The impact of CSR disclosures on external finance: Evidence from China

Abstract

This thesis examines the relationship between the dimensions of CSR disclosure and a firm's ability to access external financing in relation to the cost of equity and debt maturity in China. CSR disclosure affects shareholders’ and lenders’ perceptions regarding a firm’s risk and performance through the contained CSR information and disclosure. According to stakeholder and agency theory, CSR influences the firm’s value. Meanwhile, from a reporting and legitimacy perspective disclosure signals the firm’s quality and legitimacy, which in turn affects its transparency and risk factors relating to survival and growth. These theories are considered through this thesis.

CSR disclosure is measured using a disclosure index developed based on the Global Reporting Initiative (GRI G4.0) and an index framework designed by Hummel and Schlick (2016) for a sample of Chinese firms listed on the China Security Index 300 in 2015. It is broken down into the level of disclosure (i.e., amount), information nature (i.e., positive/negative), information type (i.e., hard/soft), and the combination of information nature and type for investigation.

Two empirical studies have been conducted as follows. The first study examines how CSR disclosure affects the cost of equity, with the findings demonstrating that the level of disclosure is positively associated with the cost of equity. Shareholders are sensitive to both positive and negative information. They consider positive information as a signal of lower firm risk and reward firms with lower required returns, and vice versa. Compared to having very few or no responses to hard information, shareholders tend to be sensitive to soft information and, accordingly, equity costs are lower. Furthermore, it is evident that shareholders respond to both positive and negative information accordingly, regardless of information type. These findings suggest that CSR disclosure, which can be considered either as a whole or as comprising individual components, has different impacts on shareholders’ perceptions of a firm’s risk. They further support the argument of Plumlee et al. (2015) that information nature and information type should be considered at the same time.

The second study investigates the impact of CSR disclosure on debt maturity and finds that the level of disclosure is positively associated with longer debt maturity. Furthermore, lenders are likely to respond to information content (either positive or negative). On the other hand, information type has different impacts on lenders’ perceptions regarding a firm’s risk: the disclosure of soft information leads to longer debt maturity, whereas hard information has no effect. Accordingly, lenders tend to respond to positive or negative information in soft form with shorter or longer debt maturity. These findings indicate that lenders consider the disclosure of positive soft information to be a signal of misappropriation of business resources and an agency problem. Firms disclosing negative soft information are seen to be trustworthy and conservative. Hence, it can be seen that CSR disclosure influences investors differently, not only based on the various dimensions of disclosure but also investment type.

In summary, the empirical findings are consistent with the arguments of both Clarkson et al. (2013) and Plumlee et al. (2015) that CSR disclosure is incrementally informative and information users should deconstruct it into different dimensions for better understanding. This thesis deepens our understanding about agency theory by analysing the agency problems among shareholder, lenders and managers,. Meanwhile, it takes CSR disclosure as a proxy of nonfinancial disclosure to advance our knowledge about nonfinancial disclosure and its impact on managing investors’ perceptions about a firm’s performance and risk. Meanwhile, this study adds to the existing literature about the reporting quality regarding information nature and information type and indicates that it may affect shareholders’ and lenders’ perception regarding a firm’s risk differently. Last, it provides valuable insights about CSR issues in an emerging market.