisions such as technology investments, development of new products, or entrance into a new market often involve intertemporal choices. Le Breton-Miller Isabelle & Miller Danny (2006) defines LTO as priorities, goals, and most of all, concrete investments that benefits over an extended time period, typically, 5 years or more. They described that the long-term priorities include good stewardship aimed at reducing risk or building up resources. The goals of LTO are more specific and involve achieving enduring quality and innovation leadership. Research conducted by Barton et al. (2017) found that from 2001-2014, the revenue of firms with long-term orientation grew on average 47 percent more than the revenue of other firms, and with less volatility. Also cumulatively, the earnings of long-term firms grew with 36% percent more on average than of those of other firms, and their economic profit grew by 81%
more on average. Furthermore, they found in this period that long-term companies on average spent almost 50% more on R&D than other companies. More interestingly, these companies increased their R&D investments with 8.5% during the financial crisis while other companies increased their R&D investments with 3.7%. Another interesting finding is that long-term companies exhibit stronger financial performance over time. The market capitalization of long-term companies grew $7 billion more than that of other firms in the same period. In addition, their total returns to shareholders was superior. Although these long-term firms took bigger hits to their market capitalization during the financial crisis, their share price recovered more quickly after the crisis. Taking these benefits into account, Moravcikova, Stefanikova, & Rypakova (2015) suggests that CSR is a trend that appeals to change the business’ orientation from short-term to long-term goals and from maximum to optimum profit.
2.4 Research and development investments
Spending money on research and development (R&D) is one of the fundamental investment decisions made by managers. R&D investments consist of myriad activities where research is the primary search for technical and scientific advancement, and development is the translation of such advancement into product or process innovations (Link, 1982). Therefore, organizations that have the incentive to undertake R&D, must be able to make sufficient returns. However, it takes years to discover a new product and fully realize its commercial benefits. Pharmaceuticals or biotechnology for example, are industries where firms spend very large amounts of money on R&D (Barker & Mueller, 2002). According to Le Breton-Miller Isabelle & Breton-Miller Danny (2006) long-term investments are expenditures and resource allocations that are intended to realize long-term goals, like the investments in R&D projects, new infrastructure expenditures, and investing in reputation or relationships with employees, clients, suppliers, or the community. Prior research has shown the attributes of top managers involved in allocating corporate resources (Barker & Mueller, 2002). They found that R&D spending is greater at firms where CEOs are younger, have greater wealth invested in stock and career experience in marketing and/or engineering/R&D. They also found that the relative R&D spending increase with longer CEO tenures implying that over time, they can spend on R&D that suit their own preferences. High R&D spending may also reflect high agency costs, with managers that attempt to keep funds within a firm rather than distribute them to shareholders (Zahra, 1996). Other research found that managers are less likely to cut R&D when the level of institutional ownership is high (Bushee, 1998).
The link between CSR and the intensity of R&D is researched by McWilliams & Siegel (2000). According to these researchers, R&D investment is a form of technical capital. This technical capital enhances knowledge, which leads to product and process innovation. The innovative activity may therefore enhance the productivity of the organization. Investment in CSR promotes product differentiation that can be at the product and firm levels (McWilliams & Siegel, 2000). Some organizations produce goods and services with a certain characteristic or attribute that gives a signal to the consumer that the organization is concerned about certain social issues. For example, natural food companies that have products with labels that indicate the use of certain ingredients and production methods that promote CSR such as the use of organic, pesticide-free ingredients. This example with the organic, pesticide-free label constitutes the process innovation by the farmer and the product innovation by the natural foods retailer. Additionally, organizations also try to build a socially responsible brand reputation. The assumption is that firms that are actively engaged with CSR are more reliable and therefore their products are of higher quality. These two strategies strengthen consumers’ believes by thinking that, by consuming the product, they are directly or indirectly supporting a cause. Thus, CSR and R&D investments are highly correlated, because they are both associated with product and process innovation.
2.5 Long term incentive plans
One of the complex issues within organizations is the design of a proper management compensation system. Long-term incentives has become an increasingly larger portion of CEO’s total compensation (Marshall & Lee, 2016). Organizations that adopt long term incentive plans (LTIP) emphasize the role of such plans to align the interest of top management with those of the firm's owners (Westphal & Zajac, 1994). LTIP comprise of one or more of the following vehicles: stock option plans, stock appreciation rights, restricted stock, and performance plans (Larcker, 1983; Westphal & Zajac, 1994).
Stock options give the right to purchase a share of the company’s stock at a stated exercise price that is prior to a contractually specified expiration date (Babenko, Lemmon, & Tserlukevich, 2011; Larcker, 1983; Westphal & Zajac, 1994). These options are not transferable and in contrast to cash, there is no cash outflow from the firm at the time of the option grant. Thus, stock options has its advantage over cash compensation when the organization needs to finance an investment where external finance is costly (Babenko et al., 2011).
Prior research support the finding that incentives linked to stock options, could encourage managers to undertake risk-increasing activities (Coles, Daniel, & Naveen, 2006; Dong, Wang, & Xie, 2010). This evidence shows that stock options are not aligning the interests of managers and stakeholders, rather, it shows that managers pursue suboptimal capital structures. Also studies found evidence that stock and especially stock option holdings incentivize managers to manipulate corporate earnings and commit accounting fraud to boost market values and enrich themselves by selling shares or exercising stock options at inflated stock prices (Bergstresser & Philippon, 2006; Cheng & Warfield, 2005; Faulkender, Kadyrzhanova, Prabhala, & Senbet, 2010). This causes managers to develop symptoms of corporate myopia which can be detrimental for shareholders. Other research uncovered backdating of executive stock options by companies (Heron & Lie, 2007; Lie, 2005). Backdating shows that stock returns are abnormally negative before executing option grants and abnormally positive afterwards. It occurs when the executive choose the options grant date some date before the date on which the board decided to grant options. This causes the executive to obtain options at a lower exercise price, which benefits executives that receive stock options and when exposed, can detrimentally affect shareholder wealth (Narayanan, Schipani, & Seyhun, 2007).
The board can address this issue by allowing a positive fraction of the CEO’s options to vest early (Laux, 2012). The vested options by the CEO does not mean that he is allowed to immediately exercise it. In an optimal contract, the CEO is restricted by the board to cash out vested options. A combination of early vesting and restricted vesting will shift away the interest of the manager from short-term results long-term results. Thus, by choosing an appropriate number of options that vest early, the board can exclude the short-termism of managers and induce a better allocation of resources. However, Laux (2012) argue that this is not optimal, because early vesting induces cost for the shareholders.
Another way to reduce the excessive risk taking, is by developing combination plans (Ellig, 2014). Providing more forms of long-term incentives and making a combination of it, such as stock options and stock awards, neutralizes the disadvantages of individual plans.
Further research found the link between corporate governance and executive pay levels (Armstrong, Ittner, & Larcker, 2012). They researched the role of compensation consultants in executive pay, which can be used to justify excessive pay packages in poorly governed companies. However, they conclude that the results provide the evidence that higher pay is largely due to differences in corporate governance, rather than the use or non-use of consultants. Thus, a weaker corporate governance leads to higher executive pay.
2.6 Agency theory
Agency theory is formulated by (Jensen & Meckling, 1976) as a contract under which one or more persons (the principal) engage another person (the agent) to perform service on their behalf which involves delegating decision making authority to the agent. If both parties are utility maximizers then there is a reason that the agent will not act in the best interest of the principal. The principal can limit this divergence by establishing appropriate incentives and incur monitoring cost to limit contradicting activities by the agent. Moreover, the principal will pay the agent to expend resources (bonding costs) that will not harm the principal. Despite the actions of the agent, it is impossible for the principal at zero cost to ensure that the agent is acting in the best interest of the organization. This cost is the reduction in welfare experienced by the principal that is referred as the residual loss.
According to Eisenhardt (1989), another problem is risk sharing that arises when the principal and agent have different attitudes towards risk. The problem is that the principal and the agent may prefer different actions because of the different risk preferences.
Further, Fama & Jensen (1983) described the role of the board of directors as an information system that the stockholders within large corporations could use to monitor the opportunism of top executives. They found that when the principal has information to verify the agent’s behavior, the agent is more likely to behave in the interests of the principal. However, there will be always a residual loss, because a perfect monitoring device does not exist.
2.7 Enlightened stakeholder theory
The stakeholder theory is an explanation that managers should make decisions so as to take account of the interests of all the stakeholders in a firm (Jensen, 2002). Jensen (2002) examines the stakeholders that include all individuals or groups who can substantially affect the welfare of the firm. This includes not only the financial claimants, but also employees, customers, communities, and governmental officials.
However, Jensen (2002) criticizes that the stakeholder theory provides no criteria for what is better or what is worse. There is a failure to give managers a means of balancing the conflicting demands of corporation’s various stakeholders. For example, customers want high quality and low price; employees want high wages with high-quality working conditions; suppliers of capital want high returns with low risk; communities want large donations to local projects and so on (Lougee & Wallace, 2008). According to Jensen (2002) the reason so
many managers and directors of corporations embrace stakeholder theory is, because it defends their own personal short-term interests. This is because it leaves managers and directors unaccountable for their stewardship of the firm’s resources. If there is no appropriate criteria for performance, managers cannot be evaluated in any principled way. Therefore, it is possible that the stakeholder theory works for self-interested managers allowing them to pursue their own interests at the expense of society and the firm’s financial claimants. This leads to managers and directors to invest in their favorite projects that destroy firm value without having to justify the value destruction. An interesting point that Jensen (2002) addresses is that employees and managers need a structure that will resist the temptation to maximize the short-term financial performance of the organization. Hence, this is where enlightened stakeholder theory can play a critical role. Enlightened stakeholder theory adds the specification that the objective of a firm is long-term value creation. In literature enlightened stakeholder theory is also referred as enlightened shareholder maximization. Firms using this strategy make decisions and devote resources to socially responsible initiatives as a means to achieve value creating outcomes in the long-run (Lougee & Wallace, 2008). Those firms that achieve good social performance and good financial performance that converts into shareholder wealth show principles of enlightened shareholder wealth maximization (Queen, 2015). According to Queen (2015), management compensation packages and incentive programs which are aimed at aligning manager’s actions to shareholders’ objectives should include measures which capture non-financial performance measures. However, these non-financial performance measures are also susceptible to accounting manipulations (Ittner & Larcker, 2003).
2.8 Hypothesis development
Prior research found that CSR reports can mitigate the value destruction that is associated with the cash holdings (Arouri & Pijourlet, 2017; Lu, Shailer, & Yu, 2017). They found that the issuance of a standalone CSR report increases the marginal value of cash holdings and this effect is more pronounced for firms in a less transparent information environment and for firms with weaker external monitoring. This finding is consistent with the notion that CSR policies are a means for managers to act in the shareholders’ interest by mitigating the conflicts with stakeholders. Thus, CSR reports can facilitate monitoring. Organizations that have higher quality of CSR reports attract the attention of stakeholders. As a consequence,
organizations that attract the attention are more inclined to invest in R&D. With these previous studies, the following hypothesis is developed:
Hypothesis 1: high quality of CSR report is positively related to R&D investment
A significant literature examines how long-term incentive plans such as stock options affect managerial behaviour. For example, Dong et al. (2010) investigated the relationship between stock-option based compensation and managerial risk-taking. They found that CEOs whose wealth is more sensitive to stock return volatility (Vega), tend to favour debt over equity as a capital-rising vehicle. This debt preference reflects excessive risk taking by managers in order to maximize the value of their stock option holdings. Their findings highlight that the stock options bring disadvantages and they suggest that firms should exercise some restraint in compensating and incentivizing their executives with these options. Other research provide empirical evidence of a strong causal relation between managerial compensation and investment policy, debt policy and firm risk (Coles et al., 2006). In this study Coles et al. (2006) finds that higher vega, which is the sensitivity of CEO wealth to stock volatility, leads to riskier policy choices. This evidence provides support that higher sensitivity to stock volatility in the managerial compensation scheme gives executives an incentive to both invest in riskier assets and implement more aggressive debt policy.
Further, research conducted by (Wowak, Mannor, & Wowak, 2015) shows that stock options can result in outcomes that are exactly the opposite of what shareholders want. Unlike stock grants in which executives lose money when initiatives fall flat, option grants carry little downside for executives. In their study they show that stock options can lead to product safety problems that threaten consumer well-being. This is because CEOs with higher levels of stock-option may move too quickly or aggressively to execute on goals like product releases, which could lead to higher likelihood of safety flaws and other problems. Thus, this study shows that the managerial opportunism can affect a variety of organizational stakeholders.This results in the following hypothesis:
Hypothesis 2:high quality of CSR report is negatively related with managerial stock option compensations
3 Research Methodology
This chapter describes the research methodology of this thesis. First, the empirical model is outlined with the methodology of statistical research. Second, data collection and the measurement of variables is described. Last, an overview of the variables is given.
3.1 Empirical Approach and methodology of research
To test the relationship between CSR reporting quality and the long-term orientation, a regression analysis is conducted in Stata. The long-term orientation is determined by looking at the company’s managerial annually stock option compensation and annually R&D investments. There are two models that are tested. The first model examines R&D investments as a proxy for LTO, where CSR reporting quality is the independent variable and the size, industry, return on assets, book-to-market ratio, leverage, loss dummies, and sales growth are included as control variables. The second model that is tested, examines the stock option compensation for the managers as a proxy for LTO, with also the CSR reporting quality as independent variable, including the same control variables as the first model.
Overall, the models that will be tested, takes the following form:
R&DINV = α + β1 * CSRQUAL + β2 * Size + β3 * Industry + β4 * ROA + β5 * BTM + β6 *
Leverage + β7 * Loss + β8 * Salesgrowth + φi* Year + Ɛ (1)
OPTIONCOMP = α + β1 * CSRQUAL + β2 * Size + β3 * Industry + β4 * ROA + β5 * BTM + β6
* Leverage + β7 * Loss + β8 * Salesgrowth + φi* Year + Ɛ (2),
Where R&DINV stands for the annually investments in R&D, measured as the logarithm of the ratio of research and development investments to the net sales. For the measurement of the CSR reporting quality, the dummy variable CSRQUAL is used, which can be set equal to 1 in which the company has disclosed a high quality CSR report, and 0 for a weak CSR report. Control variables in the regression analyses include factors such as the size of the firms, the industry, return on assets, book-to-market ratio, leverage, loss dummy, and the sales growth. Size is the natural logarithm of total assets. BTM stands for the book to market ratio, which is the ratio of total common equity to price multiplied by outstanding shares.
Leverage is the debt to equity ratio. Loss is a dummy variable which indicates a 1 for
stands for the annually stock options granted for the managers divided by the total compensation.
Figure 1.
Conceptual Model
3.2 Sample
Table 1 provides an overview of the data that is eliminated based on missing information, outliers, and clustering. The table describes the CSR reporting quality which contains reports between 2005 and 2012. Data regarding CSR reporting quality after 2013 is missing in the KLD database and therefore excluded. The first output gives 23.410 observations. After excluding the missing values, 4.002 observations is left, which is the master data that is used for both models. The data regarding the quality which is stated as 0 for strength and 0 for weakness is excluded from the sample, because this does not include relevant information whether a CSR report have a high quality or low quality. The sample that is used for R&D investments and stock option compensation consist of firms in North America. The 2.145 missing observations of R&D was the consequence of merging the KLD and Compustat datasets based on the CUSIP9. The sample for the R&D and CSR reporting quality after the merge is 1.587. The information regarding the stock options compensation for managers is after the merge reduced with 3.343 observations to 659 observations. Thus, both models have different observations. The outliers with the high R&D investments to sales ratio are
eliminated, which were pharmaceuticals and biotechnology companies. Also both R&D to sales ratio and stock option to total compensation ratio are clustered based on the firm-level, which brings the final sample to 1.259 and 338 respectively.
Table 1
Final sample of both models CSR reporting quality
First data 2005-2012 of CSR reporting quality Excluding missing CUSIP
Excluding missing observations
Data with 0 as strength and 0 as weakness dropped Sample observation CSR reporting quality
___________________________________________ R&D investment reduced observations
Clustered observations
Final sample R&D and CSR reporting quality ___________________________________________ Stock option compensation reduced observations Clustered observations
Final sample stock option and CSR reporting quality Observations 23.410 (114) (4.094) (15.200) 4.002 ________________ (2.415) (328) 1.259 ________________ (3.343) (321) 338
3.3 Data Collection and measurement of variables Corporate social responsibility reporting quality
To answer the research question archival research will be conducted. My sample consist of companies that report their corporate social responsibility along with the research and development investments and the long term incentive plans of executives. Due to the lack of information about CSR reports after 2013, I am testing my hypothesis using the sample period in 2005-2012.
Data on the quality of CSR reports are gathered from KLD within the Wharton Research Data Services (WRDS). The quality of the CSR reports is measured by the strengths and weaknesses that are rated on separate scales ranging from 0 (neutral) to 1 (significant strengths/weakness). For example, when a firm is rated 1 on strength and 0 on weakness this indicate that the quality of the CSR report is high. The quality of the CSR report is weak when strength is 0 and weakness is 1. Ratings that have both 1 or 0 on strength and weakness indicate a neutral quality of the CSR report and are excluded of the sample. Factors affecting the quality of a firm’s reporting on its CSR include, but are not limited to, the completeness and specificity of a firm’s reporting, its setting of specific goals for its CSR efforts, and quantitative measurement of progress towards these goals.
Companies with missing or invalid data are eliminated in Stata. Thus, the data gathered on executive compensations and R&D with zero or missing compensation are eliminated. In addition, if there are potential outliers in the data, these will be removed, because this can affect the results.
Research and development investments
Previous studies used investments in R&D as a proxy for long-term orientation (Bushee, 1998; David, Hitt, & Gimeno, 2001; Zahra, 1996). According to Le Breton-Miller Isabelle & Miller Danny (2006) long-term investments can be assessed by industry-adjusted ratios such as the R&D to sales. Thus, the ratio of R&D expense to net sales is created. The net sales represents the gross sales, reduced by cash discounts, trade discounts, and returned sales and allowances for which credit is given to customers, for each operating segment. Data on R&D investments are gathered through Compustat. The R&D expense represents all costs incurred during the year that relate to development of new products or services. The timeframe that is used for this variable is 2005-2012, because data for CSR reporting quality was available between these timeframes.
Stock options
Data on executive’s stock options are gathered from Compustat which is also in the database on WRDS. The timeframe for this sample is also between 2005 and 2012. The stock options are measured with the stock options granted to total compensation ratio. For the stock options the value of the option-related awards are included, which are options, stock appreciation rights, and other instruments with option-like features. The valuation of these awards are based upon the value of options that vested during the year. The amount is the cost that is reported by the company on its income statement as well as any amounts that were capitalized on the balance sheet for the fiscal year. The total compensation is the sum of the salary, bonus, stock awards, option awards, non-equity incentives, pension plans, and other compensation.
Control variables
In this study, 7 control variables are included to test the two models. According to Tagesson et al. (2009) studies show that factors like firm size and industry influence the reporting of social and environmental information. This is also consistent with the study of (Chan et al., 2014), where firm size and industry profile were also positively associated with CSR disclosure. This finding is also consistent with Gallo & Christensen (2011), which studied U.S.-based firms and found evidence that organizational size, ownership, and industry are strongly related with reporting of sustainability. Other research find that larger firms may have a greater exposure and may need to respond more openly to stakeholders’ demands (Burke, Logsdon, Mitchell, Reiner, & Vogel, 1986; Perrini, Russo, & Tencati, 2007). This indicates that smaller firms may expose less socially responsible behaviors than larger firms. Also, Zadeh & Eskandari (2012) describes that the agency theory highlights that bigger firms have higher monitoring and agency costs due to the asymmetrical information. Further, Rosen (1991) found that larger firms invest more in R&D than smaller firms. This finding is consistent with Mansfield (1981) that also find a relationship between size and the industry. Thus, the first control variable that is incorporated in the analysis is the firm size. The study of Dalbor, Kim, & Upneja (2004) finds that proxies like number of owners and total assets are variables with maximum explanatory power for size. Therefore, the firm size is measured by the logarithm of the total assets of the end of the year and can be found in the database Compustat.
According to Cohen & Klepper (1996) the percentage of total R&D that is dedicated to different types of innovative activities differs across the industries. Thus, the second
control variable that is added in the analysis is the industry, which can also be found in Compustat. This industry is specified with the Standard Industrial Classification (SIC) code which contains four numbers and describes the industry group classification (Jan Douwe, 2017). The groups are divided based on the first two numbers of the SIC-code, which indicates the industry. Dummy variables were created for industry that equal 1 if an organization belongs to the industry and 0 otherwise. The SIC-code are described in table 2. Another profitability measure which is added as control variable, is return on assets (RoA) which measures how profitable a company is relative to its total assets. The total assets are measured by using the book value of its assets. Furthermore, Hand (2001) found that the book-to-market ratio and R&D spending is positively correlated, thus book-to-market ratio is included as control variable. This variable is winsorized at the 1% level, because it had outliers. Winsorizing is the transformation of the variable to limit extreme values. Also leverage is included as control variable, because it has impact on the effectiveness of R&D investment in generating growth opportunities (Ho, Tjahjapranata, & Yap, 2006; Li & Hwang, 2011). This variable is also winsorized at the 1% level due to outliers. According to Chen (2008), firms increase R&D search when they expect next year’s performance is below target and reduce search when they expect to outperform their target. This finding indicates a taking behavior in R&D spending when firms expect a loss in performance and risk-averse behavior when firms expect a gain in performance. Thus, a control variable is included for firms that equal 1 for making a loss and 0 otherwise. Last, previous research found a positive relationship between R&D spending and sales growth (Coad & Rao, 2008). This finding is consistent with Del Monte & Papagni (2003), that explains firms with a strong commitment to R&D have a higher growth rate because they succeed in the product market. Thus, sales growth is included as control variable. This variable is also winsorized at the 1% due to outliers.
Table 2
SIC codes
Sic codes Industry
01-09 Agriculture, Forestry, Fishing
10-14 Mining
15-17 Construction
20-39 Manufacturing
40-49 Transportation & Public Utilities
50-51 Wholesale Trade
52-59 Retail Trade
60-67 Finance, Insurance, & Retail Estate
70-89 Services
91-98 Public Administration
99-99 Non-classifiable Establishments
3.4 Overview of variables
Table 3
Definition and source of variables
Variable Type Measurement Source
CSR reporting quality Independent Dummy variable (0-1) KLD
Stock options Dependent Annually stock options granted/total compensation
Compustat
R&D investment Dependent Logarithm of annually R&D expenses/Net sales
Compustat
Size Control Logarithm of total Assets Compustat
Industry Control SIC-code Compustat
Return on Assets (RoA) Book to market ratio
Leverage Loss Sales growth Control Control Control Control Control
Net income/ total assets
Total common equity/Price * Common shares outstanding
Debt to equity ratio Dummy variable (0-1)
Current sales – prior sales/ prior sales
Compustat Compustat
Compustat Compustat Compustat
4 Results
In this section, the results of the statistical analysis are described. First, the descriptive statistics are explained. This is followed by a correlation matrix of the variables with significant correlations highlighted. Finally, the results of the t-tests and the regression analysis of both models are provided.
4.1 Descriptive statistics
First, the variables were checked for missing values. The missing values are excluded from the sample. Furthermore, all variables were checked for normality. Due to outliers in the RDSALES variable, the logarithm of the RDSALES ratio is taken. Table 4 provides the descriptive statistics of the variables. The observations of RDSALES is 1259 which is different than the sample of OPTIONCOMP which is 338. The reduction of RDSALES is on the one hand due to the merge with the CSR reporting quality dataset and on the other hand due to outliers. The outliers on the R&D to sales ratio are eliminated. These outliers consist of pharmaceuticals and biotechnology companies which are industries where firms spend relatively large amounts of money on R&D. There were no outliers for the stock options dataset. The reduction of the stock options dataset was due to missing values and the merging.
The mean value of the logarithm of RDSALES is -3.146, with a standard deviation of 1.696. The mean of OPTIONCOMP is 0.446 with a standard deviation of 0.250.
Table 4
Descriptive statistics
Variable Observations Mean Median Std. Dev Min Max
RDSALES 1259 -3.146 -2.975 1.696 -9.349 2.298 OPTIONCOMP 338 0.446 0.3793 0.250 0.0139 1 Size 1259 7.509 7.277 2.121 1.485 13.590 RoA 1259 0.034 0.062 0.158 -1.119 0.783 BTM 1259 0.444 0.467 1.703 -11.679 5.504 Leverage 1259 0.702 0.225 2.605 -9.581 16.112 Loss 1259 0.415 0 0.493 0 1 Salesgrowth 1259 0.222 0.071 0.882 -1 6.587 Notes:
The summary statistics entail an overview of the mean, median, standard deviation, minimum and maximum per variable. The variables included are for R&D investments, managerial stock option grants, size, return on assets, book-to-market ratio, leverage, loss dummy, and sales growth. The dummy variables for CSR reporting quality were excluded from the table. Industries included are drawn from those listed in table 5. RDSALES = Log of R&D expense to sales ratio (n = 1259). OPTIONCOMP = annually stock options grant to total compensation ratio (n = 338). Size = log of total assets. RoA = net
income / total assets. BTM stands for Book to Market ratio = the ratio of total common equity to price multiplied by outstanding shares (winsorized at 1% level). Leverage is the debt to equity ratio (winsorized at 1% level). Loss is a dummy variable which indicates a 1 for companies that make a loss and 0 if not. Salesgrowth stands for sales growth (winsorized at 1% level).
Table 5 reports the sample distribution by industry sector. The industry sectors include manufacturing (78.2 percent), services (14.5 percent), transportation & public utilities (2 percent), mining (1.3 percent), retail trade (1 percent), finance, insurance, & retail estate (1 percent), non-classifiable establishments (0.9 percent), wholesale trade (0.5 percent) and construction (0.2 percent).
Table 5
Sample distribution
SIC-code Industry Freq. Percent Cum.
10-14 Mining 16 1,3 1,3
15-17 Construction 3 0,2 1,5
20-39 Manufacturing 985 78,2 79,7
40-49 Transportation & Public Utilities 25 2,0 81,7
50-51 Wholesale Trade 6 0,5 82,2
52-59 Retail Trade 13 1,0 83,2
60-67 Finance, Insurance, & Retail Estate 13 1,0 84,3
70-89 Services 186 14,8 99,0
91-98 Public Administration 0 0,0 99,0 99-99 Non-classifiable Establishments 12 1,0 100,0
Total 1259 100.00 100.00
More specific, in table 6 the observations during 2005 to 2012 is explained. The 1 represents a strong quality of the CSR report, whereby the 0 indicate a weak quality of the CSR report. From 2010 a significant increase is reported with the low quality being higher than the higher quality of the CSR report. This is especially in 2011 the case where the weak quality of CSR report is much higher than the strong quality of the CSR report. A possible explanation for the increase in CSR reporting in 2010 despite the recession, is that CSR reporting became critical to a company’s credibility, transparency and endurance (PwC, 2010).
Table 6
CSR reporting quality observations
STR 2005 2006 2007 2008 2009 2010 2011 2012 Total
0 0 0 0 2 1 128 713 35 879
1 35 35 37 33 36 80 91 33 380
Total 35 35 37 35 37 208 804 68 1259
The correlation matrix is provided in table 7, which is the strength and direction of a relationship between two variables. The independent variable STR, which is the high quality of the CSR report is significantly negatively correlated with the R&D investment (p < 0.05) and managerial stock options granted (p < 0.05). This could be indicative that both R&D investment and managerial stock options compensation decreases when the quality of the CSR report is high. The multiple linear regression will investigate this further. Interesting to note is that all of the control variables size, return on assets (RoA), and firms with leverage are significantly positively correlated. The book-to-market ratio, firms with a loss, and sales growth are significantly negatively correlated.
Table 7
Correlation Matrix
Variable STR RDSALES OPTIONCOMP Size RoA
Book-to-Market ratio Leverage Loss-dummy Salesgrowth STR 1.0000 RDSALES -0.2067* 1.0000 OPTIONCOMP -0.2954* 0.1256* 1.0000 Size 0.7214* -0.2843* -0.3274* 1.0000 RoA 0.2063* -0.3812* -0.0747 0.3534* 1.0000 Book-to-Market ratio -0.1714* -0.1319* -0.1555* -0.0994* -0.0115 1.0000 Leverage 0.1015* -0.0608* -0.1258* 0.1151* 0.0247 0.1464* 1.0000 Loss-dummy -0.2391* 0.3542* -0.0075 -0.3661* -0.6910* -0.1084* -0.0810* 1.0000 Salesgrowth -0.1273* 0.1051* 0.1860* -0.1366* -0.1126* -0.0181* -0.0188* 0.0319* 1.0000 Correlation is significant at the 0.05 level (2-tailed)
Notes: STR = high quality of CSR report as dummy. RDSALES = Log of R&D expense to sales ratio. OPTIONCOMP = annually stock options grant to total compensation ratio. Size = log of total assets. RoA = net income / total assets. Book to Market ratio = the ratio of total common equity to price multiplied by outstanding shares (winsorized at 1% level). Leverage is the debt to equity ratio (winsorized at 1% level). Loss is a dummy variable which indicates a 1 for companies that make a loss and 0 if not. Salesgrowth stands for sales growth (winsorized at 1% level).
Table 8 introduces the multicollinearity test, which tests if there is correlation among two or more variables (Alin, 2010). High correlation implies multicollinearity, which can be a data problem that may cause difficulty with the reliability of the estimates of the model. In the multicollinearity test, the results are expressed as the Variance Inflation Factor (VIF). Values of VIF below 5 indicates that there is no collinearity between the independent variables. The results in table 8 shows that there is no multicollinearity problems in this study.
Table 8
Multicollinearity tests Independent variable VIF
Size 2.35 Loss-dummy 2.13 RoA 1.95 Leverage 1.88 Book-to-Market ratio 1.52 OPTIONCOMP 1.45 Salesgrowth 1.14 4.2 Hypothesis testing
The first hypothesis (quality of CSR disclosure is positively related with R&D investment) was tested by a multiple linear regression as stated in table 9. Since both dependent variables have more observations within a year, these datasets are clustered on the firm-level. The results in table 9 indicate that the quality of the CSR report is negatively related with the R&D investment, which is inconsistent with hypothesis 1. The coefficient of -0.002 indicates that with a high quality of CSR report, a 0.002 decrease in R&D investment is predicted, holding all other variables constant. However, this finding is not statistically significant as indicated with the T statistic -0.24. The size is positively significant as indicated with the T statistic 17.36 (p < 0.01). Furthermore, the results shows that return on assets (RoA) is negatively significant with T statistic -1.85 (p < 0.1) the book-to-market ratio is negatively significant with 2.65 (p < 0.01) and sales growth is negatively significant with T statistic -2.63 (p < 0.01). Industry and year fixed effects are included in the analysis. The R2 coefficient describes the proportion of the variance in the dependent variable that is predictable from the independent variable, which is 66.48% in this model. Concluding, the results are inconsistent with hypothesis 1, which is that high quality of CSR report leads to a lower investment in R&D. However, this result is not significant and has a very low T statistic.
Table 9
Multiple linear regression RDSALES
STR
Test variable Coefficient T-stat
RDSALES -0.002 -0.24
Market control variables
Size 0.110 17.36*** RoA -0.111 -1.85* Book-to-Market ratio -0.069 -2.65*** Leverage 0.004 1.04 Loss-dummy -0.021 -0.83 Salesgrowth -0.023 -2.63*** INTERCEPT -0.328
Industry fixed effects Included
Year fixed effects Included
No. Observations 1259
R2 66.48%
Note: this table examines the quality of the CSR report in relation to the R&D investments. T-statistics based on standard errors are clustered at the firm-level. STR = high quality of CSR report as dummy. RDSALES = Log of R&D expense to sales ratio. OPTIONCOMP = annually stock options grant to total compensation ratio. Size = log of total assets. RoA = net income / total assets. Book to Market ratio = the ratio of total common equity to price multiplied by outstanding shares (winsorized at 1% level). Leverage is the debt to equity ratio (winsorized at 1% level). Loss is a dummy variable which indicates a 1 for companies that make a loss and 0 if not. Salesgrowth stands for sales growth (winsorized at 1% level).
* p < 0.1, ** p < 0.05, ***p < 0.01
The second hypothesis (quality of CSR disclosure is negatively related with stock options granted) was also tested by a multiple linear regression. The results in table 10 indicate that the quality of the CSR report is negatively related with the stock options granted, which is consistent with hypothesis 2. The coefficient of -0.146 indicates that with a high quality of CSR report, a 0.146 decrease in stock options granted is predicted, holding all other variables constant. This finding is statistically significant as indicated with the T statistic -2.05 (p < 0.05). The size is positively significant as indicated with the T statistic 5.12 (p < 0.01). Furthermore, the book-to-market ratio is negatively significant with -2.25 (p < 0.05) and the loss-dummy is positively significant with 1.76 (p < 0.1). Industry and year fixed effects are included in the analysis. The R2 coefficient is 70.61% in this model. Concluding, the significant result is consistent with hypothesis 2, which is that a high quality of CSR report leads to lower stock options granted for managers.
Table 10
Multiple linear regression OPTIONCOMP
STR
Test variable Coefficient T-stat
OPTIONCOMP -0.146 -2.05**
Market control variables
Size 0.094 5.12*** RoA 0.254 1.64 Book-to-Market ratio -0.136 -2.25** Leverage -0.007 -0.34 Loss-dummy 0.122 1.76* Salesgrowth -0.029 -1.47 INTERCEPT -0.05
Industry fixed effects Included
Year fixed effects Included
No. Observations 338
R2 70,61%
Note: this table examines the quality of the CSR reports to the managerial stock option compensation. T-statistics based on standard errors are clustered at firm-level. T-statistics based on standard errors are clustered at the firm-level. STR = high quality of CSR report as dummy. OPTIONCOMP = annually stock options grant to total compensation ratio. Size = log of total assets. RoA = net income / total assets. Book to Market ratio = the ratio of total common equity to price multiplied by outstanding shares (winsorized at 1% level). Leverage is the debt to equity ratio (winsorized at 1% level). Loss is a dummy variable which indicates a 1 for companies that make a loss and 0 if not. Salesgrowth stands for sales growth (winsorized at 1% level).
5 Discussion
CSR has emerged as a global trend involving companies, states, international organizations and civil society organizations. Research on CSR disclosure points an increasing lack of completeness and a decreasing amount of credibility, as well as concerns about overall reporting practices. The purpose of this study was to add to the existing literature about CSR reporting and its effect on the long-term orientation of managers. Through testing multiple hypothesis about this subject, this research find answer on the research question: does the
quality of corporate social responsibility reporting have an impact on the long-term orientation of managers?
The first hypothesis, which stated that the CSR reporting quality is positively related with the R&D investment, is not supported. The results are negatively insignificant. A possible explanation for this insignificant results could be due to the research design. The second hypothesis, which stated that the CSR reporting quality is negatively related with the managerial grant stock options is, significant and supported.
5.1 Academic relevance
This research contributes to the literature on CSR, CSR reporting quality, and long-term orientation of managers. The relevance of CSR is growing and especially the increased attention by stakeholders for the quality of CSR reports. The current study contributes on CSR reporting as a tool that appeals to change the business’ orientation from short-term to long-term goals and from maximum to optimum profit. The usefulness and credibility of CSR reports depends on the quality of disclosed data and information, where only high quality information will be useful for the reports’ readers (Hąbek & Wolniak, 2016). This is consistent with the results, where the quality of the CSR reports are vital for the managerial investment decisions in R&D and the granted stock options for incentivizing long-term thinking.
5.2 Managerial implications
Apart from the academic relevance the results have managerial implications. The results of this study can be valuable for managers of manufacturing and service companies, because these industries were the biggest group in the sample. As the study shows, CSR reporting quality cannot be used as a tool to facilitate monitoring. The results shows the higher the quality of the CSR report, the lower a manager invest in R&D. This can have implications for
managers that tend to be more focused on short-term decisions and delay long-term decisions which can harm the company as a whole. Moreover, one of the complex issues within organizations remains the design of a proper compensation system. Long-term incentives has become an increasingly larger portion of CEO’s total compensation. In this study the managerial stock options grant has shown to be negatively related with the CSR reporting quality. This indicates that the CSR reporting quality is an important tool for stakeholders to keep the managers’ interest aligned with the long-term value activities of the company. This is because evidence has shown that stock options could encourage managers to undertake risk-increasing activities.
5.3 Limitations and suggestions for future research
This study has limitations that can present opportunities for future research. First, the use of data regarding the strength and weaknesses of CSR reporting, which indicates the quality of the report, is limited to a 0 or 1. This indicator does not outline which factors are included into the qualification. Also, the data that was available in the KLD database regarding the CSR reporting quality was not consistent over the years. The data shows clearly that companies with a low quality of CSR report was larger in 2010, 2011 and 2012. Second, it is important to note that the sample distribution consisted mostly of manufacturing and services companies. It would have been ideal if the sample had a more even distribution over the industries. Third, this study contains a sample of companies in North America, where CSR reporting is not mandatory. Companies for example in countries where CSR reporting is mandatory can give different results.
In response to this study, there are various directions for future research. First of all, although using binary items is a good way to quantitatively measure CSR reporting, a database with more specific components assigned to CSR quality could give more insights in what quality drivers are the most important. For example, a more specific rating on community, employees, environment and governance factors should give more insight into the grading. Further, since long-term orientation takes place via a wide range of managerial choices in different activities throughout the business, R&D spending and managerial compensation are one of many future-oriented activities. Thus, it could be interesting to research other components of long-term orientation.
6 Conclusion
The purpose of this study is to examine the influence of the CSR reporting quality on the long-term orientation of managers by measuring the R&D investments and managerial stock option grants. Corporate myopia remains a problem within the business environment, which is also known as short-termism (Alexander, 2017). Short-termism is the lack of attention to future strategy and long-term value creation. Previous research suggests that CSR is a trend that changes the business’ orientation from short-term to long-term goals and from maximum to optimum profit (Moravcikova et al., 2015). However, despite the increase in the number of CSR reports, their quality is different (Hąbek & Wolniak, 2016). The CSR reports do not always provide information that readers desire, which in turn intensifies the problem with the comparison and evaluation of the organization’s results achieved in this scope. Therefore, this study linked the quality of the CSR report to the long-term orientation of managers.
For answering the hypotheses, empirical models are used that include dependent, independent and control variables. By performing database research, for a sample of 1.259 for R&D investments and 338 for managerial stock option grants the hypotheses were tested. The sample for this research was determined by using the KLD and Compustat database. Subsequently, multiple linear regression analyses and t-tests were performed to answer the hypotheses. The first hypothesis tested the CSR reporting quality with the R&D investment. The results show that CSR reporting quality is negatively related with the R&D investments, however the results are not significant. The second hypothesis tested the CSR reporting quality with the managerial stock options grant. The results show that CSR reporting quality is negatively significant with managerial stock options grant, which is consistent with the second hypothesis.
Building on theories on agency theory and enlightened stakeholder theory, the current research has given a theoretical reasoning as to why the quality of the CSR report would have an impact on the R&D investments. Recent research has shown that CSR reports can mitigate the value destruction that is associated with cash holdings (Arouri & Pijourlet, 2017; Lu et al., 2017). The issuance of CSR reports increases the marginal value of cash holdings and this effect is more pronounced for firms in a less transparent information environment and for firms with weaker external monitoring. Their findings suggest that the quality of the information in CSR reports can facilitate monitoring and induce an increase in R&D investment by a manager. However, in this study this finding is supported.
Regarding the managerial stock options grant, previous research has shown that stock options could encourage managers to undertake risk-increasing activities (Coles et al., 2006; Dong et al., 2010). This evidence shows that stock options are not aligning the interests of managers and stakeholders, rather it pursue suboptimal capital structures. It is possible that the quality of the CSR reports can facilitate monitoring which induces managers to think more in the long-term and reduce the incentive for short-termism. This finding is consistent with Dong et al. (2010) which suggest that firms should exercise some restraint in compensating and incentivizing their executives with options.
The findings of the study have academic and managerial implications. First, by finding the relationship between CSR reporting quality, R&D investment and managerial stock option grant, it contributes to the literature on CSR, CSR reporting and long-term orientation. However, long-term orientation takes place via a wide range of managerial choices in different activities throughout the business, where R&D spending and managerial compensation captures only two of many future-oriented activities. The results of the study make stakeholders and managers aware of the implications of the CSR report quality and how it can help as a tool to make optimal contracts for managers.
