The moderating effects of management's Non-GAAP treatment of a CAM item and investors' position on investors' management credibility judgments

In contrast to the extensive archival research on the relationship between corporate social performance and financial performance, behavioral studies are scarce. We explore whether excellence in corporate social performance affects investors' judgments of financial assessments (i.e., future profitability, liquidity, and financial risk) and credibility of management's forecasts. We define “excellence in corporate social performance” as the case of a firm simultaneously showing high and stable social performance and being provided with professional assurance on social activity reporting. We design a 2 × 2 experimental design with two control groups by manipulating corporate social performance (high versus low) and assurance (present versus absent), in which investors are asked to provide their judgments on the financial status of the firm. Our results indicate that corporate social performance excellence has an impact on both investors' financial assessments and their reliance on management‐forecasted information. Additional analysis shows that corporate social performance excellence is perceived as having a significantly higher impact on investors' financial assessments and their credibility of managers' forecasts in comparison with temporary corporate social performance. Therefore, we find support for the argument that only the combination of superior and stable corporate social performance and reliable corporate social responsibility disclosure pays off.

This study provides a theoretical framework and experimental evidence on how managers' disclosure decisions affect their credibility with investors. Further, I examine whether investors' judgments of management credibility are based on different factors in the short- and longer-term. My results show that in the short-term, management disclosure decisions regarding negative news have larger effects on perceived management credibility than disclosure decisions regarding positive news. Specifically, managers who warn investors about unexpected negative news are rewarded with greater credibility increases than managers who warn about unexpected positive news, and managers who fail to warn about unexpected negative news are penalized with greater credibility decreases than managers who fail to warn about unexpected positive news. The results also show that these short-term credibility effects do not persist over time. In the longer-term, managers who report positive earnings news are rated as having higher credibility than managers who report negative earnings news, regardless of their disclosure decisions.