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INTRODUCTION
Since the early surveys of Ernst & Ernst (1978), the voluntary social
disclosure practices of firms have become widely documented (see, for
example, Guthrie & Parker, 1990; Gray, Kouhy & Lavers, 1995; Deegan
& Gordon, 1996; Hackston & Milne, 1996). Many of these studies show
that most of the social information disclosed in annual reports relates to
employees, the environment and the community. The disclosures, which
Correspondence should be addressed to M. J. Milne, Department of Accountancy, University of Otago,
PO Box 56, Dunedin, New Zealand. Fax: 64-3-4798450; e-mail: mmilne@commerce.otago.ac.nz
The authors would like to thank David Owen, Alan Macgregor, Kate Brown, Ken Moores and Ralph
Adler for comments on earlier drafts. In addition, the authors express their appreciation to participants
at seminars at Massey and Otago Universities. All errors remain the responsibility of the authors.
Previously a BCom (Hons) student, Department of Accountancy, University of Otago. This paper
was developed from Christians dissertation.
Received 23 November 1998; revised June 1999; accepted July 1999.
08908389/99/040439+19 $30.00/0
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reports. In fact, in a broader sense, little is known about any decision impact
from such information.
By following Dierkes and Antals (1985) model of social responsibility
information usefulness, and by using an experimental design, this study
provides a stronger test of the decision usefulness argument. The study also
provides a basis for quantifing the magnitude of any investment decision
impact from narrative social disclosures.
PRIOR LITERATURE
The extent to which previous market reaction, experimental and survey
studies can be used to develop prior expectations for the overall impact of
narrative social disclosures on investment decision making is far from clear
cut. Not only do the different research methods elicit different results,
but so too do the same methods across different studies. The social
information signals used to test market reactions vary enormously and
there appears to be no consistent pattern of results associated with such
variability. Belkaoui (1976), for example, obtained positive reactions to
financially quantified pollution control expenditures obtained from annual
report disclosures (also see Shane & Spicer, 1983). Mahapatra (1984),
however, using financially quantified pollution expenditures supplied by the
US Environmental Protection Agency, found a negative market reaction
associated with such disclosures. Yet Freedman and Jaggi (1986) could
find no incremental reaction to financially quantified pollution disclosures
over and above that for descriptive pollution disclosures. Anderson and
Frankle (1980) obtained positive market reactions. Their information
signal, however, was a mixture of financially quantified, but predominately
qualitative, social information from annual reports.
The survey evidence is also mixed, although there are perhaps some
clearer reasons for the variability in the results. When investors have specific
ethical investment motives, their perceptions of the usefulness of corporate
social disclosure appear to be strong. Buzby & Falk (1978), Rockness &
Williams (1988) and Harte, Lewis & Owen (1991) all found evidence
from social investors that suggest some social items of disclosure were
important, and in some cases at least equally important, as financial items
of disclosure. With regard to making investment decisions more generally,
however, the survey evidence is less consistent about the importance of
social information. Again, there appear to be reasons for this. Several
early surveys (e.g. Benjamin & Stanga, 1977; Firth, 1978; Buzby & Falk,
1979) could find moderate or no importance given to social responsibility
information in their respondents investment decision-making processes.
On the other hand, more recent surveys (e.g. Epstein, 1992; Goodwin,
Goodwin & Konieczny, 1996; Deegan & Rankin, 1997) suggest that social,
and particularly environmental, information is important to investors more
generally.
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Apart from investors saying and doing different things, one other possible
explanation for the observed differences in the survey and behavioural
studies concerns differences taken in the social information signals that
are provided to respondents. Most of the experimental studies focused on
social information that was quantified and disclosed within the financial
statements or footnotes thereto. Yet, as noted above, most of the social
information that firms typically disclose is qualitative and appears outside
the financial statements in the annual report. Investor surveys, on the
other hand, rarely ask respondents for their perceptions of the usefulness
of financially quantified social information. Consequently, respondents to
surveys may well have the more typical qualitative information in mind when
responding. Apart from providing a measure of the behavioural impact of
narrative social disclosures, this study may therefore also help provide
explanations for the differences between the prior survey and experimental
evidence.
In addition to unclear empirical evidence, economic theory is also
unclear about the expected investment reactions to social information.
While common sense would dictate that firms acting rationally would not
voluntarily disclose social information if they believed it would do them
harm (Verrecchia, 1983; Craswell & Taylor, 1992), they may not always
get it right. Furthermore, as has been long argued by Friedman (1970),
firms engaged in social responsibility activities are potentially doing so at the
expense of increased profits. As such, one would expect rational investors
to react negatively because of expected reductions in profitability with no
corresponding reduction in risk (Holman, New & Singer, 1985). In contrast,
however, lies the argument that investors will reward socially responsible
firms in terms of higher investments. By engaging in corporate social
responsibility, investors can be confident that the firm will not be subjected
to government sanctions in the future as a result of violations regarding the
environment and other social involvement matters (Holman et al., 1985).
Consequently, whether narrative social disclosures communicate corporate
excesses and waste of shareholder funds, reduced corporate risk, or neither
of these is an empirical question. Furthermore, given some of the findings
in social psychology, it is an empirical question best answered by reference
to investors behavioural reactions at least as well as by reference to what
they might say.
From this review of empirical findings and economic argument, it is
not possible to clearly specify with any degree of confidence the expected
behavioural reactions to narrative corporate social disclosures. In a very
real sense, no clear hypothesized reactions emerge, and the study should
be seen largely as an exploratory investigation into behavioural reactions
to narrative social information. In spite of no clear decision expectation,
however, the review does indicate the potential for the type of respondent
and their investment strategy to influence the decision outcomes.
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METHOD
As noted in the introduction, the literature has typically, and certainly more
recently, followed capital market research and investor surveys in addressing
the question of whether corporate social disclosure is useful for investment
decision making. In addition to using a survey method, this study revives
the experimental decision task.
All three approaches have limitations, but the experimental method
does have some advantages over the other two. Not least is the fact that
the method has not been used before to assess the worth of corporate
narrative social disclosures to investors.2 Unlike surveys that capture
attitudes, decision experiments measure behaviour. Also, a greater degree
of confidence can be placed on the observed behavioural changes being
the result of the social information than with capital market studies. The
limitation with decision experiments, of course, is that while they do
measure changes in behaviour, they do so under controlled and hypothetical
conditions. The extent to which such behaviour would be repeated in real
decision situations is always open for debate. The level of confidence that
can be placed in the experimental results often depends on how well the
experimental conditions model reality.
As part of this study, a short survey was mailed to similar sets
of respondents as the decision experiment. Five 5-point ordinal-scaled
questions were developed from the dimensions suggested by Dierkes &
Antal (1985) for measuring the perceived usefulness of corporate social
disclosure.3 In addition, survey respondents were also asked, if social
responsibility information had no influence whatsoever on their investment
decisions, to explain why. For the sake of brevity, however, the results from
the survey, which are largely confirmed by the decision experiment, are
reported in an appendix to this paper.
The investment decision task used in this study was modelled after
such earlier studies as Elias (1972), Acland (1976), Hendricks (1976),
Schwan (1976) and Belkaoui (1980). This study improves on these previous
studies by incorporating a variety of social responsibility information and
not just human resource or pollution control information alone. This
should provide a better representation of corporate social disclosure as
contained in annual reports in the 1990s. The shifting demands of public
interest now go beyond matters of employment practices and include the
environment, local communities and consumers. Arguably, more realism is
also introduced in this study because it examines the impact of narrative
corporate social disclosure. The experiments of Elias (1972), Schwan
(1976), Hendricks (1976) and Belkaoui (1980) contained financially
quantified social disclosures or notes to the main accounts. Furthermore,
while Aclands (1976) experiment does contain some narrative statements,
these are included to help interpret the non-financial behavioural human
resource indicators he used, and are not representative of typical narrative
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For the social packet, it was necessary to match the amount of information
provided on companies A and B. This was to ensure participants were
responding to the social information and not just to the amount of
information provided for Company B. Both the neutral and the corporate
social disclosure statements were excerpts from the actual annual reports. In
fact, the extracts were taken from the annual reports of two companies used
in a previous social disclosures study (Hackston & Milne, 1996). In that
study, Company A made zero social disclosures, while Company B made
48 social disclosures, about twice the average of disclosing companies. To
conceal any description of names or places, and also for sentence structure
and flow, the narrative statements were slightly modified. The page of
corporate social disclosure included information pertaining to the impact
of the company on the environment, customer relations, human resources,
employee safety and health, product quality and community involvement.
The pages of corporate social disclosure and neutral statements were
headed Chairmans review of Omega and Chairmans review of Delta,
respectively.
Sample selection
The participants selected for this study represented two different professional groups, namely investment analysts and accountants. Accountants
and investment analysts may not be strictly investors per se, but for this
study an investor is not so much a current shareholder but an individual
who possesses the necessary skills to evaluate investments.6
The choice of participants for the study obviously involves some tradeoffs. Studies by Lee & Tweedie (1975, 1976), for example, show that
sophisticated investors (individuals who possess a significant degree
of experience in accounting and financial matters) are more likely to
understand financial reporting practices and the accounting information
contained in the annual report than unsophisticated investors. Although
not a prerequisite for this study, such professionals would also very likely be
investors on behalf of their companies or clients anyway. Financially trained
investors, then, are more likely to boost the validity of the experiment, but
nevertheless it should be remembered that the choice of such participants
might well limit the extent to which the results could be generalized to other
investor groups.
Participants for the study were randomly selected from the membership
list provided by the local Institute of Chartered Accountants Yearbook
and directly through the New Zealand Society of Investment Analysts.7
Participants from each of the two professional groupings were then randomly
assigned to either receive the control information packet or the social
information packet. The information packets were then mailed to the
participants, along with appropriate decision response sheets to be returned
by mail.
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Investment analysts
Total
53
15
28%
3135 years
610 years
56 courses
59
14
24%
3640 years
610 years
56 courses
112
29
26%
51
11
22%
3640 years
35 years
78 courses
58
10
18%
4050 years
1120 years
910 courses
109
21
19%
Control Group
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TABLE 2
Descriptive statistics for investment decision task
Investment
strategy
Group
Company
Long term
Control
N D29
Social
N D21
Control
N D29
Social
N D21
Alpha
Sigma
Delta
Omega
Alpha
Sigma
Delta
Omega
Short term
Mean
(in dollars)
3405172
1594828
3250000
1750000
3025862
1974138
3154762
1845238
(SD)
(in dollars)
1411708
1411708
1592953
1592953
1606828
1606828
1582080
1582080
K-S stats
115
115
072
072
089
089
075
075
The
The
minimum and maximum for all the categories were $0 and $50,000, respectively.
SD is the same for companies in each experimental group because the distribution for Company
A is $50,000 minus the distribution of Company B.
All the distributions approximate normality.
TABLE 3
Average percentages invested
Group
Additional
information
Company
Profession
Long-term
strategy
Short-term
strategy
Control
None
Alpha
Accountant
Inv anlyst
Accountant
Inv anlyst
Accountant
Inv anlyst
Accountant
Inv anlyst
69%
67%
31%
33%
57%
74%
43%
26%
52%
70%
48%
30%
66%
60%
34%
40%
Sigma
Social
Neutral
Delta
Social disclosure
Omega
450
451
452
453
454
4. A page of corporate social disclosure statements was deemed appropriate because the
average amount of corporate social disclosure provided by New Zealand companies
in the annual report is 23 sentences, which roughly constitutes a page (Hackston &
Milne, 1996). Although the page of corporate social disclosure is justified in terms of
the amount, the concentration of statements in just one page is recognized as nonrepresentative of the average annual report. Consequently, the results might have been
different if the corporate social disclosure statements had been dispersed across a few
pages, resulting in a less intense dosage of the treatment. Full copies of the experimental
investment decision task are available from the authors upon request. Please e-mail:
mmilne@commerce.otago.ac.nz.
5. The choice of key financial ratios was based on Gibsons (1987) study that ranked
60 ratios in terms of their relative importance to Chartered Financial Analysts. Each
of the 8 ratios selected was among the top four in their classification (i.e., measuring
profitability, liquidity or debt) ranked in terms of relative importance.
6. Bank managers and corporate loan officers would also possess the kind of experience
and expertise relevant to this study. Attempts to secure their participation failed due to
an inability to identify a database of suitable candidates.
7. Due to the Privacy Act, the Society of Investment Analysts insisted on performing their
own selection procedure, which we were assured would be random. Nevertheless, as
researchers, we could not attest that this was, in fact, properly carried out.
8. Response rates for the perceptions the survey referred to in the appendix were as follows:
Accountants
Sent & received
Usable responses
Response rate
Median age
Median experience
Median education
39
27
69%
3640 years
610 years
78 courses
Investment analysts
40
19
47%
3135 years
610 years
910 courses
Total
79
46
58%
9. As noted by one of the referees, however, these tests do not capture the content or
nature of the courses taken and experience gained. It is possible, for example, that the
accountants received greater exposure to social reporting issues through their education
and training, and this may possibly explain different decision reactions between the two
groups.
10. It is the large variance of individual responses in each group that makes it difficult to
obtain statistical significance, and this raises the issue of whether a related sample or
repeated measures design would not have been better than the independent samples
design used in this study. While the repeated measures design controls for individual
variation, it would have undoubtedly contaminated the responses by sensitizing
respondents when asking them to complete the decision task twice. Such a request
would also have undoubtedly further eroded the response rate.
REFERENCES
Acland, D. (1976). The effects of behavioural indicators on investor decisions: an exploratory
study, Accounting, Organisations and Society, Vol 1, No 2, 3, pp. 133142.
Anderson, J.C. & Frankle, A.W. (1980). Voluntary social reporting: an iso-beta portfolio
analysis, The Accounting Review, Vol. LV, No. 3, pp. 467479.
Belkaoui, A. (1976). The impact of the disclosure of the environmental effects of
organizational behaviour on the market, Financial Management, Winter, pp. 2631.
455
456
Hendricks, J.A. (1976). The impact of human resource accounting information on stock
investment decisions: an empirical study, The Accounting Review, April, pp. 292305.
Holman, W.R., Randolph New, J. & Singer, D. (1985). The impact of corporate social
responsiveness on shareholder wealth, Research in Corporate Social Performance and Policy,
Vol. 7, pp. 137152.
Kutner, B., Wilkins, C. & Yarrow, P.R. (1952). Verbal attitudes and overt behaviour
involving racial prejudice, Journal of Abnormal & Social Psychology, Vol. 47, pp. 649652.
LaPiere, R.T. (1934). Attitudes vs. actions, Social Forces, Vol. 13, pp. 230237.
Lee, T.A. & Tweedie, D.P. (1975). Accounting information: an investigation of private
shareholder understanding, Accounting & Business Research, Winter, pp. 317.
Lee, T.A. & Tweedie, D.P. (1976). The private shareholder: his sources of financial
information and his understanding of reporting practices, Accounting & Business Research,
Autumn, pp. 304314.
Mahapatra, S. (1984). Investor reaction to a corporate social accounting, Journal of Business
Finance & Accounting, Vol. 11, No. 1, Spring, pp. 2940.
Oppenheim, A.N. (1966). Questionnaire Design and Attitude Measurement, New York, Basic
Books.
Rockness, J. & Williams, P.F. (1988). A descriptive study of social responsibility mutual
funds, Accounting, Organizations & Society, Vol. 13, No. 4, pp. 397411.
Saenger, G.H. & Gilbert, E. (1950). Customer reactions to the integration of Negro
personnel, International Journal of Opinion & Attitude Research, Vol. 4, pp. 5776.
Schuman, H. & Johnson, M.P. (1976). Attitudes and behaviour, Annual Review of Sociology,
pp. 161207.
Schwan, E.S. (1976). The effects of human resource accounting data on financial decisions:
an empirical test, Accounting, Organizations & Society, Vol. 1, No. 2, 3, pp. 219237.
Shane, P.B. & Spicer, B.H. (1983). Market response to environmental information produced
outside the firm, The Accounting Review, Vol. LVIII, No. 3, July, pp. 521538.
Teoh, H.Y. & Thong, G. (1984). Another look at corporate social responsibility and
reporting: an empirical study in a developing country, Accounting, Organizations and
Society, Vol. 9, No. 12, pp. 189206.
Teoh, H.Y. & Shiu, G.Y. (1990). Attitudes towards corporate social responsibility and
perceived importance of social responsibility information characteristics in a decision
context, Journal of Business Ethics, Vol. 9, pp. 7177.
Tilt, C.A. (1994). The influence of external pressure groups on corporate social disclosure:
some empirical evidence, Accounting, Auditing & Accountability Journal, Vol. 7, No. 4,
pp. 4772.
Ullmann, A.A. (1985). Data in search of a theory: a critical examination of the relationships
among social performance, social disclosure, and economic performance of U.S. firms,
Academy of Management Review, Vol. 10, No. 3, pp. 540557.
Verrecchia, R. (1983). Discretionary disclosure, Journal of Accounting and Economics,
December, pp. 179194.
Significant
at the 5% level.
Survey questions
1
3
7
1
0
0
1
1
2
1
2
4
1
1
2
Very important
Number
Percentage
Always
Number
Percentage
Very reliable
Number
Percentage
Very easy
Number
Percentage
Very much
Number
Percentage
2
3
6
2
11
24
2
14
31
2
13
29
2
3
6
3
21
46
3
25
54
3
18
40
3
13
29
3
16
35
4
18
40
4
7
15
4
11
25
4
11
24
4
18
39
Frequencies
5
3
6
5
2
5
5
0
0
5
5
11
5
9
20
Not at all
Not understandable
at all
Never
APPENDIX
Median
162
145
193
146
119
K-S Stats
NARRATIVE CORPORATE DISCLOSURES
457