Corporate Social Responsibility Information Disclosure and Corporate Fraud—“Risk Reduction” Effect or “Window Dressing” Effect?

Haifeng Hu,Bin Dou,Aiping Wang

doi:10.3390/su11041141

Abstract

We examine the impact in Chinese capital markets of publishing information on corporate fraud in a corporate social responsibility (CSR) report. We develop and test two competing hypotheses of “risk reduction” and “window dressing”. Based on the listed company’s CSR report, we analyze the effect of CSR disclosure on the commission of corporate fraud, fraud detection and the severity of corporate fraud. The research results show that after controlling for the firms’ characteristics and corporate governance factors, the CSR report’s information disclosures have a significantly negative relation to corporate fraud. Specifically, the CSR report’s publication reduces the information asymmetry between the insiders and the stakeholders, thus decreasing the tendency to commit fraud. Our findings support the risk reduction hypothesis but not the window dressing hypothesis. Further research shows that firms with a good CSR disclosure practice have a lower probability of committing corporate fraud and have fewer types of fraud violations, thereby mitigating the severity of corporate fraud.

Highlights

Fraudulent cases in the Chinese capital markets have occurred frequently in recent years and have greatly jeopardized the market order, seriously undermined investor confidence and caused serious social consequences
By using the special characteristics of the Bivariate Probit model, we can simultaneously test the two effects: the “risk reduction “effect acts on the process of fraud commission, and the “window dressing” effect acts on the process of fraud detection
We can conclude that corporate social responsibility (CSR) disclosure will significantly reduce the corporate fraud tendency and that a higher CSR disclosure causes a lower probability of fraud commission

Summary

Introduction

Fraudulent cases in the Chinese capital markets have occurred frequently in recent years and have greatly jeopardized the market order, seriously undermined investor confidence and caused serious social consequences. The Changchun Changsheng Bio-tech Company has become the target of public fury for falsifying production data and making substandard DPT (diphtheria-pertussis-tetanus) vaccines that were given to children This bad behavior of seeking illegal profits by endangering the public’s life and health is undoubtedly the result of the lack of corporate social responsibility and the loss of a moral bottom line. The first hypothesis of CSR disclosure is the “risk reduction” effect: When a company, in accordance with the regulations of the CSRC (China Securities Regulatory Commission), invests more resources to undertake social responsibility and the timely release of social responsibility reports, it reflects the company’s good corporate culture and high ethical standards [1] and reduces the chances of concealing bad news for investors. In China’s capital markets, the determination of which effect is primarily manifested by the relationship between CSR disclosure and corporate fraud still deserves our in-depth discussion

Methods

Results

Conclusion