Corporate Social Responsibility and Managerial Reporting

Abstract

This study uses an experiment to examine the role that managerial reporting plays in CSR decisions. Managerial reporting can affect CSR decisions when information asymmetry makes it necessary for lower-level managers to communicate decision-relevant information to upper-level managers. If lower-level managers value the societal benefits associated with CSR activities, they may bias the information they communicate in favor of such activities even when they have financial incentives to communicate unbiased information. I find that when lower-level managers recommend whether a CSR or a non-CSR project be implemented, they bias their recommendations in favor of the CSR project even though this reduces their personal payoff and firm profit. However, when lower-level managers must make a report that requires a factual assertion about project costs, their biased reporting is significantly reduced, suggesting that their honesty preferences act as a partial, but not full, control against their bias in favor of the CSR project. Finally, when lower-level managers can also build slack into their reports as they can in many actual settings, their biased reporting significantly increases, offsetting the deterrent effect of honesty preferences on their bias in favor of CSR projects. I also find that some lower-level managers are motivated primarily by wealth, some primarily by honesty, and some primarily by a preference for CSR. Those motivated primarily by a preference for CSR take significantly less slack than those motivated primarily by wealth, leading to higher firm profit when lower-level managers are motivated primarily by a preference for CSR. These results have implications for upper-level managers who rely on lower-level managers’ reports, for shareholders because biased reporting affects firm profit, and for those in society who are affected by CSR decisions.