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Journal of Contemporary Accounting & Economics 13 (2017) 166–178

Contents lists available at ScienceDirect

Journal of Contemporary
Accounting & Economics
journal homepage: www.elsevier.com/locate/jcae

Assessing social and environmental performance through


narrative complexity in CSR reports
Jamal A. Nazari ⇑, Karel Hrazdil, Fereshteh Mahmoudian
Beedie School of Business, Simon Fraser University, 8888 University Drive, Burnaby, BC V5A 1S6, Canada

a r t i c l e i n f o a b s t r a c t

Article history: We analyse the relationship between the complexity of corporate social responsibility
Received 26 April 2016 (CSR) disclosure and actual CSR performance, and postulate a positive association between
Revised 3 February 2017 actual CSR performance and readability and the size of CSR disclosure documents. Using
Accepted 13 March 2017
several readability and disclosure size measures from computational linguistics, we test
Available online 26 May 2017
our hypotheses using a cross-sectional sample of stand-alone CSR reports issued by large
U.S. companies. We find that increased CSR disclosure and more readable CSR reports
JEL:
are associated with better CSR performance. Our findings suggest that extending CSR dis-
Q56
M49
closure increases transparency regarding firms’ social and environmental performance,
while using less-readable language in CSR reports increases obfuscation. This study con-
Keywords: tributes to the disclosure literature by documenting that the complexity indices that have
Corporate social responsibility (CSR) been used as measures of obfuscation in prior finance and accounting research can help
CSR disclosure shareholders, financial analysts, and investors determine the credibility of CSR disclosure.
CSR performance Ó 2017 The Authors. Published by Elsevier Ltd. This is an open access article under the CC
Readability
BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
Voluntary disclosure
Social performance
Environmental performance

1. Introduction

Publicly traded companies face increasing pressure to prepare corporate social responsibility (CSR) documents to inform
stakeholders about their voluntary activities undertaken to operate in an economically, socially, and environmentally sus-
tainable manner (e.g., human rights, community engagement, employment equity, and environmental impact). The percent-
age of firms that voluntarily issue CSR reports has increased considerably. As of 2015, 92% of Fortune Global 250 firms issued
voluntary CSR reports, up from only 35% in 1999 (KPMG, 2015). While existing governing accounting standards regulate only
a fraction of the accounting for socially relevant corporate activities disclosed in annual reports, (e.g., asset retirement obli-
gations, contingencies related to environmental clean-up), reporting of CSR performance through other channels (i.e., stand-
alone CSR reports) remains largely voluntary and unregulated. The lack of regulation has resulted in diverse reporting prac-
tices with respect to length, performance indicators, and readability of voluntary and stand-alone CSR reports. Additionally,
verification of these reports by accounting firms is neither comprehensive nor stringent compared with their verification of
corporate annual reports. For example, a recent survey by PwC (2014) reveals that most global and U.S. investors are dissat-
isfied with the current diversity in CSR reporting practices. Resultantly, there is considerable scepticism about the content,

⇑ Corresponding author.
E-mail addresses: jnazari@sfu.ca (J.A. Nazari), kha18@sfu.ca (K. Hrazdil), mahmoudi@sfu.ca (F. Mahmoudian).

http://dx.doi.org/10.1016/j.jcae.2017.05.002
1815-5669/Ó 2017 The Authors. Published by Elsevier Ltd.
This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
J.A. Nazari et al. / Journal of Contemporary Accounting & Economics 13 (2017) 166–178 167

complexity and reliability of these reports. In response, several international initiatives, such as the Global Reporting Initia-
tive (GRI) and Integrated Reporting (IR), are underway, seeking to harmonize voluntary CSR reporting (Huang and Watson,
2015).1
While mandatory disclosures are highly regulated and subject to stringent external audits, the discretionary nature of CSR
reporting provides managers with opportunities and motivations to signal their superior commitment to CSR or to pose as
‘good’ corporate citizens when their CSR performance is poor (e.g., Leung et al., 2015; Mahoney et al., 2013). Merkl-Davies
and Brennan (2007) suggest that deliberate manipulation in reporting, known as obfuscation, can occur when managers use
more complex syntax, which is difficult to read and understand, to impress readers and/or hide poor firm performance. Using
recent advances in textual analysis techniques applied to narrative disclosures, the present study contributes to this debate
by determining whether poor CSR performance can be identified through narrative complexity in CSR reports. Specifically,
we investigate whether corporations that supply limited information or use deliberately complex language in CSR reports
signal incremental relevant information about their CSR practice or conceal adverse CSR performance.
To our knowledge, our study is the first to use readability indices to measure obfuscation in CSR disclosure. Using a sam-
ple of U.S. firms listed on the S&P 500 Index, we investigate the association between CSR performance (based on data from
KLD Research & Analytics, which provides a widely used CSR rating database) and the complexity of CSR disclosure (mea-
sured by readability and size of voluntary CSR reports). Our results show that better overall CSR performance is significantly
associated with higher readability and longer CSR disclosure. These results further hold for each of the social and environ-
mental dimensions of CSR performance that were examined.
Our findings contribute to the CSR disclosure literature in that we document how readability indices, used as measures of
obfuscation in the literature on regulated corporate financial disclosure, can help in assessing the credibility of CSR disclo-
sures. As voluntary CSR disclosure reports are the only publicly available sources of CSR information, thereby making them
accessible to different stakeholder groups, our research has significant implications in terms of enabling stakeholders to
make more informed decisions regarding actual CSR performance. The present findings could, for instance, facilitate stake-
holders’ preliminary evaluations of actual firm CSR performance, without the need to further investigate difficult-to-access
performance data. Furthermore, if shorter and more difficult-to-read CSR reports indicate greenwashing (attempts to convey
an image of responsible corporate citizenship, but that is inconsistent with actual social and environmental performance),
the perception of this can impact consumer and investor decision-making. Finally, our results also provide evidence to sup-
port ongoing initiatives by policy makers for promoting use of plain language in publicly available disclosure documents.2

2. Literature review

Our research builds on a body of accounting literature that investigates the association between environmental reporting
and environmental performance (e.g. Al-Tuwaijri et al., 2004; Clarkson et al., 2008; Neu et al., 1998; Patten, 1992). Textual
analysis techniques that investigate the relationship between CSR performance and CSR disclosure have been used in several
studies, with the specific techniques used ranging from counting the number of words in disclosures to creating indices to
measuring the quality of entire CSR reports. For example, Wiseman’s (1982) index, developed to analyse annual reports for
determining the extent of CSR disclosure, is one of the first and most widely used indices in earlier research that evaluated
environmental performance (e.g. Neu et al., 1998). More recently, researchers have developed indices to analyse stand-alone
CSR reports. For instance, Clarkson et al. (2008) developed an index based on the GRI to determine the extent of discretionary
disclosure in CSR reports; CSR disclosures receive scores based on their degree of conformity with GRI guidelines. While
some studies find a positive relationship between CSR performance and CSR disclosure (e.g. Al-Tuwaijri et al., 2004;
Clarkson et al., 2008; Luo and Tang, 2014), others document a negative relationship (e.g. Cho and Patten, 2007; Patten,
1992). Thus, it appears from studies critical of CSR disclosure that firms providing more disclosure are in fact CSR underper-
formers. These studies provide evidence that corporate CSR disclosure is used as a mechanism to manage stakeholder
impressions and could indicate greenwashing.
While previous studies on CSR disclosure have employed quantity-based measures of disclosure using either the number
of words/sentences or indices based on the appearance of pre-defined keywords (e.g. Clarkson et al., 2008; Nazari et al.,
2015; Wiseman, 1982), there is a dearth of research on using complexity measures. Core (2001) suggests that measures
developed in computational linguistics to determine complexity could advance disclosure research by enabling examination
of specific characteristics. Similarly, Courtis (2004) argues that researchers in accounting have failed to adequately leverage
textual analysis techniques. While an influential study by Li (2008) on the relationship between readability of annual reports
and financial performance inspired researchers in accounting and finance to use readability indices when evaluating corpo-
rate financial disclosure, the present study is among the first to use readability indices to measure obfuscation in CSR
disclosures.

1
To date, several countries have taken steps to mandate CSR disclosure (Dhaliwal et al., 2012); however, the content and length remains largely arbitrary.
2
For instance, the U.S. Securities and Exchange Commission issued A Plain English Handbook in 1998 to encourage corporations to provide easily readable
disclosures. In Canada, along with a number of other organizations, the Plain Language Association International has been established to promote use of
readable language in public disclosures. Several other associations, including the Legal Writing Institute, Canadian Bar Association and Canadian Bankers
Association support this initiative, and a recent policy by the Treasury Board of Canada Secretariat (2012) mandates its offices to use plain language in all public
disclosures.
168 J.A. Nazari et al. / Journal of Contemporary Accounting & Economics 13 (2017) 166–178

Researchers in accounting and finance are increasingly using readability indices to examine the relationship between the
language used in corporate financial disclosures and other variables of interest (Loughran and McDonald, 2011); these
include investment efficiency (Biddle et al., 2009), analyst forecasts (Lehavy et al., 2011), trading volume reactions (De
Franco et al., 2015), earnings judgments (Tan et al., 2014), and other financial outcomes such as liquidity, analyst following
and institutional ownership percentage (Lang and Stice-Lawrence, 2015). Li (2010) maintains that the textual analysis tech-
niques developed in computational linguistics (e.g. Jurafsky et al., 2000) are useful tools for evaluating managerial intent.
Specifically, in the context of this study, these techniques help us assess the presence of obfuscation, whether resulting from
negligent writing or deliberate manipulation of verbal content (Courtis, 2004).

3. Theoretical approach and hypothesis development

Accounting research has two schools of thought concerning disclosure: one assumes that voluntary disclosures are value-
relevant, and the other assumes such disclosures to be opportunistic. Each view is based on different assumptions about why
corporations voluntarily disclose information to the public, which leads to different understandings of the incentives for pro-
viding disclosure.
Under the value-relevant stream of research, financial disclosure scholars focus on the economic value relevance of vol-
untary disclosure to assess the relationship between financial performance and financial disclosure (Li, 2008). According to
the semi-strong form of the Efficient Market Hypothesis (EMH), market prices fully reflect all publicly available information.
However, many researchers have disputed Fama’s (1970) assumption, both empirically and theoretically. In contrast, beha-
vioural economists argue that market participants have bounded rationality, and their cognitive limitations prevent their
attending to all available information (Lee, 2012). Bloomfield (2008, 2002) therefore proposed the Incomplete Revelation
Hypothesis (IRH) as an alternative to the EMH. According to the IRH, markets do not respond immediately to obscure infor-
mation; therefore, managers can reduce the cost of the market’s reaction to bad news by making the bad news complex and
costly to comprehend (i.e., obfuscation).
Several empirical studies support this hypothesis. For example, using a large sample of listed U.S. companies, Miller
(2010) documents that less-readable annual reports are costly for small investors to process and, therefore, investors may
elect to avoid processing such complex reports. These higher information-extraction costs will lead to a delays in making
investments in response to complex reporting and lower stock trading volumes. Lee (2012), using quarterly earnings reports
filed by companies listed on the SEC, investigates their readability and shows that less-readable reports are associated with
delayed market reaction to earnings announcements. This supports the view that providing more disclosure does not nec-
essarily help investors unless such disclosure is easy to understand, and that the market cannot process value-relevant infor-
mation from a difficult-to-read disclosure. Lang and Lundholm (1993) also provide evidence that managers of companies
with good performance use more-readable disclosure language.
Under the opportunistic stream, research informed by stakeholder and legitimacy theories argues that managers use the
language in corporate disclosures opportunistically; that is, to manipulate stakeholder impressions (Merkl-Davies and
Brennan, 2007). Many studies use length of disclosure in annual reports as a proxy for impression management. For example,
Patten (1992) finds that the quantity of annual environmental disclosure by a sample of petroleum companies increased sub-
stantially in response to the Exxon Valdez oil spill. Neu et al. (1998) provide evidence of impression management, arguing
that environmental disclosure in annual reports is given to alter influential stakeholders’ impressions of CSR performance.
More recent studies echo the importance of investigating language characteristics in CSR disclosure. For example, Cho
et al. (2010) content-analyse a small sample of U.S. companies to investigate if linguistic constructs suggestive of ‘optimism’
and ‘certainty’ used in CSR disclosure can provide a signal for actual CSR performance. Despite mixed evidence on the rela-
tionship between CSR performance and CSR disclosure and recent calls to study the language characteristics of CSR disclo-
sure, to date little research has investigated whether complexity of CSR disclosure can indicate actual CSR performance.
Although rooted in different ontological and epistemological perspectives, the value-relevant and opportunistic perspec-
tives share some assumptions with respect to predicting the relationship between firm performance and corporate disclo-
sure, and both predict that managers of poorly performing firms use less-readable narrative disclosure to mask actual
performance. We rely on these theoretical predictions to hypothesize that managers of companies with poor CSR perfor-
mance use less-readable CSR disclosure language. Therefore, our first hypothesis is as follows:

Hypothesis 1: Poor CSR performance is associated with low readability of narratives in CSR reports.

Besides the readability measures used to assess the narrative complexity of corporate disclosures, disclosure file size has
also been proposed as a measure of complexity. Loughran and McDonald (2014) use the gross file size of 10-K text files as a
measure of complexity/readability, defining complexity as the ability of investors and financial analysts to apply valuation-
relevant information from business disclosure documents to stock prices. They argue that, in the context of their study, file
size is a better measure of complexity than traditional linguistic-based readability measures. They contend file size can easily
be replicated and used without document parsing, and is correlated with other measures of readability. Following their pro-
posed approach, a number of subsequent studies have used the log of 10-K submission file size as a measure of annual report
complexity. Ertugrul et al. (2016), for instance, find that firms with larger 10-K reports have higher informational risk, which
leads to an increased likelihood creditors will require collateral and, thus, increase monitoring intensity by banks.
J.A. Nazari et al. / Journal of Contemporary Accounting & Economics 13 (2017) 166–178 169

However, the results of some earlier studies suggest the log of file size might be an imperfect measure of readability and/
or complexity in financial disclosures. Leuz and Schrand (2009), for instance, use the Enron collapse as an example of exoge-
nous cost of capital shock in investigating the association between firm disclosure responses and capital costs. The collapse
raised concerns about the transparency and quality of other firms’ financial disclosures. Leuz and Schrand (2009) show an
association of increased length and number of pages in annual reports with increased disclosure transparency and decreased
firm cost of capital. Other studies highlight the benefits of increased disclosure volume and argue that larger and longer dis-
closures do not necessarily indicate higher complexity or lesser readability. These studies obtain findings contrary to the lit-
erature that argues large disclosure volume indicates high disclosure complexity.
Callen et al. (2013) show that firms with a high Gunning Fog Score (FOG) have significantly higher stock price delay, while
number of words loads significantly negatively, which is consistent with longer reports having more information. Lang and
Stice-Lawrence (2015), using a large sample of international companies, find disclosure length to be an indicator of disclo-
sure transparency and informativeness, and further find that lengthy disclosure is associated with better economic out-
comes, such as liquidity, institutional ownership and analyst following. Guay et al. (2016) find a strong relation between
financial statement complexity and voluntary disclosure, suggesting that managers use voluntary disclosure to mitigate neg-
ative effects of complex financial statements on the information environment. Finally, Loughran and McDonald (2016) rein-
force their definition of readability in that, while file size may serve as a proxy for readability, it cannot fully separate the
fundamental complexity of the firm’s business from the language complexity of its annual reports. As a result, the authors
call for careful consideration of using textual artefacts to measure information quality, as it remains unclear what they pur-
port to measure.
In sum, the findings of the financial disclosure literature on whether disclosure length indicates greater readability, trans-
parency or complexity are inconclusive. This inconclusiveness of results with regard to information in regulated corporate
and financial disclosures applies even more to the literature on voluntary CSR and environmental disclosures. On the one
hand, recent studies such as Dhaliwal et al. (2012) argue that length of CSR disclosure may indicate higher credibility and
transparency as longer CSR reports contain more information. On the other hand, a body of research indicates increased vol-
ume of CSR disclosure is an unreliable and misleading indicator because self-serving firms can manipulate disclosure volume
to emphasize positive aspects of their CSR performance while minimizing negative social and environmental aspects. For
example, Deegan and Gordon (1996) use legitimacy theory to explain the increase in environmental disclosure policies in
annual reports, which accompanies environmental prosecution in Australia, and find that prosecuted firms disclose signif-
icantly more environmental information in the year they are prosecuted than in other years. Regardless of whether more
information disclosure renders CSR reports more complex or difficult to read, we use a number of measures related to
CSR disclosure size to better understand firms’ information environments and as proxies for information quantity. Our sec-
ond hypothesis is as follows:

Hypothesis 2: CSR performance is positively associated with the size of narratives in CSR reports.

4. Methodology

4.1. Empirical context and sample

Sample: While it is mandatory to report on some aspects of CSR performance in corporate annual reports, reporting of CSR
performance through stand-alone CSR reports remains arbitrary and unregulated. Compared with annual reports, stand-
alone CSR reports are more diverse with respect to length, indicators reported and accessibility of language. Furthermore,
the assurance of these reports by accounting firms is neither as comprehensive nor as stringent as that for corporate annual
reports. Considering the diversity in the complexity and length of stand-alone CSR reports, which results from the lack of
regulation, we limited our sample to U.S. companies listed on the S&P 500 Index and that issued voluntary stand-alone
CSR reports for the recent period of 2008–2013, and for which CSR performance and financial data were available.
Table 1 shows the frequency distribution of the sample firms by industry and year. The final sample consists of 1180 firm-
year observations, with the highest concentration of firms in the manufacturing (N = 603) and utilities (N = 134) industries.
Table 1 further shows a steady increase in the number of firms issuing stand-alone CSR reports over time and across most
industries. The final number of firms in our sample that issue stand-alone CSR reports increases from 158 in 2008 to 228 in
2013. Our initial sample consists of 1458 firm-year observations. The number of firms issuing CSR reports each year ranges
from 198 in 2008 to 297 in 2013. However, 278 observations are omitted from the sample because of listwise deletion and
unavailability of CSR performance or financial data.
Data sources: We hand collected stand-alone CSR reports via a number of steps. First, we collected CSR reports of S&P 500
companies that were available from Bloomberg during our sample period. As Bloomberg Terminal is not a comprehensive
database for CSR reports and contains only about half of all CSR reports for our sample companies, we checked a number
of other sources for the remaining CSR reports. These additional sources included company websites, the Global Reporting
Initiative database (http://database.globalreporting.org/search), the Social Funds website (http://www.socialfunds.com/re-
port/) and the Global Register website (www.corporateregister.com). We further collected CSR performance data from the
well-known and widely used CSR rating database, Kinder, Lydenberg, and Domini (KLD), and the data for financial control
170 J.A. Nazari et al. / Journal of Contemporary Accounting & Economics 13 (2017) 166–178

Table 1
Frequency distribution for number of firm-year observations by industry sector and year.

Industry 2008 2009 2010 2011 2012 2013 Total


Agriculture, forestry, fishing and hunting 1 2 2 1 1 1 8
Mining, quarrying, and oil and gas extraction 12 10 11 14 14 15 76
Utilities 17 24 22 25 21 25 134
Construction 1 2 2 2 1 2 10
Manufacturing 86 82 103 106 114 112 603
Wholesale trade 2 2 2 1 3 4 14
Retail trade 10 10 11 17 18 17 83
Transportation and warehousing 7 9 8 8 8 8 48
Information 11 6 12 14 16 16 75
Finance and insurance 2 2 5 5 7 5 26
Real estate and rental and leasing 1 2 2 3 1 3 12
Professional, scientific, and technical services 2 3 5 6 4 5 25
Administrative and support and waste management and remediation services 1 2 3 2 3 5 16
Educational services 0 0 0 1 1 1 3
Health care and social assistance 0 2 4 4 4 3 17
Accommodation and food services 5 4 5 4 6 6 30
Total 158 162 197 213 222 228 1180

variables from Research Insight and Capital IQ. These data were compiled into a single comprehensive database for further
statistical analysis.

4.2. Model specification and variables

To test our research hypotheses, we estimate the following model specification in Eq. (1):

RepCompInit ¼ b0 þ b1 CSRPer it þ b2 INST it þ b3 SIZEit1 þ b4 ROAit þ b5 CURRAT it þ b6 CAPSPit1 þ b7 PNEW it1


X
16 X
6
þ b8 LEV it1 þ ;j Industry þ kk Year þ eit ð1Þ
j¼1 k¼1

where RepCompInit (Sustainability Reporting Complexity Index) denotes various measures of the narrative complexity in the
CSR disclosure (defined later) of firm i in year t; CSRPerit (CSR performance) is the total ESG (Environmental, Social, and
Governance) strengths less the total ESG concerns of firm i in year t; INSTit is measured by the percentage of equity shares
owned by institutional investors of firm i in year t; SIZEi,t1 is measured by the natural logarithm of the total assets as of the
end of fiscal year t1; ROA it (Return on Assets) is income before extraordinary items in year t divided by the total assets at
the end of fiscal year t1; CURRATit (Current ratio) is the total current assets dividend by the total current liabilities of firm i
in year t; CAPSPit1 (Capital Spending Intensity) is the capital spending in year t1 divided by the total sales revenues in the
same year; PNEW it1 (Plant Newness) is net properties, plant and equipment divided by gross properties, plant and equip-
ment at the end of fiscal year t1; and LEV it1 (Leverage) is the total debt at the end of fiscal year t1 divided by total assets
at the end of the same fiscal year. Industry and Year are dummy variables to control for industry and temporal effects.
Dependent Variables (Readability and Size of CSR Disclosure): We use a combination of textual variables to assess dis-
closure length and readability and as proxies for the complexity of CSR disclosures. The readability indices used to test our
first hypothesis are Flesch–Kincaid Reading Ease (FRE), Flesch–Kincaid Grade Level (FGL), FOG, Coleman Liau (CLI), SMOG
(SMOG), and Automated Readability (AR) indices, as well as the Average (AVE) of all these indices.
Most readability formulas used in the disclosure literature use English-based word and syllable count to determine the
reading difficulty of a text. Readability formulas are commonly used in the literature to measure reader comprehension and
determine narrative difficulty. Smith and Taffler (1992) contend that all readability measures are based on two common ele-
ments: word length and sentence length. The FRE measure of readability has been the predominant choice of researchers in
the disclosure literature (Courtis, 1998). Flesch is generally easier to compute and comprehend than other methods. There
are two Flesch-based measures: FRE and FGL. Although they use the same data for word length and sentence length, they
have different meanings and their results roughly correlate inversely. That is, text with a high FRE score is more readable,
which means readers with lower comprehension skills can read it more easily and, therefore, the same text will have a lower
FGL score. For ease of interpretation and for comparability with other proxies for readability, we multiply FRE by negative
one. We test whether CSR performance is associated with these two measures, in Models 1 and 2. We use FOG in Model 3.
Many recent papers in the disclosure literature have used FOG to measure the readability of narrative disclosure. Some reg-
ulators have also suggested using it to measure the readability of SEC filings. According to Lundholm et al. (2014), former SEC
Chairman Christopher Cox proposed that the SEC may start using a readability measure such as FOG to evaluate compliance
with Plain English rules. The FOG formula calculates the grade level of a document based on the numbers of sentences and
complex words it contains, where complex words are defined as those that comprise three or more syllables.
J.A. Nazari et al. / Journal of Contemporary Accounting & Economics 13 (2017) 166–178 171

Apart from these commonly used measures of readability we employ other readability measures that, while subject to
similar interpretation as for the FOG and Flesch measures, use different formulas to calculate readability. We evaluate
CLI, SMOG, AR and AVE in Models 4, 5, 6 and 7, respectively. The CLI formula calculates the grade level of a document based
on sentence length and character count; SMOG estimates the years of education an individual needs to understand a piece of
writing using the number of polysyllabic words in sample sentences; AR calculates the grade level of a document based on
sentence length and character count and AVE is the average of all grade-level measures that assess document readability.
Overall, a high score for any of the readability indices indicates low readability (high complexity). In addition to these read-
ability indices, we further utilize a number of textual statistics to measure disclosure size and test our second hypothesis. We
use the log of the word number (WRDS), sentence number (SENT) and text size (TSIZE) to test the second hypothesis in Mod-
els 8, 9 and 10, respectively. We use a readability software in conjunction with programing in Python to content analyse the
stand-alone CSR reports and determine the corresponding readability and size variables.
Independent variable (CSR Performance): Our sample is limited to firms in the KLD database, which provides CSR ratings
on actual CSR performance. The KLD database monitors and rates firm CSR performance and categorizes firms accordingly.
KLD publishes the CSR ratings of major public companies in the United States and provides ratings for the following dimen-
sions: employee relations, diversity, community relationships, human rights, the environment, corporate governance, and
product issues. These dimensions are aggregated to obtain overall KLD CSR performance and CSR performance on three main
dimensions: social, environmental and governance. The KLD rating contains both ‘‘strength” and ‘‘concern” indicators for
each of the aforementioned CSR dimensions. KLD has been used extensively in business and social research for measurement
of CSR performance, and is considered one of the best available databases for CSR research (Koh et al., 2014). For each firm in
our sample, we determine a final aggregate score based on overall corporate CSR performance after we subtract total con-
cerns for all categories from total strengths. This approach to calculating CSR performance is widely used in the literature
(e.g. Kim et al., 2012). We follow a similar approach in determining the social and environmental performance dimensions
of CSR performance in running our sensitivity analysis.
Control Variables: Consistent with previous studies (Clarkson et al., 2008, 2011), we use the following financial and non-
financial control variables: INST, measured by the percentage of institutional equity ownership; SIZE, measured by natural
logarithm of total assets; ROA, income divided by total assets; CURRAT, total current assets divided by total current liabilities;
CAPSP, capital spending divided by total sales revenues; PNEW, net property, plant and equipment divided by gross property,
plant and equipment; LEV, total debt divided by total assets; and Industry and Year dummy variables to control for industry
and temporal effects.
After determining the readability and size indices, we regress CSR performance on each index and control variable. We
conduct this second statistical analysis through fixed effect regression analysis on our firm-year observations using Stata.

5. Results

5.1. Descriptive statistics

Table 1 shows the breakdown of firm-year observations into the different industries of our sample. Approximately 51% of
the sample comprises firms from the manufacturing industry, while 11% are from utilities, 7% from retail, 6.5% from infor-
mation technology, 6.5% from mining and oil and gas, and 18% from other industries.
Table 2 shows descriptive statistics for the variables of interest. Our descriptive statistics suggest that the CSR perfor-
mance (CSRPer) for the sample firms ranges from 8 to 17, with a mean of 3.27. KLD’s overall CSR performance rating is
based on seven areas: corporate governance, employee relations, environment, community relations, diversity, human
rights, and product quality and safety. Each of the seven areas is rated based on ‘‘strengths,” indicating firm practices that
yield positive externalities, and ‘‘concerns,” indicating firm practices that yield negative externalities. KLD strengths receive
a score of 1 or 0, where 1 indicates strength and 0 indicates its absence. KLD concerns receive a score of 1 or 0, where 1 indi-
cates concern and 0 indicates absence of concern. Following earlier studies, our CSR performance score is measured as total
strengths minus total concerns across KLD’s seven dimensions. As a supplemental analysis, we disaggregate CSR perfor-
mance into three major categories based on environmental, social and governance dimensions. Our sample firms have mean
CSR scores of 0.97 on environmental issues, 2.55 on social issues and 0.16 on governance issues. The descriptive statistics of
all remaining variables indicate that all variables follow normal distributions.
Table 3 reports the Pearson correlations for the variables of interest. As shown in the table, strong and significant corre-
lations exist among all seven CSR disclosure readability measures (FRE, FGL, FOG, CLI, SMOG, AR and AVE). The correlation
coefficients between CLI and other readability measures are weaker, primarily because of the different methodology applied
in calculating CLI. The correlation coefficients among all three measures of CSR disclosure size also show strong and signif-
icant associations. As each of these measures are used in different models, the high correlation among them does not raise
concern about multicollinearity. The correlation coefficients between each of these size and readability measures, CSR per-
formance and control variables do not indicate potential multicollinearity problems, as all the correlation coefficients are less
than 0.90. However, to ensure absence of multicollinearity, we perform several additional analyses, including the variance
inflation factor and condition index statistics. These additional analyses demonstrate no potential multicollinearity among
the variables used in the various models of our study. The correlation table further shows all readability measures are
172 J.A. Nazari et al. / Journal of Contemporary Accounting & Economics 13 (2017) 166–178

Table 2
Descriptive statistics for sample of 1180 firm-year observations.

Variable Mean Minimum Maximum Median 1st Quartile 3rd Quartile


Independent variable
CSRPer 3.27 8 17 3 0 6
CSRPer–Governance Dimension 0.16 3 2 0 1 0
CSRPer–Environmental Dimension 0.97 5 5 1 0 2
CSRPer–Social Dimension 2.55 7 14 2 0 5
Disclosure readability variables
FRE 41.75 6.00 66.20 41.40 37.20 46.50
FGL 10.39 5.80 17.30 10.40 9.40 11.40
FOG 12.02 3.50 18.80 12.10 10.90 13.10
CLI 14.68 5.80 20.50 14.80 13.90 15.60
SMOG 9.63 5.80 15.60 9.70 8.80 10.50
AR 8.91 0.70 17.60 8.90 7.50 10.20
AVE 11.13 5.90 17.10 11.20 10.20 12.10
Disclosure size variables
WRDS 17,541 242 143,065 13,542 7,208 23,092
SENT 1581 30 11,983 1188 609 2023
TSIZE 124.51 0.45 716.94 98.98 47.57 165.37
Control variables
INST 0.73 0.23 0.91 0.76 0.65 0.82
SIZE 16.67 14.14 19.66 16.59 15.95 17.37
ROA 0.16 0.19 0.54 0.15 0.10 0.19
CURRAT 1.67 0.00 11.20 1.43 1.07 2.01
CAPSP 0.09 0.00 1.66 0.04 0.03 0.09
PNEW 0.51 0.17 0.94 0.49 0.41 0.62
LEV 0.60 0.00 1.56 0.60 0.48 0.71

CSRPer is the measure of CSR performance; FRE, FGL, FOG, CLI, SMOG, AR and AVE are readability measures; WRDS, SENT and TSIZE are measures of number
of words, sentences and text size, respectively, of CSR reports; INST is the percentage of institutional equity ownership; SIZE is the natural logarithm of total
assets; ROA is income divided by total assets; CURRAT is total current assets divided by total current liabilities; CAPSP is capital spending divided by total
sales revenues; PNEW is net property, plant and equipment divided by gross property, plant and equipment; and LEV is total debt divided by total assets.

negatively and significantly associated with CSR performance. Additionally, all the size measures are positively and signif-
icantly associated with CSR performance. Of the control variables, institutional ownership, ROA, current ratio, capital spend-
ing percentage, and newness of property, plant and equipment are significantly associated with CSR performance at
conventional levels of significance (i.e., alpha level of 0.05). In addition, while institutional ownership does not have a con-
sistent significant correlation with disclosure readability measure, it does have a significant correlation with disclosure size
measures.

5.2. CSR disclosure readability and CSR performance

Table 4 shows the regression results for our specified models on the association between all seven readability indices and
CSR performance. These models show regressions of each of seven readability indices on CSR performance and test whether
FRE, FGL, FOG, CLI, SMOG (SMOG), AR and AVE grade levels are significantly associated with CSRPer in Models 1–7,
respectively.
Our regression results show that CSR performance is significantly and negatively associated with FRE, FGL, FOG, CLI,
SMOG, AR and AVE grade level (significance < 0.01) in Models 1–7, respectively. As higher grade level values in each of these
readability indices indicate lower readability, these results suggest that companies with worse performance are more likely
to have less-readable CSR disclosure. The results in all these models support our first hypothesis that poor CSR performance
is associated with low readability of narratives in corporate CSR reports.
In all seven models, we can also see that firms with higher newness of assets have more-readable CSR disclosure (PNEW is
significant at 0.01). Institutional ownership and size significantly impact some of the readability measures, but these results
are not consistent across all seven models. Finally, ROA, CURRAT, CAPSP and LEV show no significant associations with read-
ability of CSR disclosure.

5.3. CSR disclosure size and CSR performance

Table 5 shows regression results for our specified models on the association between CSR performance and CSR disclosure
size measures. Models 8–10 show the results of regressing each of three size indices on CSRPer and test our second
hypothesis.
The results show that CSR performance has significant positive association (significance <0.01) with all dependent vari-
ables of WRDS, SENT and TSIZE. As higher values of performance are associated with each of the disclosure size indices, these
results suggest that companies with better CSR performance are more likely to have greater amounts of CSR disclosure.
J.A. Nazari et al. / Journal of Contemporary Accounting & Economics 13 (2017) 166–178
Table 3
Pearson correlations.

Variables 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
1 CSRPer 1.00
2 FRE 0.10*** 1.00
3 FGL 0.13*** 0.89*** 1.00
4 FOG 0.16*** 0.77*** 0.93*** 1.00
5 CLI 0.06** 0.86*** 0.69*** 0.57*** 1.00
6 SMOG 0.17*** 0.77*** 0.96*** 0.94*** 0.54*** 1.00
7 AR 0.13*** 0.81*** 0.96*** 0.91*** 0.71*** 0.94*** 1.00
8 AVE 0.14*** 0.88*** 0.98*** 0.94*** 0.75*** 0.95*** 0.98*** 1.00
9 WRDS 0.14*** 0.06* 0.02 0.03 0.07** 0.01 0.03 0.03 1.00
10 SENT 0.17*** 0.08*** 0.20*** 0.20*** 0.01 0.24*** 0.20*** 0.18*** 0.92*** 1.00
11 TSIZE 0.14*** 0.05* 0.00 0.06 0.08*** 0.02 0.00 0.01 0.76*** 0.72*** 1.00
12 INST 0.06** 0.04 0.02 0.09 0.07** 0.00 0.04 0.03 0.19*** 0.19*** 0.20*** 1.00
13 SIZE 0.05* 0.03 0.01 0.03 0.00 0.01 0.00 0.01 0.26*** 0.27*** 0.27*** 0.42*** 1.00
14 ROA 0.09*** 0.04 0.04 0.08*** 0.02 0.06** 0.01 0.04 0.05 0.05* 0.03 0.01 0.20*** 1.00
15 CURRAT 0.10*** 0.07** 0.04 0.01 0.05* 0.01 0.01 0.02 0.05* 0.03 0.07** 0.18*** 0.29*** 0.20*** 1.00
16 CAPSP 0.13** 0.06*** 0.02 0.03 0.02 0.02 0.03 0.00 0.01 0.03 0.01 0.05* 0.14*** 0.16*** 0.20*** 1.00
17 PNEW 0.28*** 0.02 0.03 0.01 0.08*** 0.01 0.06** 0.03 0.05** 0.04 0.06* 0.14*** 0.27*** 0.23*** 0.27*** 0.40*** 1.00
18 LEV 0.03 0.07** 0.04 0.02 0.06** 0.01 0.02 0.03 0.01 0.02 0.01 0.09*** 0.04 0.15*** 0.52*** 0.00 0.07** 1.00

All variables are defined in Table 2.


***
Denote significance level (two-tailed) at 1%.
**
Denote significance level (two-tailed) at 5%.
*
Denote significance level (two-tailed) at 10%.

173
174 J.A. Nazari et al. / Journal of Contemporary Accounting & Economics 13 (2017) 166–178

Table 4
Association between CSR performance and CSR disclosure readability indices.

Variable Model 1 FRE Model 2 FGL Model 3 FOG Model 4 CLI Model 5 SMOG Model 6 AR Model 7 AVE
CSRPer 0.17*** 0.05*** 0.06*** 0.03*** 0.05*** 0.07*** 0.05***
(3.22) (4.25) (3.46) (2.51) (5.18) (4.42) (4.54)
INST 3.55*** 0.42 0.16 0.97*** 0.06 0.66 0.45
(2.22) (1.21) (0.35) (2.95) (0.2) (1.34) (1.31)
SIZE 0.58*** 0.09* 0.09 0.11*** 0.06 0.1* 0.09*
(2.66) (1.93) (1.2) (2.42) (1.37) (1.56) (1.93)
ROA 4.31* 0.94* 1.74* 0.17 0.91 0.54 0.75
(1.53) (1.49) (1.65) (0.3) (1.58) (0.61) (1.21)
CURRAT 0.56* 0.05 0.02 0.03 0.01 0.04 0.01
(1.92) (0.84) (0.2) (0.41) (0.26) (0.45) (0.13)
CAPSP 3.91* 0.32 0.35 0.13 0.15 0.34 0.11
(1.5) (0.69) (0.68) (0.24) (0.46) (0.59) (0.27)
PNEW 3.87*** 0.98*** 0.83* 1.1*** 0.75*** 1.74*** 1.08***
(2.21) (2.68) (1.46) (3.14) (2.37) (3.43) (3)
LEV 1.12 0.21 0.34 0.33 0.07 0.38 0.27
(0.82) (0.68) (0.7) (1.22) (0.24) (0.83) (0.87)
Intercept 50.54*** 9.59*** 11.71*** 12.98*** 9.51*** 8.42*** 10.45***
(10.56) (9.19) (7.13) (13.43) (10.4) (5.72) (10.03)
Time Fixed Effect Yes Yes Yes Yes Yes Yes Yes
Industry Fixed Effect Yes Yes Yes Yes Yes Yes Yes
N 1180 1180 1180 1180 1180 1180 1180
Adjusted R2 0.04 0.04 0.05 0.03 0.04 0.03 0.04
F statistics 3.85 3.46 4.68 3.25 3.88 3.37 3.73

All variables are defined in Table 2. ** Denote significance level (two-tailed) at 5%.
***
Denote significance level (two-tailed) at 1%
*
Denote significance level (two-tailed) at 10%.

Table 5
Association between CSR performance and CSR disclosure size indices.

Variable Model 8 WRDS (103) Model 9 SENT (103) Model 10 TSIZE


CSRPer 0.02*** 0.02*** 0.02***
(2.20) (3.26) (3.07)
INST 0.37 0.32 0.30
(1.42) (1.26) (1.20)
SIZE 0.58* 0.65* 0.52
(1.45) (1.60) (1.16)
ROA 0.01 0.00 0.04
(0.15) (0.02) (0.99)
CURRAT 0.21 0.13 0.17
(0.85) (0.49) (0.64)
CAPSP 0.28 0.43* 0.45*
(1.26) (1.93) (1.90)
PNEW 0.06 0.05 0.08
(0.31) (0.27) (0.42)
LEV 6.41*** 3.85*** 1.46***
(10.05) (6.12) (2.19)
Intercept 0.02*** 0.02*** 0.02***
(2.20) (3.26) (3.07)
Time Fixed Effect Yes Yes Yes
Industry Fixed Effect Yes Yes Yes
N 1180 1180 1180
Adjusted R2 0.07 0.07 0.17
F statistics 7.14 7.14 12.17

All variables are defined in Table 2. ** Denote significance levels (twotailed) at 5% respectively.
***
Denote significance level (two-tailed) at 1%.
*
Denote significance level (two-tailed) at 10%.

Overall, the results in all three models support our second hypothesis that CSR performance is positively associated with nar-
rative length in corporate CSR reports.
With regard to the control variables in all three models, our results show that companies with more debt in their capital
structure tend to have greater amounts of CSR disclosure in their CSR reports. This result indicates that companies with
higher capital risk are attempting to provide more disclosure to convince the creditors of their reduced social and environ-
mental risks. Coefficients for the remaining control variables of INST, SIZE, ROA, CURRAT, CAPSP and PNEW remains
insignificant.
J.A. Nazari et al. / Journal of Contemporary Accounting & Economics 13 (2017) 166–178 175

Table 6
Association between CSR performance dimensions and CSR disclosure readability indices.

Variable Model 1 FRE Model 2 FGL Model 3 FOG Model 4 CLI Model 5 SMOG Model 6 AR Model 7 AVE
Panel A: Environmental dimension
CSRPer 0.35*** 0.10*** 0.12*** 0.05* 0.11*** 0.14*** 0.1***
(2.69) (3.38) (3.58) (1.93) (4.22) (3.34) (3.52)
INST 4.18*** 0.60* 0.40 0.83*** 0.19 0.92* 0.64*
(2.68) (1.73) (0.99) (3.04) (0.71) (1.88) (1.87)
SIZE 0.52*** 0.07* 0.08 0.09*** 0.04 0.08 0.07*
(2.38) (1.56) (1.43) (1.97) (0.87) (1.17) (1.53)
ROA 4.62* 1.03* 1.71*** 0.14 1.11* 0.66 0.84
(1.64) (1.62) (2.34) (0.25) (1.95) (0.75) (1.35)
CURRAT 0.58*** 0.06 0.00 0.02 0.04 0.03 0.01
(1.99) (0.95) (0.03) (0.3) (0.93) (0.35) (0.24)
CAPSP 3.62 0.24 0.22 0.08 0.08 0.45 0.03
(1.37) (0.51) (0.59) (0.15) (0.24) (0.77) (0.07)
PNEW 3.36* 0.84*** 0.64* 1.00*** 0.63*** 1.52*** 0.92***
(1.93) (2.33) (1.59) (2.93) (2.04) (3.05) (2.60)
LEV 0.97 0.17 0.32 0.40* 0.01 0.32 0.23
(0.70) (0.54) (0.85) (1.57) (0.02) (0.70) (0.72)
Intercept 50.45*** 9.61*** 11.69*** 13.40*** 9.60*** 8.45*** 10.47***
(10.50) (9.20) (9.91) (14.41) (10.99) (5.74) (10.05)
Time Fixed Effect Yes Yes Yes Yes Yes Yes Yes
Industry Fixed Effect Yes Yes Yes Yes Yes Yes Yes
N 1180 1180 1180 1180 1180 1180 1180
Adjusted R2 0.04 0.03 0.04 0.02 0.03 0.03 0.03
F statistics 3.44 2.75 3.80 2.62 3.03 2.53 2.79
Panel B: Social dimension
CSRPer 0.21*** 0.06*** 0.07*** 0.03*** 0.06*** 0.08*** 0.06***
(2.90) (3.95) (4.29) (2.26) (4.83) (4.08) (4.19)
INST 3.50*** 0.41 0.17 0.76*** 0.05 0.64 0.44
(2.18) (1.16) (0.41) (2.71) (0.15) (1.28) (1.25)
SIZE 0.59*** 0.09*** 0.10* 0.10*** 0.06 0.11* 0.09***
(2.69) (1.99) (1.88) (2.25) (1.43) (1.61) (1.99)
ROA 4.30* 0.94* 1.60*** 0.19 0.91* 0.53 0.75
(1.52) (1.48) (2.17) (0.34) (1.56) (0.60) (1.19)
CURRAT 0.53* 0.04 0.02 0.01 0.00 0.05 0.00
(1.81) (0.69) (0.25) (0.21) (0.08) (0.59) (0.02)
CAPSP 4.14* 0.38 0.39 0.16 0.21 0.24 0.18
(1.60) (0.83) (1.05) (0.30) (0.67) (0.43) (0.44)
PNEW 3.53*** 0.89*** 0.70* 1.05*** 0.66*** 1.60*** 0.98***
(2.03) (2.45) (1.75) (3.03) (2.08) (3.20) (2.76)
LEV 1.24 0.25 0.41 0.43* 0.10 0.42 0.31
(0.91) (0.78) (1.10) (1.70) (0.36) (0.93) (0.98)
Intercept 50.65*** 9.56*** 11.62*** 13.31*** 9.48*** 8.37*** 10.42***
(10.56) (9.14) (9.83) (14.35) (10.33) (5.68) (9.98)
Time Fixed Effect Yes Yes Yes Yes Yes Yes Yes
Industry Fixed Effect Yes Yes Yes Yes Yes Yes Yes
N 1180 1180 1180 1180 1180 1180 1180
Adjusted R2 0.04 0.03 0.04 0.03 0.04 0.03 0.04
F statistics 3.63 3.3 4.61 2.97 3.72 3.17 3.55

All variables are defined in Table 2. ** Denote significance level (two-tailed) at 5%.
***
Denote significance level (two-tailed) at 1%.
*
Denote significance levels (two-tailed) at 10%.

5.3.1. Supplemental analysis


As a supplemental analysis, we regress each of the readability and size indices on each of the main social and environ-
mental dimensions of CSR performance, as well as on the control variables.3 We exclude the governance dimension from this
analysis, as earlier studies perceive governance to be a distinct dimension of the overall ESG score by KLD (Kim et al., 2012). We
conduct this statistical analysis using fixed effect regression analysis on our firm-year observations. Panel A of Table 6 shows the

3
We also run a number of additional analyses to verify the validity of our results. Our main hypothesis is that managers of companies with poor CSR
performance use less-readable CSR disclosure language. Therefore, in our main statistical analyses, we use CSR performance as our independent variable. We
are not claiming a causality and only test for association between CSR performance and narrative complexity. As a further sensitivity, we regress each CSR
dimension on the complexity measures along with the same control variables. The untabulated results of these analyses further support our predictions
(negative association between narrative complexity and CSR performance, and positive association between size of CSR disclosures and CSR performance),
wherein all coefficients on readability and size are significant at conventional levels. These results are also robust when we break down overall ESG into its
main social and environmental dimensions (results are not tabulated).
176 J.A. Nazari et al. / Journal of Contemporary Accounting & Economics 13 (2017) 166–178

Table 7
Association between CSR performance dimensions and CSR disclosure size indices.

Variable Model 8 WRDS (103) Model 9 SENT (103) Model 10 TSIZE


Panel A: Environmental dimension
CSRPer 0.05*** 0.07*** 0.05***
(2.96) (3.70) (2.53)
INST 0.42* 0.40* 0.38*
(1.61) (1.57) (1.56)
SIZE 0.19*** 0.19*** 0.19***
(6.37) (6.35) (6.15)
ROA 0.61* 0.69* 0.56
(1.50) (1.69) (1.25)
CURRAT 0.01 0.01 0.05
(0.30) (0.16) (1.09)
CAPSP 0.15 0.06 0.12
(0.61) (0.23) (0.46)
PNEW 0.29 0.41* 0.40*
(1.30) (1.85) (1.67)
LEV 0.03 0.02 0.11
(0.17) (0.09) (0.55)
Intercept 6.38*** 3.82*** 1.45***
(9.98) (6.06) (2.16)
Time Fixed Effect Yes Yes Yes
Industry Fixed Effect Yes Yes Yes
N 1180 1180 1180
Adjusted R2 0.07 0.07 0.17
F statistics 7.35 7.33 12.02
Panel B: Social dimension
CSRPer 0.01* 0.02*** 0.03***
(1.48) (2.56) (2.78)
INST 0.38* 0.33 0.29
(1.47) (1.30) (1.19)
SIZE 0.18*** 0.18*** 0.19***
(6.26) (6.1) (5.82)
ROA 0.59* 0.66* 0.52
(1.47) (1.62) (1.16)
CURRAT 0.00 0.01 0.04
(0.06) (0.14) (0.88)
CAPSP 0.23 0.17 0.20
(0.94) (0.61) (0.77)
PNEW 0.22 0.36* 0.40*
(1.03) (1.64) (1.73)
LEV 0.07 0.066 0.07
(0.35) (0.35) (0.34)
Intercept 6.42*** 3.86*** 1.48***
(10.06) (6.15) (2.21)
Time Fixed Effect Yes Yes Yes
Industry Fixed Effect Yes Yes Yes
N 1180 1180 1180
Adjusted R2 0.07 0.07 0.17
F statistics 7.05 6.95 12.15

All variables are defined in Table 2. ** Denote significance level (two-tailed) at 5%.
***
Denote significance level (two-tailed) at 1%.
*
Denote significance level (two-tailed) at 10%.

regression results for the associations between environmental dimension of CSR performance (CSRPer–Environmental) and
readability indices, while Panel B shows the results for using the social dimension of CSR (CSRPer–Social) as the independent
variable. Panel A of Table 7 shows the regression results for the associations between the environmental dimension of CSR per-
formance and disclosure size measures, while Panel B shows the results for using the social dimension of CSR as the indepen-
dent variable. The regression results on each dimension of CSR performance are consistent with our main results supporting the
view that worse social and environmental performance can be an indicator of less-readable reports, while better social and
environmental performance results in a greater amount of disclosure.
Earlier research showed the benefits of providing stand-alone CSR reports including reduced capital cost and increased
market value (Dhaliwal et al., 2011), more accurate analytical forecasts (Dhaliwal et al., 2012), and positive effects on brands
and reputation (Olsen et al., 2014). However, despite these benefits, the issuance and content of stand-alone CSR reports
remains largely arbitrary. Recent research shows that variability in issuance, quality and content of these reports depends
on the stakeholder relationships and engagement strategies (Herremans et al., 2016), as well as on managerial motivations
and control systems (Herremans and Nazari, 2016). Table 1 shows there is a steady increase in the number of firms issuing
J.A. Nazari et al. / Journal of Contemporary Accounting & Economics 13 (2017) 166–178 177

stand-alone CSR reports; however, there are still companies that do not provide stand-alone CSR reports. To check for the
reasoning behind not providing these reports, we ran an independent-samples t-test comparing the CSR performance of
the firms issuing them and those not issuing them. As expected, we find CSR performance (and its dimensions) of firms issu-
ing CSR reports is significantly higher than that of companies not issuing them. In other words, companies with poor CSR
performance tend toward keeping silent. Although this inaction could have less consequence in the past, the recent increase
in employee whistleblowing, as well an increase in public and stakeholder scrutiny of corporations, have made silence a
potentially costly choice. As such, increasing numbers of companies, as also evidenced by our sample, are issuing stand-
alone and other types of CSR disclosure.

6. Conclusions

Our study investigates the relationship between CSR performance and the complexity of voluntary CSR disclosure, mea-
sured by readability of CSR disclosure, and size of CSR reports. We hypothesize that shorter and less-readable CSR disclosure
documents indicate worse CSR performance, whereas increased disclosure and more readable CSR reports indicate better
CSR performance. We use a number of readability and size measures from computational linguistics to test our hypotheses
and show that poor overall CSR performance, and each of its social and environmental performance dimensions, is signifi-
cantly associated with low readability. We further find that both overall CSR performance and each of its social and environ-
mental performance dimensions are positively associated with the size of CSR disclosures. Based on these findings, we argue
that lengthier CSR disclosure increases transparency while less-readable language indicates obfuscation.
Responding to recent calls for research that examines the usefulness of applying computational linguistics methodology
to examine managerial intentions or behaviour from corporate disclosure documents, our research makes a number of sig-
nificant contributions to the literature on CSR disclosure. The results of our analyses enhance the theoretical arguments sup-
porting use of obfuscation as a tool to conceal poor performance, and improve understanding of the use of obfuscation in
voluntary disclosure documents. These results contribute to both value relevance and opportunistic perspectives (Merkl-
Davies and Brennan, 2007) with respect to predicting the relationship between firm performance and corporate disclosure.
We also contribute to the recent debate in the disclosure literature on the informativeness of disclosure size (Lang and Stice-
Lawrence, 2015) by finding that, within the context of voluntary CSR disclosure, increased size of CSR reports indicates better
CSR performance.
Our work also makes a methodological contribution to the CSR disclosure literature by applying methods developed from
computational linguistics for evaluating text complexity (i.e., readability and size) in a CSR disclosure context. While con-
tributing to the literature on the relationship between actual performance and disclosure, our research also builds a foun-
dation for larger-scale investigations, using textual analysis methods from computational linguistics to assess the
credibility of the full range of CSR disclosure documents (e.g., media coverage of environmental and social issues, website
disclosure, and other managerial reports). To our knowledge, ours is the first study to apply numerous linguistic metrics
to assess disclosure complexity.
Our study also has several practical implications. Many regulatory agencies in North America have made consistent
efforts to encourage use of straightforward language in corporate disclosures. Nevertheless, for most stakeholders, environ-
mental disclosure remains difficult to read and assess. The approach used in this study can enable stakeholders to conduct
preliminary evaluations of firms’ actual CSR performance, without the need to probe further into actual, hard-to-access CSR
performance data. The study results can also help policy makers support ongoing initiatives to promote use of plain language
in public disclosure documents.
Our study is not without limitations. We limit our sample to companies listed on the S&P 500. On the whole, North Amer-
ican companies lag behind their European counterparts in CSR disclosure. Future studies can explore the results in a sample
from other regions, such as Europe or Asia-Pacific. We also limited our analysis to an increasingly popular CSR disclosure
document, the stand-alone report; however, companies can also select to provide disclosure through other channels, such
as media, websites, and industry associations. Future studies can assess if the results hold for other forms of disclosure
documents.

Acknowledgement

The authors would like to thank the Social Sciences and Humanities Research Council of Canada (SSHRC) and Simon Fra-
ser University for financial support and Shivani Sachdev for research assistance. This study was funded by a SSHRC Insight
Development Grant (File number 430-2016-00198). The study has benefited from comments and suggestions of Ferdinand
Gul, Woo-Jong Lee, Irene Gordon, Irene Herremans, Gordon Richardson, Stephanie Bertels, Barbara Burkhardt, and comments
by discussants and attendees of American Accounting Association annual meeting, Conference on Business Sustainability and
Corporate Governance (JCAE), and the 39th European Accounting Annual Congress.

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