Corporate Social Responsibility and Information Effect of Future Earnings

This study hypothesized that Corporate Social Responsibility(Hereafter ‘CSR’) activities would be a positive relation with the information effects of future earnings, and empirically analyzed using the future earnings response coefficient (FERC) model of Tucker and Zarowin (2006). The hypothesis of this study is based on mixed results between CSR activity and earnings quality. The empirical results show that there is a positive relationship between CSR activity and information effects of future earnings. This is consistent with controlling the effects of the omitted variables. It is also consistent with controlling the size effect. Based on these results, CSR activities can be interpreted as enhancing the information effect of future earnings. After dividing the group into companies with good corporate governance and companies with weak corporate governance, this study additionally analyzed the effect of CSR activities on the information effect of future earnings. The results of the analysis showed that CSR activity increased the information effect of future earnings in both the group with good corporate governance and the group with weak corporate governance. Taken together, investors believe that CSR activities are positive, suggesting that CSR activities are an incentive to increase value relevance of future earnings. This study contributes to the finding that there is a complementary relationship between CSR activity and earnings quality in the mixed situation of the relationship between CSR activity and the quality of accounting information. In addition, this study is expected to provide implications that corporate social responsibility may affect stock prices. In this regard, the results of this study are expected to be useful data for investor’s investment decision making and policy maker’s policy making. In addition, this study contributes to the fact that Korean companies need to strategically utilize CSR activities. This study has limitations that do not measure implied CSR activity.