Risk of shareholder litigation, product market competition and the quality of corporate social responsibility disclosure

Abstract

Corporate social responsibility (CSR) activities are embedded in the firm's future value, while agency problems and information asymmetry between shareholders and managers may bring high risk of litigation, will managers choose to improve the quality of CSR disclosure in order to alleviate the interest conflicts between managers and shareholders? In this paper, we investigate whether the increase of the litigation risk from firm's shareholders influence the quality of firm's future CSR disclosure. We find robust evidence of a positive relation between the litigation risk from shareholders and the quality of firm's CSR disclosure in the next period. We further find that the relation between the quality of CSR disclosure and the risk of shareholder litigation is not significant in the state-owned firms, but at high significant in the non-state ownership firm. Furthermore, we find that the intense product market competition appear to aggravate this relationship. Compared to the state-owned firms, the non-state-owned firms are more likely to improve their quality of CSR disclosure with the increment of the shareholder litigation risk when their product market competition is also high. In this paper, we explore how the litigation risk brought by shareholders, the main internal stakeholders, affect the disclosure quality of CSR information, extending literatures about the driving factors of CSR disclosure of listed companies.