SpringerLink
Log in

Foreground or background my social responsibility: impact of the trade war on the readability of corporate social responsibility disclosures

  • Published:
Information Technology and Management Aims and scope Submit manuscript

Abstract

This study empirically investigates the impact of the U.S.-China trade war on corporate social responsibility (CSR) disclosure readability. We first propose a measure of CSR disclosure readability with the latest word embedding model of Word2Vec. Using the U.S.-China trade war as an exogenous shock, we conduct a difference-in-differences analysis and find that firms release more readable CSR disclosures in response to the trade war. We interpret this finding to indicate that CSR disclosure can be a strategic tool to enhance the firms’ reputations when they suffer a negative shock. Moreover, such an effect is more pronounced for firms with tighter internal governance or external supervision. Our results are robust to confining our sample with a Coarsened Exact Matching algorithm and a battery of robust checks. Finally, we find that the trade war leads to increased charitable donations, indicating that our CSR readability measure is more likely to reflect actual CSR activities.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Subscribe and save

Springer+ Basic
EUR 32.99 /Month
  • Get 10 units per month
  • Download Article/Chapter or Ebook
  • 1 Unit = 1 Article or 1 Chapter
  • Cancel anytime
Subscribe now

Buy Now

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. We define CSR disclosure as the nonfinancial reports containing information on the practical social responsibility activities firms have engaged in, which refers to firms disclosing their real CSR activities [5,6,7].

  2. The WinGo Textual Analytics Database (www.wingodata.com) is one of the leading Artificial Intelligence-based textual databases building on natural language processing and machine learning techniques of corporate documents released by publicly listed firms in both China and the U.S. market.

  3. For robust, we also use alternative method to calculate SIZE and find similar results (the logarithm of the market value of equity at the end of the fiscal year). We do not report them for conciseness and the full set of results is available upon request.

  4. For robust, we also control for firm’s leverage and growth opportunity with CEM. We still obtain similar results and not report them for conciseness. The full set of results is available upon request.

References

  1. Amiti M, Kong SH, Weinstein D (2020) The effect of the US-China trade war on US investment. Liberty Street Economics. https://libertystreeteconomics.newyorkfed.org/2020/05/the-investment-cost-of-the-us-china-trade-war/. Accessed 28 May 2020

  2. Fajgelbaum PD, Goldberg PK, Kennedy PJ, Khandelwal AK (2020) The return to protectionism. Q J Econ 135(1):1–55

    Article  Google Scholar 

  3. Cavallo A, Gopinath G, Neiman B, Tang J (2021) Tariff pass-through at the border and at the store: evidence from us trade policy. Am Econ Rev Insights 3(1):19–34

    Article  Google Scholar 

  4. Huang Y, Lin C, Liu S, Tang H (2019) Trade networks and firm value: evidence from the U.S.-China trade war. CEPR Discussion Paper No. DP14173. https://ssrn.com/abstract=3504602

  5. Li Z, **ang R (2007) Study on content definition, measure methods and status quo of information disclosure on community responsibility in Chinese enterprises. Account Res J 7:3–11

    Google Scholar 

  6. Dhaliwal DS, Radhakrishnan S, Tsang A, Yang YG (2012) Nonfinancial disclosure and analyst forecast accuracy: International evidence on corporate social responsibility disclosure. Account Rev 87(3):723–759

    Article  Google Scholar 

  7. Nazari JA, Hrazdil K, Mahmoudian F (2017) Assessing social and environmental performance through narrative complexity in CSR reports. J Contemp Account Econ 13(2):166–178

    Article  Google Scholar 

  8. Dau LA, Moore EM, Soto M (2017) Global economic integration: the impacts of trade networks on firm-level CSR signaling. in academy of management proceedings. Briarcliff Manor, NY 10510. Acad Manage J

  9. Dau LA, Moore EM, Doh JP et al (2022) Does global integration stimulate corporate citizenship? The effect of international trade agreements and regulatory quality on state and private firm adoption of CSR standards. J Int Bus Policy 5(3):328–352

    Article  Google Scholar 

  10. Bloomfield, RJ (2002) The ‘incomplete revelation hypothesis’ and financial reporting. Cornell University Working Paper. https://ssrn.com/abstract=312671

  11. Zhang L, Shan YG, Chang M (2021) Can CSR disclosure protect firm reputation during financial restatements? J Bus Ethics 173(1):157–184

    Article  Google Scholar 

  12. Nadeem M (2022) Board gender diversity and managerial obfuscation: Evidence from the readability of narrative disclosure in 10-K reports. J Bus Ethics 179:153–177

    Article  Google Scholar 

  13. Lu F (2018) China-US trade disputes in 2018: an overview. China World Econ 26(5):83–103

    Article  Google Scholar 

  14. Minor D, Morgan J (2011) CSR as reputation insurance: Primum non nocere. Calif Manag Rev 53(3):40–59

    Article  Google Scholar 

  15. Koh PS, Qian C, Wang H (2014) Firm litigation risk and the insurance value of corporate social performance. Strateg Manag J 35(10):1464–1482

    Article  Google Scholar 

  16. Shiu YM, Yang SL (2017) Does engagement in corporate social responsibility provide strategic insurance-like effects? Strateg Manag J 38(2):455–470

    Article  Google Scholar 

  17. Li C, He C, Lin C (2018) Economic impacts of the possible China-US trade war. Emerg Mark Financ Trade 54(7):1557–1577

    Article  Google Scholar 

  18. Godfrey PC (2005) The relationship between corporate philanthropy and shareholder wealth: a risk management perspective. Acad Manag Rev 30(4):777–798

    Article  Google Scholar 

  19. Godfrey PC, Merrill CB, Hansen JM (2009) The relationship between corporate social responsibility and shareholder value: an empirical test of the risk management hypothesis. Strateg Manag J 30(4):425–445

    Article  Google Scholar 

  20. Hong H, Liskovich I (2019) Crime, punishment and the halo effect of corporate social responsibility. CEPR Discuss Pap. https://doi.org/10.2139/ssrn.2492202

    Article  Google Scholar 

  21. Lins KV, Servaes H, Tamayo A (2017) Social capital, trust, and firm performance: the value of corporate social responsibility during the financial crisis. J Financ 72(4):1785–1824

    Article  Google Scholar 

  22. Du S, Bhattacharya CB, Sen S (2010) Maximizing business returns to corporate social responsibility (CSR): the role of CSR communication. Int J Manag Rev 12(1):8–19

    Article  Google Scholar 

  23. Dhaliwal DS, Li OZ, Tsang A et al (2010) Voluntary nonfinancial disclosure and the cost of equity capital: the initiation of corporate social responsibility reporting. Account Rev 86(1):59–100

    Article  Google Scholar 

  24. Edmans A (2011) Does the stock market fully value intangibles? Employee satisfaction and equity prices. J Financ Econ 101(3):621–640

    Article  Google Scholar 

  25. Mikolov T, Sutskever I, Chen K, Corrado GS, Dean J (2013) Computation and language working paper. https://doi.org/10.48550/ar**v.1310.4546

  26. Shin D, He S, Lee GM, Whinston AB, Cetintas S, Lee KC (2020) Enhancing social media analysis with visual data analytics: a deep learning approach. MIS Q 44(4):1459–1492

    Article  Google Scholar 

  27. Li F (2008) Annual report readability, current earnings, and earnings persistence. J Account Econ 45(2–3):221–247

    Article  Google Scholar 

  28. Biddle GC, Hilary G, Verdi RS (2009) How does financial reporting quality relate to investment efficiency? J Account Econ 48(2–3):112–131

    Article  Google Scholar 

  29. Lehavy R, Li F, Merkley K (2011) The effect of annual report readability on analyst following and the properties of their earnings forecasts. Account Rev 86(3):1087–1115

    Article  Google Scholar 

  30. Kim C, Wang K, Zhang L (2019) Readability of 10-K reports and stock price crash risk. Contemp Account Res 36(2):1184–1216

    Article  Google Scholar 

  31. Ben-Amar W, Belgacem I (2018) Do socially responsible firms provide more readable disclosures in annual reports? Corp Soc Responsib Environ Manag 25(5):1009–1018

    Article  Google Scholar 

  32. Flesch R (1948) A new readability yardstick. J Appl Psychol 32(3):221

    Article  Google Scholar 

  33. Gunning R (1952) The technique of clear writing. McGraw-Hill, New York

    Google Scholar 

  34. McLaughlin GH (1969) SMOG grading-a new readability formula. J Read 12(8):639–646

    Google Scholar 

  35. Kincaid JP, Fishburne RP, Rogers RL, Chissom BS(1975) Derivation of new readability formulas (automated readability index, fog count and flesch reading ease formula) for navy enlisted personnel. Institute for Simulation and Training. 56. https://stars.library.ucf.edu/istlibrary/56

  36. Goodman K (1967) Reading: a psycholinguistic guessing game. Literacy research and instruction. J Read Spec 6(4):126–135

  37. Gough PB (1972) One second of reading. Visible Lang 6(4):291–320

    Google Scholar 

  38. Amiti M, Redding SJ, Weinstein DE (2019) The impact of the 2018 tariffs on prices and welfare. J Econ Perspect 33(4):187–210

    Article  Google Scholar 

  39. Benguria F, Saffie F (2020) The impact of the 2018–2019 trade war on U.S. local labor markets. https://doi.org/10.2139/ssrn.3542362

  40. Sheldon O (1924) The philosophy of management. Sir Isaac Pitman and Sons Ltd, London

    Google Scholar 

  41. Loughran T, McDonald B (2011) When is a liability not a liability? Textual analysis, dictionaries, and 10-Ks. J Financ 66(1):35–65

    Article  Google Scholar 

  42. Rake M, Grayson D (2009) Embedding corporate responsibility and sustainability-everybody’s business. Corp Gov 9(4):395–399

    Article  Google Scholar 

  43. McWilliams A, Siegel DS (2011) Creating and capturing value: Strategic corporate social responsibility, resource-based theory, and sustainable competitive advantage. J Manag 37(5):1480–1495

    Google Scholar 

  44. Frynas JG (2015) Strategic CSR, value creation and competitive advantage. Routledge, New York

    Google Scholar 

  45. Li G, Li N, Sethi SP (2021) Does CSR reduce idiosyncratic risk? Roles of operational efficiency and AI innovation. Prod Oper Manag 30(7):2027–2045

    Article  Google Scholar 

  46. Healy PM, Palepu KG (2001) Information asymmetry, corporate disclosure, and the capital markets: a review of the empirical disclosure literature. J Account Econ 31(1–3):405–440

    Article  Google Scholar 

  47. Pevzner M, **e F, **n X (2015) When firms talk, do investors listen? The role of trust in stock market reactions to corporate earnings announcements. J Financ Econ 117(1):190–223

    Article  Google Scholar 

  48. Lev B, Petrovits C (2010) Is doing good good for you? How corporate charitable contributions enhance revenue growth. Strateg Manag J 31(2):182–200

    Google Scholar 

  49. El Ghoul S, Guedhami O, Kwok CCY et al (2011) Does corporate social responsibility affect the cost of capital? J Bank Financ 35(9):2388–2406

    Article  Google Scholar 

  50. Moser DV, Martin PR (2012) A broader perspective on corporate social responsibility research in accounting. Account Rev 87(3):797–806

    Article  Google Scholar 

  51. Cho SY, Lee C, Pfeiffer RJ Jr (2013) Corporate social responsibility performance and information asymmetry. J Account Public Policy 32(1):71–83

    Article  Google Scholar 

  52. Hartzell JC, Starks LT (2003) Institutional investors and executive compensation. J Financ 58(6):2351–2374

    Article  Google Scholar 

  53. Dowell G, Hart S, Yeung B (2000) Do corporate global environmental standards create or destroy market value? Manag Sci 46(8):1059–1074

    Article  Google Scholar 

  54. Jo H, Harjoto MA (2012) The causal effect of corporate governance on corporate social responsibility. J Bus Ethics 106(1):53–72

    Article  Google Scholar 

  55. Khan A, Muttakin MB, Siddiqui J (2013) Corporate governance and corporate social responsibility disclosures: evidence from an emerging economy. J Bus Ethics 114(2):207–223

    Article  Google Scholar 

  56. Jizi MI, Salama A, Dixon R et al (2014) Corporate governance and corporate social responsibility disclosure: evidence from the US banking sector. J Bus Ethics 125(4):601–615

    Article  Google Scholar 

  57. Bruton GD, Peng MW, Ahlstrom D, Stan C, Xu K (2015) State-owned enterprises around the world as hybrid organizations. Acad Manag Perspect 29(1):92–114

    Article  Google Scholar 

  58. Wei C (2021) State ownership and target setting: evidence from publicly listed companies in China. Contemp Account Res 38(3):1925–1960

    Article  Google Scholar 

  59. Cox P, Brammer S, Millington A (2004) An empirical examination of institutional investor preferences for corporate social performance. J Bus Ethics 52(1):27–43

    Article  Google Scholar 

  60. Servaes H, Tamayo A (2013) The impact of corporate social responsibility on firm value: the role of customer awareness. Manag Sci 59(5):1045–1061

    Article  Google Scholar 

  61. Khan M, Serafeim G, Yoon A (2016) Corporate sustainability: first evidence on materiality. Account Rev 91(6):1697–1724

    Article  Google Scholar 

  62. Hasan I, Kobeissi N, Liu L et al (2018) Corporate social responsibility and firm financial performance: the mediating role of productivity. J Bus Ethics 149:671–688

    Article  Google Scholar 

  63. Graves SB, Waddock SA (1994) Institutional owners and corporate social performance. Acad Manag J 37(4):1034–1046

    Article  Google Scholar 

  64. Johnson RA, Greening DW (1999) The effects of corporate governance and institutional ownership types on corporate social performance. Acad Manag J 42(5):564–576

    Article  Google Scholar 

  65. Teoh HY, Shiu GY (1990) Attitudes towards corporate social responsibility and perceived importance of social responsibility information characteristics in a decision context. J Bus Ethics 9(1):71–77

    Article  Google Scholar 

  66. Waddock SA, Graves SB (1997) The corporate social performance–financial performance link. Strateg Manag J 18(4):303–319

    Article  Google Scholar 

  67. Sethi SP (2005) Investing in socially responsible companies is a must for public pension funds-because there is no better alternative. J Bus Ethics 56(2):99–129

    Article  Google Scholar 

  68. Giroud X, Mueller HM (2011) Corporate governance, product market competition, and equity prices. J Financ 66(2):563–600

    Article  Google Scholar 

  69. Jones TM (1995) Instrumental stakeholder theory: a synthesis of ethics and economics. Acad Manag Rev 20(2):404–437

    Article  Google Scholar 

  70. Lourenço IC, Callen JL, Branco MC, Curto JD (2014) The value relevance of reputation for sustainability leadership. J Bus Ethics 119(1):17–28

    Article  Google Scholar 

  71. Dupire M, M’Zali B (2018) CSR strategies in response to competitive pressures. J Bus Ethics 148(3):603–623

    Article  Google Scholar 

  72. Bengio Y, Ducharme R, Vincent P, Jauvin C (2003) A neural probabilistic language model. J Mach Learn Res 3:1137–1155

    Google Scholar 

  73. Liu LX, Shu H, Wei KJ (2017) The impacts of political uncertainty on asset prices: evidence from the Bo scandal in China. J Financ Econ 125(2):286–310

    Article  Google Scholar 

  74. Xu W, Yao ZY, Chen DH (2021) Readability of Chinese annual reports: measurement and testing. Account Res J 3:28–44

    Google Scholar 

  75. Piotroski JD, Roulstone DT (2004) The influence of analysts, institutional investors, and insiders on the incorporation of market, industry, and firm-specific information into stock prices. Account Rev 79(4):1119–1151

    Article  Google Scholar 

  76. Cornett MM, Marcus AJ, Saunders A, Tehranian H (2007) The impact of institutional ownership on corporate operating performance. J Bank Financ 31(6):1771–1794

    Article  Google Scholar 

  77. Lau C, Lu Y, Liang Q (2016) Corporate social responsibility in China: a corporate governance approach. J Bus Ethics 136(1):73–87

    Article  Google Scholar 

  78. Hofman PS, Moon J, Wu B (2017) Corporate social responsibility under authoritarian capitalism: dynamics and prospects of state-led and society-driven CSR. Bus Soc 56(5):651–671

    Article  Google Scholar 

  79. Kao EH, Yeh CC, Wang LH, Fung HG (2018) The relationship between CSR and performance: evidence in China. Pac-Basin Financ J 51:155–170

    Article  Google Scholar 

  80. Chen H, Tang S, Wu D, Yang D (2021) The political dynamics of corporate tax avoidance: the Chinese experience. Account Rev 96(5):157–180

    Article  Google Scholar 

  81. Jiang F, Kim KA, Nofsinger JR, Zhu B (2015) Product market competition and corporate investment: evidence from China. J Corp Financ 35:196–210

    Article  Google Scholar 

  82. Gu L (2016) Product market competition, R&D investment, and stock returns. J Financ Econ 119(2):441–455

    Article  Google Scholar 

  83. Blackwell M, Iacus S, King G, Porro G (2009) CEM: coarsened exact matching in Stata. Stand Genom Sci 9(4):524–546

    Google Scholar 

  84. Nawaiseh ME (2015) Do firm size and financial performance affect corporate social responsibility disclosure: employees’ and environmental dimensions? Am J Appl Sci 12(12):967

    Article  Google Scholar 

  85. Li W, Wang P (2016) Philanthropy, political connection and debt finance: reciprocal behavior of governments and private enterprises. Nankai Bus Rev Int 7(4):451–473

    Article  Google Scholar 

  86. Houqe MN, van Zijl T, Karim AW, St George T (2021) The value relevance of corporate donations. Pac-Basin Financ J 66:101127

    Article  Google Scholar 

  87. Nunnally JC (1994) Psychometric theory 3E. Tata McGraw-Hill Education, New York

    Google Scholar 

  88. Short JC, Broberg JC, Cogliser CC, Brigham KH (2010) Construct validation using computer-aided text analysis (CATA) an illustration using entrepreneurial orientation. Organ Res Methods 13(2):320–347

    Article  Google Scholar 

  89. Loughran T, McDonald B (2014) Measuring readability in financial disclosures. J Financ 69(4):1643–1671

    Article  Google Scholar 

  90. Senter RJ, Smith EA (1967) Automated readability index. AMRL-TR. Aerospace Medical Research Laboratories. pp 1–14

  91. McLaughlin GH (1969) SMOG grading-a new readability formula. J Read 22:639–646

    Google Scholar 

  92. Anderson J (1981) Analysing the readability of English and non-English texts in the classroom with Lix. Unpublish paper presented at the annual meeting of the Australian Reading Association, Darwin. https://eric.ed.gov/?id=ED207022

Download references

Author information

Authors and Affiliations

  1. College of Management and Economics, Tian** University, Tian**, 300072, China

    Ruixi Long

  2. College of Management, **’an Jiaotong University, **’an, 710049, Shaanxi, China

    Shuyang Jia

Authors
  1. Ruixi Long
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Shuyang Jia
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Ruixi Long.

Ethics declarations

Conflict of interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendices

Appendix A1: Variable definitions

Variables

Definitions

Panel A: Main variables

Readability

Readability in CSR reports based on Word2Vec model and the order of words

Treat

A dummy variable equal to 1 if there is at least 1 politically connected director who was an official of the central government, a local government, or the military before the trade war, and 0 otherwise

Post

A dummy variable equal to 1 if a firm-year observation after 2017, and 0 otherwise

Earn_vol

Operating earnings volatility, measured as the standard deviation of the operating earnings during the prior five fiscal years

Ret_vol

Stock return volatility, measured as the standard deviation of the monthly stock returns in the prior year

Size

Firm size, the natural logarithm of total assets (in RMB) in year t

Age

Firm age, the natural logarithm of 1 plus the number of years since a firm has been publicly listed

mboard

Board type, a dummy variable equal to 1 if the firm is listed on the main board, and 0 otherwise

MA

Mergers and acquisitions, a dummy variable equal to 1 if the firm has undergone mergers and acquisitions in year t, otherwise 0

MB

Market-to-book ratio, the ratio of market value of equity to book value of equity in year t

IO

Institutional ownership, the proportion of firm shares owned by institutional investors

HHI

Herfindahl–Hirschman index, the sum of squared market shares for all firms in the same industry, where the market share of an individual firm is the proportion of the firm's sales to the entire industry's sales

SOE

State ownership, a dummy variable equal to 1 if the firm is a state-owned enterprise, and 0 otherwise

Panel B: Other variables

Donation

Charitable donations, defined as \(\mathrm{log}\left(1+\mathrm{\$donation}/\mathrm{operating income}\times 100\right)\) as the CSR performance measure

Log(# of words)

The natural logarithm of the word count from the CSR report

Log(# of words without figures)

The natural logarithm of the word count excluding the figure count from the CSR report

Log(# of phrases)

The natural logarithm of the phrase count from the CSR report

Log(# of phrases without figures)

The natural logarithm of the phrase count excluding the figure count from the CSR report

LEV(Leverage)

Total liabilities divided by total assets

GROWTH

The change in year-to-year total sales over last year's value

Appendix A2: Validations of our readability measure

In the following sections, we test the content validity and convergent validity of our readability measure.

  1. (1)

    Content validity

    Content validity is the degree to which a measure expresses the full domain of a specific construct [87]. Following Short et al. [88], first, we assess the content validity of our readability by reading the actual contents of CSR disclosures with high and low readability scores. We provide the related samples in Table

    Table 8 Samples of CSR reports with extreme high/low readability
    Full size table

    8 and show that the preliminary validity of our Readability measure indeed encapsulates the readability of CSR report. Second, we ask experts to read a random sample of CSR reports in terms of readability. Then we assess the content validity of our readability measure by measuring the Spearman correlation between the value of our Readability measure (W2V CSR Readability rank) and the readability of the CSR disclosure as assessed by experts (Expert CSR readability rank). The result in Table

    Table 9 Spearman rank order correlation between CSR readability rated by expert and that estimated by our algorithm
    Full size table

    9 displays a high Spearman rank-order correlation (0.952) between W2V CSR Readability rank and Expert CSR readability rank.

  2. (2)

    Convergent validity

Consistent with [89], we assess the convergent validity of readability by examining the correlations between our Readability measure and other readability indexes used in previous English literature such as the Flesch-Kincaid grade level (FK), Gunning Fog index (FI), Läsbarhetsindex (LIX), Automated Readability Index (ARI), SMOG index (SMOG), Rate Index (RIX) [32, 33, 90,91,92]. For these indexes, the higher the score, the harder the text is to comprehend (Table

Table 10 Other readability indexes formulas
Full size table

10).

The One Billion Word Language Modeling Benchmark dataset was selected to calculate our proposed order complexity and a series of previously developed readability measures. The correlations were calculated. Table

Table 11 Correlation between readability with other indexes
Full size table

11 reports the correlations results. Notice that our Readability has the expected relations with the alternative readability measures. That is, our Readability is significantly negative linked with the Flesch-Kincaid grade level (FK), Gunning fog index (FI), Läsbarhetsindex (LIX), Automated readability index (ARI), SMOG index (SMOG) and Rate Index (RIX). This proves the construct validity of the order-complexity-based readability measure we build in an Chinese corpus which can be extended to English corpus

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Long, R., Jia, S. Foreground or background my social responsibility: impact of the trade war on the readability of corporate social responsibility disclosures. Inf Technol Manag 24, 79–97 (2023). https://doi.org/10.1007/s10799-022-00384-6

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10799-022-00384-6

Keywords

Search

Navigation