Assessing social and environmental performance through narrative complexity in CSR reports

Abstract

We analyse the relationship between the complexity of corporate social responsibility (CSR) disclosure and actual CSR performance, and postulate a positive association between actual CSR performance and readability and the size of CSR disclosure documents. Using several readability and disclosure size measures from computational linguistics, we test 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 are associated with better CSR performance. Our findings suggest that extending CSR disclosure increases transparency regarding firms’ social and environmental performance, while using less-readable language in CSR reports increases obfuscation. This study contributes to the disclosure literature by documenting that the complexity indices that have been used as measures of obfuscation in prior finance and accounting research can help shareholders, financial analysts, and investors determine the credibility of CSR disclosure.