Does Corporate Social Responsibility Affect Information Asymmetry: Evidence from the Adoption of SFAS 123R

Using the adoption of Statements of Financial Accounting Standards (SFAS) 123R as a quasi-natural experiment, this study examines whether corporate social responsibility (CSR) alleviates the level of information asymmetry. After the implementation of SFAS 123R, firms should report their employee stock options (ESO) at fair value, indicating that this act exogenously improves firms’ financial reporting quality. The literature suggests that SFAS 123R reduces information asymmetry between the firm and outside investors, thus eventually improving firms’ investment efficiency. However, we find that a firm’s CSR performance mitigates the positive relationship between the improvement of financial reporting quality (by SFAS 123R) and investment. Various additional tests to supplement the main analysis also show consistent results. Our finding that CSR offsets the positive effect of SFAS 123R on investment efficiency, suggests the role of CSR in reducing information asymmetry; for instance, CSR firms’ disclosure of transparent information could be more frequent than that of non-CSR firms even before SFAS 123R. In particular, this finding provides an implication for outside investors as CSR can significantly play a positive role in information asymmetry, supporting the conflict-resolution hypothesis of CSR. Furthermore, this study extends the CSR literature by using an exogenous event on financial reporting quality (i.e., SFAS 123R) to examine whether CSR mitigates information asymmetry. Overall, we conclude that CSR performance is a key factor in enhancing firms’ surrounding information environment.