Real Effects of Disclosure Regulation: Evidence from the European Union's CSR Directive

Abstract

In 2014, the European Union (EU) passed a corporate social responsibility (CSR) directive that mandates large listed firms to prepare non-financial reports beginning from fiscal year 2017 onward. We examine whether firms within the scope of the directive (hereafter, “treated firms”) anticipate the disclosure mandate—and related adverse stakeholder reactions—by increasing the CSR activities before the first mandatory disclosures. Consistent with such an anticipatory real effect, our results from a difference-in-differences test document that treated firms on average increase their CSR activities after the 2014 passage of the directive, and that this effect increases with lower pre-directive CSR disclosure levels. Findings from cross-sectional tests further show that the increase in CSR activities is larger for firms with higher expected benefits of the anticipation strategy (higher exposure to stakeholder reactions, stricter expected implementation of the directive, and longer investment horizon). Taken together, our study provides evidence on a specific channel through which CSR disclosure regulation may create real effects: anticipation of adverse stakeholder reactions.