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www.asb.unsw.edu.au
Last updated: 25/07/14 CRICOS Code: 00098G
School of Accounting Seminar Series Semester 2, 2014
Are Auditor Opinions on Internal Control
Effectiveness Influenced by Corporate
Social Responsibility?
Encarna Guillamón‐Saorín Universidad Carlos III de Madrid
Date: Friday 1st August 2014
Time: 3.00pm – 4.30pm
Venue: ASB 220
Australian School of Business
Accounting
Are Auditor Opinions on Internal Control Effectiveness Influenced by
Corporate Social Responsibility?
Andrés Guiral*
Yonsei University
Encarna Guillamón-Saorín
Universidad Carlos III de Madrid
Belen Blanco
The University of Melbourne
*Corresponding author: Andrés Guiral, Yonsei University School of Business, 50 Yonsei-ro, Seodaemun-gu,
Seoul 120-749, Tel.: +(82)2-2123-5452, Email: [email protected] We acknowledge useful comments from Aldonio Ferreira, Carlos Larrinaga, Doocheol Moon, Karla
Johnstone, Maria Jose Montes, Emiliano Ruiz, Greg Shailer, Jordi Surroca, Mark Wilson, and seminar
participants at Australian National University, Monash University, Grenoble Ecole de Management,
Wroclaw University of Economics and Universidad de Burgos.
Andrés Guiral acknowledges financial contribution from the National Research Foundation of Korea Grant
funded by the Korean Government (NRF-2012-S1A3A2-2012S1A3A2033412) and the Spanish Ministry of
Innovation and Science (research projects SEJ2004-00791ECON, SEJ2007-62215/ECON/FEDER, SEJ
2006-14021, ECO2010-17463 ECON-FEDER). Encarna Guillamón-Saorín acknowledges financial
contribution from the Spanish Ministry of Science and Innovation (SEJ2007-67582-C02-02/ECON,
ECO2010-19314) and Comunidad Autonoma de Madrid (SEJ2008-00059-003). Belen Blanco acknowledges
financial assistance from the Spanish Ministry of Innovation and Science (ECO2010-19314, ECO2008-
06238- C02-01/ECON, SEJ2007-67582-C02-02/ECON, ECO2009-10796 and Consolider Grant
#2006/04046/002).
1
Are Auditor Opinions on Internal Control Effectiveness Influenced by Corporate Social
Responsibility?
Abstract
We investigate the relation between corporate social responsibility and auditors’ perception of internal
control quality under the Sarbanes Oxley Act, 404 Section. Previous studies find that the management or the
quality of the board of directors is associated with the strength of internal controls. We contribute to the
existing literature by identifying that the mechanisms used by managers to improve the perception of internal
control effectiveness are related to internally-oriented social responsible engagement and, in particular, to the
enhancement of employee issues. We observe that corporate social responsibility strengths lead to an
improvement of the auditors’ perception of internal control effectiveness while corporate social concerns do
not seem to diminish effectiveness’ perception. We also examine the nature of the weaknesses which leads to
adverse auditor opinions and note that while the presence of company-level weaknesses is negatively
associated with corporate social responsibility, the presence of account-level weaknesses is not. Moreover,
we find that both the quality of information reported and corporate governance affect the relation between
corporate social responsibility and internal control effectiveness’ perception. Our results hold for alternative
proxies of internal controls and after controlling for potential endogeneity issues.
Keywords: Internal control, material weaknesses, CSR, earnings quality
1. Introduction
This study examines the relation between Corporate Social Responsibility (CSR) and the auditor’s
opinion on internal control (IC) effectiveness. Specifically, we question whether firms that exhibit
stronger CSR as established by KLD (KLD 2006) are perceived as having better quality IC and
therefore are less likely to receive an adverse auditor opinion on IC effectiveness made under
Section 404 of the Sarbanes-Oxley Act of 2002 (SOX 2002). We assess this association using data
on IC effectiveness from the provision of the Sarbanes-Oxley Act Section 404 which requires
registrants to document and test IC and their external auditors to independently assess those
controls and offer a separate opinion on IC effectiveness.
The recent collapse of large financial institutions leading to the financial crisis has made
the need of an improvement of information transparency evident (IFAC 2012). Various financial
crises in recent years have demonstrated that in many companies IC practices were deficient or
ineffective mainly because business leaders did not fully understand the risks to which they were
exposed (IFAC 2012)1.
One of the numerous criticisms related to Enron scandals and its accounting and reporting
practices was the responsibility for a weak IC2 (Verschoor 2002). The SOX (2002) introduced in
the U.S. important regulations to improve corporate governance, auditor independence and
financial reporting quality to restore investor’s confidence in reported information.
1 Revealed by the IFAC´s Global Survey on Risk Management and IC (2011) carried out on more than 60
respondents from around the globe and on all types of organizations. 2 Monitoring IC is the result of actions by, and interactions between management, the internal auditor (if
present), the external auditor, and the audit committee.
2
IC effectiveness represents the policies, processes, and procedures intended to ensure
financial statements reliability (Skaifer, Veenman, and Wangerinn 2013). This broad view of IC
effectiveness makes it difficult to observe or assess and the intention of the SOX regulation was to
resolve this through the reporting requirement. Managers reports and auditors opinion in relation to
corporate IC effectiveness should reduce uncertainty and benefit the company (McMullen,
Raghumandan, and Rama 1996; Hammersley, Myers, and Shakespeare 2008). There are two
sections 302 and 404 of the SOX related to IC and which intention has been to enhance investors
understanding of the quality of the firm’s financial reporting3.
We focus on Section 404 passed by the SEC in 2004 which requires that management
publicly state their responsibility for establishing and maintaining adequate controls over financial
reporting as well as an assessment of their effectiveness at the end of the most recent fiscal year.
External auditors, as required by Auditing Standard Number 2 (AS2) issued by the U.S. PCAOB
(2004)4, must perform detailed work that will enable them to provide audit opinions on the
financial statements of the company, management’s assessment of the company’s IC over financial
reporting and the auditor’s own opinion on the company’s IC over financial reporting. SOX 302 IC
disclosures were subject to less scrutiny by both managers and auditors and regulation was less
specific allowing more discretion than SOX 404 (Ashbaugh-Skaife, Collins, and Kinney 2007).
Moreover, one of the main differences between these two provisions is that Section 302 testing was
not compulsory (Hoitash, Hoitash, and Bedard 2009). We focus on the external auditor opinion
under Section 404 because auditors add credibility to financial reporting (DeFond 1992; O’Reilly,
Leitch, and Tuttle 2006) and their assessment on IC quality is considered more reliable than
managers assessment (Hoitash, Hoitash, and Bedard 2008). For example, Skaifer et al. (2013)
investigate the role of auditors in identifying companies where managers use inside information to
get greater rent extraction. The work shows that auditors’ adverse internal control opinions related
to weak “tone at the tone”, which implies lack of integrity and unethical behavior by managers, is
associated with higher insider selling profitability.
Along with the acceleration of corporate governance and IC issues, one of the most
significant trends in the last decade is the growth of CSR. CSR is indeed seen as an extension of
firms’ efforts to implement effective corporate governance methods which would enhance sound
business practices that ensures accountability and transparency (Prior, Surroca, and Tribo 2008;
3 SOX’s Section 302 referring to the SEC-required disclosures was issued first and the main requirement
involved that two senior executives of the company (primarily the CEO and the CFO) regularly reported
publicly on their evaluation of the disclosure controls and procedures ensuring that the information required
under the Securities and Exchange Act (1934) was recorded, processed, summarized and reported accurately
and on a timely basis. 4 The Act created the Public Company Accounting Oversight Board - PCAOB (2004) which, under the SEC
supervision, oversees the audit of public companies and provides guidance to auditors for IC audits with the
aim of protecting investors and the general public by improving the audit report accuracy.
3
Kim, Park, and Wier 2012). Moreover, CSR disclosure demonstrates a company’s confidence in its
CSR activity which constitutes an informative signal (Lys, Naughton, and Wang 2013; Carroll and
Einwiller 2014). Accordingly, more socially responsible companies are likely to be perceived as
having more effective IC systems. According to ethical theories related social responsibility,
companies benefit from being honest and ethical (Jones 1995). Although CSR actions and reporting
are increasing in importance for current business, the issue of its credibility is still at play
(Hemingway and Maclagan 2004; Wang and Tuttle 2014). Prior research also suggests that the
goal of companies engaging in CSR is often window dressing or business image enhancement,
rather than a desire to be accountable to stakeholders or presenting a broader range of information
(Dowling and Pfeffer 1975; Deegan and Gordon 1996; Neu, Warsame, and Pedwell 1998).
Managers may have incentives to engage in CSR to build up their reputation as good social citizens
at the cost of shareholders (Fombrun and Shanley 1990; Linthicum, Reitenga, and Sanchez 2010).
This argument supports the idea of CSR representing management self-serving and strategic
behavior (Hemingway and Maclagan 2004). If this is the case, and if auditors perceive this
behavior, the association between CSR and IC effectiveness perception would be negative.
The response to the pressure exerted by society over companies to engage in social actions
is evident in most companies’ websites where a section for CSR is always present. Evidence of the
link between CSR and strength of IC is clearly observed in many corporate websites as well as in
the content of their CSR reports. We include illustrations of the link between CSR and IC in
Appendix 1. The examples are structured from general (reference to SOX and compliance Panel A)
to specific (reference to corporate governance in Panel B and internal-oriented CSR issues in Panel
C). Corporate strategies through these disclosures reveal that the enhancement of IC mechanisms is
mostly related to internal-oriented social responsible actions such as employee training programs
(related to employee as stakeholders)5 or promoting product quality and safety (often considered a
proxy for consumers as a stakeholder)6. Lys et al. (2013) shows that CSR disclosures are another
channel by which firms convey private information (i.e. future financial prospects) to outsiders.
Further, professional standards (AICPA 2012, AU550.06) require that auditors review other
information such as that related to CSR to verify consistency among different sources of corporate
disclosures (Byus, Deis, and Reed 2013).
Companies may want to explicitly refer to management responsibility for IC in their CSR
reports to state the objectives of the company IC system including describing various components
of that system (e.g. independent audit committee, internal audit function) or to enhance that
management believes that IC is effective7. These arguments and the anecdotal evidence are in line
5 See Appendix 1, Panel C, Examples 12 and 13.
6 See Appendix 1, Panel C, Examples 7, 8 and 9.
7 For example Unitika LTD. includes a section on IC within its CSR section where it states “In April 2007,
we created the Internal Control Promotion Office, and began implementing internal control for financial
4
with the signaling function of CSR disclosure (Lys et al. 2013). Both CSR and IC are broadly
related to management behavior, difficult to observe or assess and considered signaling devices
(Lys et al. 2013). Companies may use CSR to enhance corporate strengths on aspects of the IC
which are difficult to assess for auditors but have a pervasive effect on a company´s financial
reporting (Moody´s Investors Service 2004). In this sense, some users question the ability of
auditors to effectively audit some types of material weaknesses (MWs)8, specifically company-
level weaknesses9 (Moody´s Investors Service 2004; Credit Suisse First Boston 2005). Moody´s
considers these material weaknesses more serious than accounting-specific ones and state that
“Company-level material weaknesses may signify an increased likelihood of financial reporting
problems in the future because the company´s foundation of internal control is weak” (Moody´s
Investors Service 2004). If the lack of observability makes auditors less able to effectively audit
around company-level weaknesses it is likely that they base their adverse opinion, which give rise
to the disclosure of these weaknesses, on additional information provided by the managers and that
signals management control of these important issues. For example, the lack of personnel
resources, competency or training related to IC, if detected by auditors, triggers a qualified opinion
which gives rise to a, what has been denominated in prior literature, company-level weaknesses
(SOX 2002) Section 404. Therefore, companies may want to enhance the existence of employee
training programs in their companies to educate employees on the importance of compliance with
the SOX requirements in relation to IC quality. In line with this argument, Ashland CSR 2008
includes the following statement “Ashland is subject to annual evaluation of IC as required by the
U.S. Sarbanes-Oxley Act of 2002 (SOX). An online learning course through Ashland’s Learning
Management System educates employees on the importance of SOX and the risks of
noncompliance. In 2007, Ashland’s SOX results did not include any reportable deficiencies or
material weaknesses.” (See Appendix 1, Example 12).
Anecdotal evidence, inferred from companies websites and CSR reports, points in the
direction of a strong association between CSR and IC mechanisms but no empirical work has
analyzed the nature of this relationship yet.
Our study also considers the information quality effect. IC problems could affect earnings
quality for example, an inadequate review of the managerial adjustments could derive into earnings
management (Doyle, Ge, and McVay 2007b). Specifically, firms with company-level material
reporting. In July 2008, we established a CSR office by integrating all the sections related to internal
control”. 8 AS2 identifies three levels of IC deficiencies based on the likelihood that a material misstatement of the
financial statements might occur (PCAOB 2004): control deficiency, significant deficiency and material
weakness with the latter being the most sever type of deficiency that results in more than a remote likelihood
that a material misstatement of the financial statement will not be prevented or detected. Only material
weaknesses trigger an adverse audit opinion. 9 Harmmersley et al. (2008) defines “less auditable” weaknesses to refer to company-level weaknesses
(related to pervasive control environment, financial reporting and personnel weaknesses) and “more
auditable” weaknesses related to account-specific weaknesses (related to controls over specific accounts or
transaction-level processes).
5
weaknesses, which are less auditable, rather than those with accounting-specific weaknesses, which
are more auditable, are more highly related with earnings management (Doyle et al. 2007b). Less
auditable weaknesses are more likely to result in erroneous accruals in financial statements.
Moreover, CSR has been associated with good quality of financial information. Transparency in
reporting practices is integrated within the social responsible behavior. Companies that make an
effort to meet their stakeholders expectations following a social responsible track are likely to be
more transparent in reporting leading to a reduction of earnings manipulation (Kim et al. 2012). If
CSR is positively associated with IC quality, companies with less engagement in earnings
management are also less likely to get an adverse SOX 404 IC audit opinion.
After controlling for the potential effects of earnings quality, corporate governance and
other corporate characteristics, our findings suggest that corporate social behavior is likely to
positively influence auditors’ opinion of the quality of the IC monitoring systems. Specifically,
responsible (CSR strengths) rather than irresponsible (CSR concerns) social activities positively
relate to auditors’ IC effectiveness perception. Our main results hold after controlling for
endogeneity issues. Moreover, the evidence emphasizes the relevance of CSR dimensions. In
particular, our results reflect the importance of the effect of activities aimed at internally-oriented
social enhancement such as employee relations and product issues rather than external
enhancement activities such as those involving environmental or community issues (Jo and Harjoto
2011) in forming the auditors´ opinion on IC effectiveness. A possible explanation for these results
is that companies engaging in CSR addressed to employees (i.e. employee training programs)
increase their satisfaction leading to better IC processes (Jo and Harjoto 2011). At the same time,
companies may enhance employees’ relations issues in their CSR to promote IC quality and affect
auditors’ perception10
.
The paper makes several contributions to the extant research. First, we contribute to the
literature on IC effectiveness. Prior research focuses on examining the determinants of IC
disclosure and its effect on cost of capital and stock market responses among others. However,
there is little evidence on the mechanisms used by managers to achieve IC effectiveness. We add to
this literature by showing that IC effectiveness is related to internal-oriented social responsible
engagement and, in particular, to employee relations issues. We show that company-level
weaknesses related to adverse auditor opinions drive this association. Second, we contribute to the
literature on CSR by showing the relevance of separating responsible and irresponsible corporate
social engagement to unmask and better understand its association with the quality of IC. Finally,
our paper provides evidence of the influence of Section 404 in determining auditors’ opinion in
relation to corporate social behavior and controlling for earning quality. To the best of our
knowledge no prior research has investigated this link.
10
See Appendix 1, Panel C, Examples 10 to 20.
6
The rest of the paper is structured as follows. Section 2 reviews the literature on IC quality
and develops the hypotheses that link CSR and IC. Section 3 presents the research methodology
including sample selection, data and variables definition. Section 4 explains the main results.
Section 5 discusses the results and concludes.
2. Literature Review and Hypotheses Development
2.1. The importance of IC quality
Financial scandals have undermined the confidence of capital markets and have placed the
corporate leaders and governance systems of modern corporations under closer scrutiny than ever
(IFAC 2012). As a consequence, investors and regulators are forcing companies to improve
disclosure practices, rethink their relationships with auditors and strengthen corporate boards as
part of a wide reform of corporate governance. In addition, companies are under increasing
pressure from the government, the accounting profession and other key stakeholders to use their
evaluation and compensation systems to encourage responsible behavior at all management levels
(Hoitash, Hoitash, and Johnstone 2012; IFAC 2012).
IC has been highlighted as a determinant corporate governance mechanism to reduce
agency problems and information asymmetry by most of the codes of best practice around the
World such as COSO (2004) in the US and Turnbull Guidance and Combined Code (2005) in the
UK. IC can provide assurance regarding the reliability of financial reporting and hence effective IC
contributes to agency problems mitigation (Hoitash et al. 2009). This is also reflected on the
emphasis put by the SOX regulation on IC quality (SOX sections 302 and 404 on the effectiveness
of IC and related disclosures). The SOX regulation has strongly influenced the literature on IC and
has motivated prior work in this area.
Prior to SOX, researchers were interested in examining the nature and economic incentives
of voluntary IC reporting. For example, Bronson et al. (2006) conducted empirical research on IC
reporting in the U.S. under the voluntary settings pre-SOX and Deumes and Knechel (2008)
investigated managers’ economic incentives for voluntarily reporting on risk management and IC
using a sample of publicly traded firms in the Netherlands in the late 1990s. Subsequent research
investigates the determinants of IC weaknesses and its disclosure (Ge and McVay 2005; Krishnan
2005; Bronson et al. 2006; Ashbaugh-Skaife et al. 2007; Doyle et al. 2007b; Goh 2009; Naiker and
Sharma 2009; Munsif, Raghunandan, and Rama 2012), the positive effect of IC effectiveness on
disclosure as well as the negative association of IC weaknesses with accrual quality (Ashbaugh-
Skaife et al. 2007; Doyle et al. 2007b; Feng and McVay 2009). Evidence of the negative effect of
MWs on cost of capital or stock market responses has been shown in the literature (Ashbaugh-
Skaife et al. 2007; Ogneva, Raghunandan, and Subramanyam 2007; Beneish, Billings, and Hodder
2008; Ittonen 2010). Prior research also considers the association between IC quality and the
auditor’s involvement, for example, investigating the relationship between IC weaknesses and audit
7
delay, audit fees or auditor change (Ettredge, Sun, and Li 2006; Raghunandan and Rama 2006;
Ettredge, Li, and Scholz 2007; Hogan and Wilkins 2008; Elder, Yan, Jian, and Nan 2009; Hoitash
et al. 2009; Ettredge, Heintz, Li, and Scholz 2011; Munsif et al. 2012).
Among the purposes of SOX regulation is to provide information about corporate IC
systems to improve investors understanding of the quality of the firm’s financial reporting and
increase its credibility which is supported by the evidence in prior literature.
2.2 The link between CSR and IC
Ethical theories suggest that social responsible behavior should be integrated as part of the goal of
any company jointly with the profit-making objective (Carroll 1979). Jones (1995) contends that
CSR firms achieve higher benefits by being honest, and ethical. The moral and ethical dimension
of CSR leads to enhancing management incentives to do “the right thing”. Moreover, recent
research also emphasizes the role of CSR in improving the financial disclosure credibility (Wang
and Tuttle 2014). The arguments of CSR engagement based on ethical behavior implies that
companies investing in CSR should have higher reporting transparency and earnings quality (Kim
et al. 2012). Prior studies’ findings demonstrate that CSR improves information available to
investors by reducing analyst forecast errors (Dhaliwal, Radhakrishnan, Tsang, and Yang 2012),
decreasing cost of capital (Dhaliwal, Li, Tsang, and Yang 2011) and reducing the likelihood of
management engagement in earnings manipulation (Kim et al. 2012). This is consistent with the
idea that companies that exhibit CSR also behave responsibly by constraining earnings
management and delivering more reliable information to investors.
Research and anecdotal evidence suggests that CSR may be not only considered an
extension of firm efforts to implement effective internal governance mechanisms which would lead
to an improvement of business practices in relation to accountability and transparency but also
reducing idiosyncratic risk (Lee and Faff 2009). Companies engaging in CSR are likely to be
perceived as having better IC systems because their aim is to improve transparency and to build a
trustworthy relationship with stakeholders. This argument points to CSR engagement signaling
corporate high quality (Lys et al. 2013) and influencing auditors’ opinion of IC effectiveness. If the
link between CSR and IC effectiveness is positive and CSR is associated with decreases in earnings
management, it is also logical that companies that engage less in earnings management enjoy
stronger IC systems.
The competing explanation suggests that companies use CSR strategically to manage
impression of users of information or to compensate poor quality of financial information (Dowling
and Pfeffer 1975; Deegan and Gordon 1996; Neu et al. 1998; Prior et al. 2008). This argument
supports the idea of CSR representing management self-serving and strategic behavior
(Hemingway and Maclagan 2004; Byus et al. 2013). If auditors are somehow suspect of this
behavior, the association influence of CSR on IC effectiveness would be zero or even negative.
8
Despite these two alternative proposed directions, we expect that the signaling hypothesis will
dominate because of the cost for managers of following the second approach.
Although we do not formally propose a hypothesis related to the effect of information
quality on the relation between CSR and IC effectiveness, we include proxies for earnings quality
in our models to explicitly account for its potential effect.
Given these arguments we propose the following hypothesis to test the influence of CSR on
IC effectiveness.
H1: After controlling for earnings management and corporate governance, companies
engaging in CSR are likely to be perceived by auditors as having better IC systems
We further investigate the nature of the effect of CSR engagement on the auditors’
perception of IC effectiveness by investigating the type of weaknesses which give rise to an
adverse auditor opinion. We focus on MWs which reflect the likelihood that material misstatements
in the financial statements will not be detected or prevented. Prior literature finds that reporting of
these MWs is associated with negative market reactions and that specific characteristics of the
MWs convey information to market participants (e.g. Hammersley et al. 2008). MWs are
sometimes issued under situations of significant uncertainty which requires auditor’s judgment
(Earley, Hoffman, and Joe 2008; Hoitash et al. 2008; Bedard and Graham 2011). Therefore,
managers have incentives to influence auditors using additional cues such as information about
CSR enhancing specific relevant issues that auditors are likely to consider to form their opinions on
IC effectiveness. These weaknesses can be classified attending to their auditability level (Moody´s
Investors Service 2004; Public Company Accounting Oversight Board (PCAOB) 2007). Company-
level MWs are considered less auditable and refer to fundamental problems such as control
environment, personnel related issues or the overall financial reporting process while accounting-
specific weaknesses concern transactions and account balances and are regarded as more auditable.
According to Moody’s, company-level weaknesses are less auditable because of the pervasive
nature of the underlying IC issues. The difficulty to audit around these weaknesses does not depend
on the amount of tests or effort the auditors dedicate to assess it but it rather depends on the ability
to determine where this substantive testing should occur (Doyle et al. 2007b). Company-level
weaknesses reflect not only management’s uncertain ability to prepare accurate financial reports
but also question its ability to control the business (Doss and Jonas 2004).
The implications of the difficulty to audit around company-level weaknesses have been
evidenced in relation to audit fees, market reactions and earnings quality. Prior literature
documents that auditors’ increases in audit fees are strongly associated with the presence of
company-level weaknesses. Market participants also consider company-level MWs more serious
9
than accounting-level ones and react negatively to the presence of the former (Hammersley et al.
2008). IC problems derived from the lack of proper checks and balances might result in procedural
errors and the inadequate review of managerial adjustments might facilitate earnings management
(Doyle et al. 2007b). Doyle et al. (2007b) find that the relation between weak IC and lower accruals
quality is driven by weaknesses disclosures that relate to company-level controls. This implies that
more auditable, accounting-level problems are detected and corrected by auditors before the
issuance of the financial statements (Doyle et al. 2007b).
Based on these arguments, we expect that engagement in CSR will not be associated with
the occurrence of accounting-level MWs. These weaknesses refer to accounting specific issues
which fall within the expertise of auditors. Auditors’ opinion in relation to accounting-level
weaknesses is based on their own assessment of IC quality and is not affected by the signal sent by
the CSR engagement. On the contrary, we expect that company-level weaknesses to be negatively
associated with CSR engagement indicating that, given their complex nature implying higher
difficulty to audit around, auditors are likely to base their opinion in relation to these weaknesses
on the signal sent by CSR engagement.
H2: After controlling for earnings management and corporate governance, the effect of
CSR on the auditor’s perception of IC effectiveness depends on the type of MWs
H2a: CSR is not associated with accounting-level IC MWs
H2b: CSR is negatively associated with company-level IC MWs
3. Research Design
3.1. Sample Selection and Data
We match companies covered by the Kinder, Lyndenberg and Domini (KLD) database (KLD
2006) with non-financial and non-regulated US firms from the Compustat annual files for the
period 2004 to 2010. We start with 31,306 company-year observations from Audit Analytics with
available Section 404 IC opinions. From this sample we remove 9,207 observations from firms in
the financial sector (SIC 60-67), 1,787 observations that are not contained in the Compustat
database, and an additional 1,608 observations that are missing other required Compustat data. This
process yields a total sample size of 18,704. Next, we match the sample from Audit Analytics and
Compustat with the KLD database. Our final sample comprises 8,396 firm-year observations with
data on all variables to run all of our tests.
3.2. Measurement of Variables
Measuring IC Effectiveness
Our dependent variable IC effectiveness (Effective_IC) is an indicator variable which takes the
value of 1 if the auditor issues a qualified IC report (auditor finds the registrant’s IC over financial
10
reporting effective), and 0 otherwise (taken from audit analytics)11
(Doyle et al. 2007b; Hoitash et
al. 2009; Gordon and Wilford 2012; Munsif et al. 2012).
We also consider different types of weaknesses by splitting them into accounting-specific
(Accounting_MW) and company-level (Company_MW) as in prior research (Moody´s Investors
Service 2004; Doyle, Ge, and McVay 2007a; Doyle et al. 2007b; Hammersley et al. 2008; Munsif
et al. 2012). Further, we identify specific weaknesses related to personnel issues (Personnel_MW)
(Ge and McVay 2005; Hammersley et al. 2008). Personnel issues (such as segregation of duties,
lack of training programs or competency) are common reasons for MWs for U.S. firms. Prior
research shows that higher level of investment in IC personnel is negatively related to the
likelihood of reporting MWs (Choi, Choi, Hogan, and Lee 2013). Information on IC personnel
investment is not available in the U.S. and therefore, our measure of the relevance attributed by the
company to personnel issues is proxied by the “Employee relations” dimension included in KLD.
We expect that companies enhance the strength of personnel issues to signal concern about these
aspects of the IC quality to affect auditor perceptions of the IC effectiveness positively. Specific
measures of IC effectiveness and MWs are detailed in Appendix 2.
Measuring CSR
KLD’s Stats includes over 3,000 companies containing various CSR characteristics. KLD uses a
combination of surveys, financial statements, articles in journal (popular and academic) and
government reports to assess companies’ social performance. In particular, KLD’s social rating
criteria contains strength and concern ratings for seven qualitative issue areas including
community, corporate governance, human rights, diversity, employee relations, environment and
product12
. By aggregating a wide range of aspects relating to CSR and environmental management,
KLD covers activities that benefit society directly or indirectly13
. Following prior research
(Waddock and Graves 1997; Chatterji et al. 2009), we construct a CSR score measured as total
strengths minus total concerns in KLD’s six basic dimensions representing different stakeholders
11
Audit analytics includes companies that are required to file reports with the SEC. Section 302 of SOX
became effective for fiscal year ending after August 29, 2002 for all companies. Section 404 of the SOX
requires accelerated filers to file both a management report and an auditor's attestation on IC over financial
reporting starting with annual reports filed after November 15, 2004. Accelerated filers include companies
that have an aggregate market value of at least $75 million as of the end of their most recently completed
second quarter. The dataset covers all SEC registrants who have disclosed their assessments of IC over
financial reporting in electronic filings since 2004. Non-accelerated filers are firms with market capitalization
less than $75 million and which are not required to comply with Section 404 reporting provisions until fiscal
year ending on or after July 15, 2007. 12
Besides, KLD includes five exclusionary screen categories dimensions such as alcohol, gambling, military
contracting, nuclear power, and tobacco. 13
KLD data is considered the most comprehensive data on CSR research in a varied number of areas (for
example, accounting, economics, finance, management, and marketing). However, some limitations have
been pointed out in prior research. KLD data has an unbalanced panel structure and certain construct-validity
issues have to be considered (Chatterji, Levine, and Toffel 2009). The data is based on a snapshot over a
number of companies’ social ratings by KLD analysts in binary responses for each strength or concern (rating
1 indicates the presence and 0 absence of strength) and therefore, affected by sample selection bias.
11
(community relations, diversity, employee relations, environment, human rights and product). As in
prior literature, corporate governance is excluded and tested as a separate variable14
. However,
prior work stated that strengths and concerns are not opposing effects but distinct type of social
action that may show different effects (Mattingly and Berman 2006). Therefore, we also
decompose CSR scores into total strengths (i.e., responsible CSR) and total concerns (i.e.,
irresponsible CSR) and analyze them separately.
Given its nature KLD data can also help to understand firm-level differences with respect
to social responsibility and can be classified and conceptualized to represent not only social
performance outcomes but also as indicators of firms’ social actions towards stakeholders
(Mattingly and Berman 2006). This later formulation and classification allows identifying
important aspects related to social responsiveness towards the stakeholders represented by each one
of the groups that KLD rates. To this end, we define a dummy variable to test the CSR activities
representing internally-oriented social engagement (i.e. employee and product quality) and external
social engagement (community, human rights, diversity and environment)15
in relation to CSR
activities addressed to the stakeholders represented by these groups (Jo and Harjoto 2011).
Moreover, we create variables related to each one of the individual stakeholders KLD data.
Main Control Variables: Earnings Quality and Corporate Governance
Discretionary accruals (DA) and real activities manipulations (RAM) are included in our models as
proxies for earnings quality. We use the absolute value of discretionary accruals (ABS_DA) as a
proxy for earnings management following prior work (Jones 1991; DeFond and Subramanyam
1998; Kothari, Leone, and Wasley 2005). If we consider that companies engaging in CSR show
better earnings quality and will also be perceived as having a better quality IC system, we expect
the coefficient of earnings management (ABS_DA) to be negative. The expected sign should be
positive when considering the management opportunistic view of CSR investment which would be
associated, if detected, with auditors´ perception of less IC effectiveness.
We also test the effect of RAM on the IC quality. The proxies are defined following prior
literature (Roychowdhury 2006; Cohen, Dey, and Lys 2008; Cohen and Zarowin 2010; Zang
14
Corporate governance is perceived as a distinct contract from CSR and its impact on corporate reporting
and disclosure practices has been widely investigated in the literature (Klein 2002; Garcia Osma and
Guillamon-Saorin 2011). Therefore, we construct a CSR score based on the five remaining dimensions,
excluding corporate governance. We control for corporate governance in our regressions by including a net
score of KLD´s corporate governance ratings (Kim et al. 2012) as well as other proxies of corporate
governance quality. 15
Diversity and Human rights dimensions are treated differently in prior works. Prior literature finds the
diversity dimension either significantly adding value to company as one of the dimensions that internally
enhances CSR (Jo and Harjoto 2011) or not considered as one of the CSR dimensions that significantly
improves the company value (Godfrey, Merrill, and Hansen 2009). We include and exclude diversity from
our CSR_Internal and the results are similar. Similarly, Human rights is not clearly considered as an external
CSR dimension in prior literature and therefore, we include it and exclude it from our tests which produce
similar results.
12
2012). RAM occurs when managers carry out actions that change the timing or structuring of an
operation, investment or financing transaction attempting to influence the output of the accounting
process. Our measures of real activities manipulation are: (1) abnormal levels of operating cash
flows (AB_CFO), (2) abnormal production costs (AB_PROD), (3) abnormal discretionary
expenses (AB_EXP), and (4) a combined measure of real activities manipulation (COMB_RAM)
(Cohen et al. 2008; Kim et al. 2012). We measure abnormal levels of the first three real activities
manipulation measures as the residual from the relevant models estimated by year and the two-digit
SIC industry code.
Considering the expected directions of the first three variables, we calculate COMB_RAM
as AB_CFO - AB_PROD + AB_EXP. Higher levels of abnormal operating cash flows (AB_CFO),
abnormal expenses (AB_EXP) and overall real activities manipulation indicate more conservative
operating decisions. We expect auditors´ perception of IC effectiveness to be positively associated
with AB_CFO, AB_EXP and COMB_RAM and negatively related to AB_PROD.
We also consider corporate governance in our models. IC is an important aspect of an
organization’s governance system (IFAC 2012). The quality of an entity’s IC is affected by its
control environment (including board of directors and audit committee) and by other non-
governance related controls (Krishnan 2005). The strength of corporate governance plays a key role
in enhancing disclosure credibility. Appendix 1, Panel B includes examples which illustrate the
role played by corporate governance strength in the link between CSR and IC effectiveness
perception. The statements included in the CSRs of companies included in our sample imply that
corporate governance strength ensures stringent IC and good business practices. Prior literature has
reported a positive association between the level of IC quality and corporate governance (Krishnan
2005; Zhang, Zhou, and Zhou 2007; Goh 2009; Hoitash et al. 2009). The nature of MW also varies
with the strength of corporate governance and in particular with the level of expertise of the
personnel involved in the governance activities (Hoitash et al. 2009). Moreover, a recent work
finds a positive association between the disclosure of IC MWs and changes in corporate
governance (Johnstone, Li, and Rupley 2011b). We control for corporate governance (CorpGov) in
our models by including the net score of KLD ratings in the governance category (Kim et al. 2012).
This is measured by subtracting the number of concerns from the number of strengths in the KLD
database. As for the rest of dimensions included in KLD we also identify and tests separately
strengths and concerns for CopGov (CorpGov_strengths and CorpGov_concerns).
Other Control Variables
Since the establishment of the SOX requirement on the quality of IC over financial reporting there
has been a debate arguing that its approach is too narrow because only takes into account financial
reporting without considering operational, compliance risk and financial risk. Literature
investigating corporate IC documents that firms’ operating characteristics, such as firm size,
13
financial health, growth and litigation risk among others, are significantly associated with the
quality of the IC system, (Krishnan 2005; Bronson et al. 2006; Ashbaugh-Skaife et al. 2007; Doyle
et al. 2007b; Deumes and Knechel 2008; Munsif et al. 2012). These characteristics are referred to
as the inherent risk factors within the business, which in turn will influence a firm’s decision on IC
disclosure. When internal risks are high, a firm will have more incentives to make outsiders aware
that their IC system operates effectively through a more credible IC monitoring system. On the one
hand, investors care more about IC, and benefit more from monitoring IC, when there is a high
level of inherent risk within an organization.
We include the following control variables: (1) return on assets (ROA), (2) firm size
(SIZE), measured with log of total assets at the year-end. IC is costly and smaller companies have
less resources to invest in increasing IC quality (Krishnan 2005; Bronson et al. 2006; Munsif et al.
2012); (3) market to book ratio (MB) is a proxy for corporate growth and it is computed as market
value of equity scaled by book value (Kim et al. 2012); (4) auditor type (Big4), an indicator
variable that is equal to 1 if the external auditor is a Big4 and 0 otherwise (Hoitash et al. 2009); (5)
financial health (LOSS), a dummy variable equals to 1 if there was a net loss at the year end and 0
otherwise. Companies with poor performance are likely to have more IC problems given the
restriction for investing on IC (Krishnan 2005; Ashbaugh-Skaife et al. 2007; Hoitash et al. 2009;
Gordon and Wilford 2012); (6) Litigation risk (LIT), managers of firms facing greater risk of
lawsuits have greater incentives to disclose the adverse news of an IC problem to minimize
potential share price declines that can trigger shareholder litigation (Ashbaugh-Skaife et al. 2007).
LIT is coded one if a firm was in a litigious industry—SIC codes 2833–2836; 3570–3577; 3600–
3674; 5200–5961; and 7370-7374, and zero otherwise (Ashbaugh-Skaife et al. 2007; Hoitash et al.
2009; Munsif et al. 2012); (7) Leverage (LEV) is the ratio of assets to equity; we also assess the
firm liquidity by including the ratio of operating cash flows to sales (Kim et al. 2012). Companies
with higher liquidity are more likely to have a stronger IC system. (8) Cash-ratio is cash to total
assets; (9) the Zmijewski’s (1984) score is a proxy for financial health or firm probability of
bankruptcy. A high Zmijewski score indicates high financial stress (Krishnan 2005).
3.3 Model Specifications
To test our hypotheses, we use a logistic regression model. Specifically, to test H1 we regress
Effective_IC dummy on (1) CSR, (2) earnings quality, (3) internal and external governance
mechanisms and (4) other control variables measuring firm characteristics (Appendix 2 presents the
definitions and measurements of all variables). To test H2a we regress Accounting_MW as the
dependent variable and Company_MW is used to test H2b. Additionally we define Personnel_MW
which represents specific cases of company level weaknesses related to personnel issues (e.g.
segregation of duties, ethical problems, issues with senior management, and insufficient training
and resources) (Hammersley et al. 2008; Hoitash et al. 2009). Observations with missing data from
14
any of the variables included in the model are eliminated. Models are estimated using industry and
year fixed effects. Standards errors are clustered by firm (Petersen 2009). The models are:
Effective IC j,t /Accounting_MWj,t / Company_MWj,t / Personnel_MWj,t = α + β1 CSRj,t +β2 ABS_DAj,t +
β3 RAMj,t + β4 CorpGovj,t +β5 ROAj,t + β6 SIZEj,t + β7 MB j,t + + β8 Big4j,t + β9 LOSSj,t + β10
LITj,t + β11 LEVj,t + β12 Cash-ratioj,t + β13 Zmijewskij,t + Σ k βk Control industry k,j,t + Σ h βh Control year h,j,t +εj,t (1)
Consistent with prior research, we expect a positive/negative/negative/negative coefficient on β1, β3,
β4, and a negative/positive/positive/positive coefficient on β2 for the model using Effective_IC,
Accounting_MW, Company_MW and Personnel_MW as dependent variables. No prediction is
offered for the rest of the coefficients.
Firms can engage in both accruals and real earnings management jointly or separately
depending on the costs (Zang 2012). Following prior literature (Cohen et al. 2008; Kim et al.
2012), we control for the substitutive nature of accrual-based and real activities manipulation. To
this end, we include proxies for both accrual-based earnings management and real activities
manipulation in our regressions. We include control variables as explained in previous section.
4. Results
4.1 Illustrating the link between CSR and IC
We illustrate the link between CSR and IC effectiveness by reviewing a random sample of CSR
reports of companies included in our study and searching for the term “internal control”. We
classify the statements in the CSR that refer to IC by nature (see Appendix 1). Particularly, we
define three main categories. Panel A, “General reference to SOX compliance”, illustrates cases
where companies explicitly refer to the importance of complying with SOX regulation in their
CSR. Panel B, “Reference to corporate governance issues”, includes examples where companies
refer to the role of corporate governance to improve IC in their CSR. Panel C, “Reference to
internal-oriented issues (products and personnel)”, includes examples related to products and
personnel issues mentioned in the CSR. References to personnel issues in relation to IC seem to be
the most pervasive. The reasons for MWs on personnel, according to SOX Section 404, are also
included in Panel C. These are the reason description for IC MWs following audits analytics
taxonomy. The examples clearly demonstrate the link between CSR and IC weaknesses. Even more
interesting, the issues included in CRS enhance the strength of companies on aspects of IC
referring to personnel that otherwise may have derived into a MW. For instance, consider Example
10 where P&G company CSR report enhances the strength of the company on segregation of duties
and development of employees. On the right hand side column we include the definition of IC MW
42 (taken from Audits Analytics MWs taxonomy file). This emphasis made by the company on the
15
quality of their policies and procedures related to employees is likely to positively influence
auditor´s opinion on IC effectiveness and reduce the likelihood of getting an adverse opinion.
The evidence shown using the qualitative analysis of CSR reports is anecdotal rather than
systematic and is included to help us to support the empirical evidence presented in the following
section16
.
4.2. Descriptive Statistics
Table 1 reports the descriptive statistics for the sample. To test H1 we use a sample of 7,968
Effective _IC firms (94.8 percent) and 436 non-effective IC firms (5.1 percent) for a total of 8,396
firms meeting all selection criteria.17
For H2a we employ a total sample of 7,813 company-year
observations, where 164 (2.1%) non-effective IC firms had an accounting-level MWs. To H2b we
use two samples of 8,089 and 8,025 firm-year observations, where 323 (4.0%) and 256 non-
effective IC firms were classified as having a company level and a personnel MW, respectively.
Our main variable of interest, CSR, has a mean (median) value of -0.330 (-1.000). The
negative mean value of CSR is reflected by a relatively lower mean of CSR_strengths, 1.390,
compared to the mean value of CSR_concerns, 1.721, indicating that firms are more involved in
irresponsible than responsible CSR activities. Further, while the mean value of internal dimensions
of CSR (i.e., employee relations and product quality) is negative, -0.398, the mean value of
external dimensions of CSR (i.e., community, human rights, diversity and environment) is positive,
0.067. This preliminary evidence suggests that while firms have, on average, irresponsible
involvement in internal-oriented CSR activities, they show social responsiveness toward external
oriented CSR activities.
The mean (median) value of discretionary accruals (DA) is -0.018 (-0.005). The mean
(median) values of real activities manipulations variables, i.e., abnormal cash flows (AB_CFO),
abnormal production expenditures (AB_PROD), and abnormal discretionary expenses (AB_EXP)
are 0.168 (0.101), -0.113 (-0.046), and -0.082 (-0.092), respectively. The mean (median) value
measure of combined real activities manipulations (COMB_RAM) is 0.199 (0.063). The mean
(median) value of corporate governance (CorpGov) is -0.223 (0.000). This negative value of
CorpGov is illustrated by relatively lower mean of CorpGov_strengths, 0.204, compared to the
mean value of CorpGov_concerns, 0.428.
16
While we focus on disclosures made in CSR reports to provide this anecdotal evidence, the empirical study
is based on a diverse number of sources of CSR reporting (such as surveys, financial statements, articles in
journals and government reports) used to produce the KLD database (KLD Research & Analytics Inc. 2003;
KLD 2006). 17
These percentages of effective vs. non effective IC firms are similar to those shown in prior literature
(Dhaliwal, Hogan, Trezevant, and Wilkins 2011; Gordon and Wilford 2012).
16
For the control variables, the mean (median) values of auditor type (Big4) is 0.898 (1.000).
ROA, MB, LEV and Cash ratios have a mean value of 7.6 percent, 168.6 percent, 36.7 percent, and
57.0 percent, respectively. The mean value of equity (SIZE) is 7,004 (i.e., $1,101 million). About
twenty two percent of all observations (i.e., 22.1 percent) show losses. The Zmijewski score has a
mean (median) value of -2.237 (1.808). Finally, more than forty-six percent of all observations (i.e.,
45.7 %) belong to a litigious industry.
(Insert Table 1 about here)
In Panel B of Table 1 we compare descriptive statistics of variables between effective IC
firms and non-effective IC firms. The mean value of the CSR score is higher for the Effective IC
firms (-0.317) in comparison to that of the non-effective IC firms (-0.571). The difference is
statically significant at the 5 percent level, indicating that effective IC firms are more socially
responsible than non-effective IC firms. Specifically, effective IC firms present significantly higher
CSR_strengths (1.419 vs. 0.854, p = 0.00) but also higher CSR_concerns (1.737 vs. 1.425, p = 0.00)
than those of non-effective IC firms. Further, CSR_internal is significantly lower for effective IC
firms than for non- effective IC firms (-0.393 vs. -0.495, p = 0.07). CSR_external is lower for
effective IC firms than for non- effective IC firms but non-significant (0.075 vs. -0.076). Therefore,
effective IC firms not only show higher (lower) commitment toward responsible (irresponsible)
CSR activities, but also lower (higher) involvement in irresponsible (responsible) internal (external)
CSR dimensions.
Both effective and non-effective IC firms exhibit positive values of discretionary accruals
being larger for the non-effective IC sample (mean values of 0.016 and 0.054, respectively; p=
0.00), indicating that CSR firms are less likely than non-CSR firms to use discretionary accruals to
manage earnings. Regarding real activities manipulations, Effective IC firms show higher mean
values of AB_CFO (0.172 vs. 0.113, p = 0.00) and COMB_RAM (0.201 vs. 0.801, p = 0.00) than
non-effective IC firms. Mean values of AB_PROD and AB_EXP for the Effective IC firms are
significantly lower than those for non-effective IC firms at the 1 percent level. These results
suggest that effective IC firms are less likely to engage in real activities manipulation than non-
effective IC firms. There are no significant differences between effective and non-effective IC
firms in terms of corporate governance. Furthermore, effective IC firms are larger, financially
healthier, face lower litigation risk, and rely more on Big4 auditors than non-effective IC firms. We
did not find significant differences in either corporate governance mechanisms or ROA between the
two groups.
The data presented in Panel C of Table 1 reveals that the most heavily represented industry
is Chemicals and Allied Products (SIC code 28), followed by Business Services (SIC code 73),
17
Electronic & Other Electric Equipment (SIC code 36), Industrial Machinery and Computer
Equipment (SIC code 35), and Instruments and Related Products (SIC code 38).
Table 2 presents the Pearson correlation matrix of main variables. CSR is significantly and
positively related to Effective_IC (0.02). CSR_strengths, CSR_concerns, and CSR_internal are also
positively correlated with Effective_IC. Accounting_MW, Company_MW, and Personnel_MW are
significantly and negatively correlated with CSR_strengths and CSR_internal. This provides
preliminary evidence consistent with a positive relation between IC quality and CSR activities.
While DA is negatively correlated with Effective_IC (-0.03), COMB_RAM is positively related to
Effective _IC (0.06). CSR is also positively correlated with DA (0.03) and COMB_RAM (0.13).
CorpGov is positively related to DA (0.07). Overall, most explanatory variables are not highly
correlated to each other and, therefore, multicollinearity does not seem to be a problem.18
(Insert Table 2 about here)
4.2 Main Tests
Table 3 presents the results of the probit regression analyses regarding the impact of CSR on
Effective_IC after controlling for accrual-based and real activities earnings management as well as
for the role played by corporate governance19
. Columns 1, 2, 3 and 4 of Table 3 report the results
controlling for different proxies of real activities manipulations, i.e., AB_CFO, AB_PROD,
AB_EXP, and COMB_RAM, respectively. Our main interest is in the sign and magnitude of the
coefficients on CSR. The coefficients on CSR are positive and significant for the regressions of
AB_CFO (0.022, p < 0.10, column 1), AB_PROD (0.028, p <0.05, column 2), AB_EXP (0.027, p
<0.05, column 3), and COMB_RAM (0.028, p <0.05, column 4).
Further, columns 1 to 4 show that the coefficients on ABS_DA are negative and significant
at the 5 percent level, indicating that firms involved in absolute discretionary accruals are
associated with less IC quality. As for real activities manipulation, while the coefficients of
AB_CFO (0.053, p < 0.10, column 1), AB_EXP (0.055, p <0.01, column 3), and COMB_RAM
(0.041, p <0.01, column 4) on Effective_IC are positive and significant, the coefficient of
AB_PROD (-0.060, p <0.01, column 2) is negative and significant, indicating that, in general, firms
that engage in real activities manipulation are associated with poor IC effectiveness. Regarding the
role played by corporate governance mechanisms, the coefficients on CorpGov are positive and
18
CSR, CSR_strengths, CSR_concerns CSR_internal, CSR_external are highly correlated with each other.
Similarly, COMBINED_RAM is highly correlated with AB_CFO, AB_PROD and AB_EXP. However, this is
not a problem since we test these variables in separate models. 19
Prior research (Graham, Harvey, and Rajgopal 2005; Cohen et al. 2008; Kim et al. 2012; Zang 2012) has
demonstrated the positive association between accruals and real activities earnings management. Therefore,
we simultaneously control for discretionary accruals and earnings management activities in our regressions
because of the potential trade-off between the two.
18
significant at the 1 percent level for all the regressions.
(Insert Table 3 about here)
Turning to control variables in Table 3, the coefficients on the Big4 variable is positive and
significant at the 1 percent level, indicating that, in general, firms audited by large audit firms are
more likely to have more effective IC systems. The coefficients on ROA, SIZE, MB, Cash-ratio and
Zmijewski variables are positive and significant, suggesting that more profitable, larger, higher
market-valued, more liquid, and less financially distressed firms are associated with more effective
IC. In contrast, the coefficients on LOSS and LEV are negative and significant, indicating that firms
with qualified audit report, losses and higher leverage are more prone to have non-effective IC
systems. The coefficient on LIT is insignificant for all the regressions.
In summary, Table 3 shows that, after controlling for the role played by corporate
governance, accrual-based and real activities earnings management, firms engaging in CSR
activities are less likely to get an adverse SOX 404 IC audit opinion (H1).
In Table 4, columns 1 to 3, we report the results of the probit regression analyses replacing
the dependent variable Effective_IC with Accounting_MW, Company_MW and Personnel_MW,
which are indicator variables that equal 1 if the firm has a MW pertaining to accounting-specific,
company-level and personnel-related material weaknesses, respectively, and 0 otherwise. For
brevity, we only report coefficients for the variables of interest.
(Insert Table 4 about here)
We find that the coefficients on CSR are negative and significant for the regressions of
Company_MW (-0.031, p < 0.05, column 2) and Personnel_MW (-0.038, p <0.05, column 3).
However, the coefficient on CSR is negative but non-significant for the Effective_IC (-0.032, p >
0.10, column 1). When CSR is separated into strengths and concerns (CSR_strengths and
CSR_concerns), we observe that the effect is driven by the strengths and that concerns is not
significant. These results are consistent across all models and provide some evidence that the
observed effect is based on perceptions of the quality of IC rather than on CSR activities. If the
effect was driven by CSR activities we would expect to see a decrease in IC effectiveness for
companies showing CSR concerns. Columns 1, 2 and 3 of Table 4 also show that the coefficients
on ABS_DA (COM_RAM) are positive (negative) and significant, indicating that firms involved in
absolute discretionary accruals (real activities manipulation) are associated with fewer accounting-
specific, company-level and personnel-related MWs, respectively. Further, the coefficients on
CorpGov are negative and significant for all the regressions, indicating that firms with stronger
corporate governance mechanisms are associated with fewer accounting-specific, company-level
and personnel-related MWs.
Taken together, this evidence suggests that after controlling for earnings management and
19
corporate governance, CSR activities are not associated with the detection of account-specific MW
(H2a). On the contrary, firms engaging in CSR activities are negatively associated with company-
level and personnel-related MWs (H2b).
4.3 Additional tests
Responsible vs. Irresponsible CSR Activities
Mattingly and Berman (2006) classify corporate social action patterns and argue that responsible
(CSR strengths) and irresponsible (CSR concerns) social actions are distinct constructs and should
be investigated separately20
. They run an additional test separating CSR strengths and CSR
concerns for all KLD dimensions to make sure that the aggregation is not hiding important
effects21
. Following prior literature (Waddock and Graves 1997; Mattingly and Berman 2006;
Chatterji et al. 2009; Kim et al. 2012; Cho et al. 2013), we split the CSR score into strengths and
concerns and run our main test on the effect of CSR on IC quality.
Table 4, columns 4 to 7 summarize the results for the impact of CSR strengths and
concerns on effective IC, accounting-specific, company-level and personnel-related MWs,
respectively. We find that the coefficient on CSR_strengths is positive and significant (0.046, p <
0.05, column 4) for the regression of Effective_IC. Further, the coefficients on CSR_strengths are
negative and significant for the regressions of Company_MW (-0.133, p < 0.10, column 6) and
Personnel_MW (-0.204, p <0.01, column 7) but not significant for the Accounting_MW (-.118, p >
0.10, column 5).
The coefficient on CSR_concerns is negative and non-significant for the regression of
Effective_IC (column 4) and positive and non-significant for the MWs regressions (columns 5 to 7).
Results for the role played by earnings management and corporate governance are qualitative
similar to our main findings in Table 3. These results seem to support that IC quality, in terms of
the presence of an adverse SOX 404 IC audit opinion and the absence of company-level and
personnel MWs, is improved through a responsible involvement in CSR activities (i.e., CSR
strengths) and that involvement in irresponsible CSR activities (i.e., CSR concerns) is not
associated with IC effectiveness and company-level and personnel-related MWs.
Dimensions of CSR
Prior work suggests that corporate social engagement responds to internal or external stakeholders
based on manager’s perceptions of their relative importance (Mattingly and Berman 2006). To this
20
The classification of social action patterns involves considering KLD data as indicators of corporate social
actions rather than consequences or outcomes of action (Mattingly and Berman 2006). 21
For example, a recent research of Cho, Leeb, and Pfeiffer (2013) finds that irresponsible CSR is much
stronger than responsible CSR in reducing information asymmetry.
20
end, prior research investigates the effect of the disaggregated dimensions of CSR included in
KLD, which represent different stakeholders, as well as groups of dimensions representing internal
or external-oriented social actions (Turban and Greening 1997; Mattingly and Berman 2006; Jo and
Harjoto 2011; Kim et al. 2012) 22
. We draw on prior research and adapt the methodology to our
particular setting. Prior work finds that investment in personnel related to IC is associated with IC
systems quality and, in particular, to be negatively associated with the disclosure of IC weaknesses
(Choi et al. 2013). Therefore, enhancing the significance of employees training programs to make
them aware of the importance of IC quality is likely to send a strong signal to auditors and
influence their perception of IC effectiveness. Accordingly, we build a measure for each CSR
dimension and combine them to test the effect of firm internal enhancement CSR activities
(employee and product quality) and external oriented CSR activities (community, human rights,
diversity and environment) on IC quality (Jo and Harjoto 2011)23
.
(Insert Table 5 about here)
Summarized results in Table 5 show that while the coefficient of CSR_internal on
Effective_IC is positive and significant (0.066, p < 0.01, column 1), the coefficient of
CSR_external is also positive but not significant. We find similar results for the regressions of
Company_MW and Personnel_MW, where the coefficients on CSR_internal are negative and
significant (-0.072, p < 0.01; -0.063, p < 0.05; columns 2 and 3, respectively). Further, columns 4
to 6 of Table 5 also present the results of internal and external CSR dimensions separated by
strengths and concerns. Results show that only the coefficient of CSR_int_strengths has a positive
and significant effect on Effective_IC (0.174, p < 0.01) and a negative and significant effect on
Company_MW (-0.181, p < 0.01, column 5) and Personnel_MW (-0.267, p < 0.01, column 6).24
(Insert Table 6 about here)
We run additional analyses based on individual KLD Ratings Categories. Columns 1 to 3
of Table 6 present a model using disaggregated subscores of CSR for each of the six qualitative
screening categories of community (CSR_Com), diversity (CSR_Div), employee relations
(CSR_Emp), environment (CSR_Env), human rights (CSR_Hum) and product (CSR_Prod).
Results show that only the coefficient on CSR_Emp is positive and significant for the regression of
22
Employee relations dimension refers to policies such as employees’ cash profit-sharing program,
employees’ involvement in management decision-making, stock ownership, and retirement benefits program.
Product dimension refers to quality or investment in R&D. Community refers to activities related with
charitable giving, support for education, support for housing, volunteer programs. Environment dimension
refers to pollution prevention policies, recycling programs, clean energy. The diversity dimension refers to
promotion of women and minorities, programs addressing work/life concerns, human research programs for
the disabled, progressive programs towards gay and lesbian employees.
24
Nontabulated results show that consistent with the results of Table 4, neither CSR_internal nor
CSR_external had a significant effect on accounting-specific MW.
21
Effective_IC (0.102, p <0.01, column 1) and negative and significant for the regressions of
Company_MW (-0.099, p < 0.01, column 2) and Personnel_MW (-0.107, p < 0.01, column 3). In
columns 4 to 6, by splitting the six aforementioned dimensions into strengths and concerns, we find
a significant and positive coefficient on CSR_Emp_strengths for the regression of Effective_IC
(0.227, p <0.01, column 4) and negative and significant for the regressions of Company_MW (-
0.304, p < 0.01, column 5) and Personnel_MW (-0.320, p < 0.01, column 6). This evidence
suggests that only a responsible commitment toward employee relations CSR activities is
associated with more effective IC and, particularly, with the absence of company-level and
personnel-related MWs.25
Responsible involvement in philanthropy (community related activities),
diversity, environmental, human rights or product quality CSR activities does not lead to IC
effectiveness. These results empirically confirm the evidence derived from the qualitative content
analysis carried out on CSR of companies and illustrated in Appendix 1. The results support the
idea that the observed effect of CSR on IC effectiveness is explained by the signaling purpose of
CSR management strategies (Lys et al. 2013). Employee CSR dimension is one of the main reasons
for the occurrence of MWs. By focusing on the most positive aspects of CSR related to personnel
issues (measured as CSR_Emp_strengths in our work) managers enhance the visibility of those
aspects which will contribute to form a positive impression of users of this information. This is also
consistent with prior literature investigating the role of CSR in enhancing the credibility of
financial disclosure (Wang and Tuttle 2014).
Number of IC weaknesses
We rerun our analyses using the number of weaknesses as an alternative measure of IC quality
(Jonhstone, Li, and Rupley 2011; Lu, Richardson, and Salterio 2011; Gordon and Wilford 2012).
Effectiveness of IC and disclosure of MWs may capture different aspects of IC but we expect that
both measures are significantly associated with CSR.26
When using number of IC weaknesses as the dependent variable, the sign is expected to be
the opposite to those found for IC effectiveness where companies with more engagement in CSR
are associated with less number of weaknesses. Untabulated results show that the coefficients on
CSR are negative and significant in the regressions on the number of weaknesses, after controlling
25
Again, nontabulated results show that neither CSR dimension nor its direction had a significant impact on
accounting-specific MW. 26
There is no explicit requirement that firms disclose material weaknesses to the public under Section 302.
However, Item 307 of Regulation S-K (“Disclosure controls and Procedures”) implicitly requires the
disclosure of any identified material weakness. Item 307 requires companies to disclose on the effectiveness
of IC systems and logically companies will only conclude that their IC is ineffective if they discover a
material weakness. As in prior literature, we assume that all material weaknesses are discovered and
disclosed (Doyle et al. 2007b; Leone 2007). This assumption can be considered one of the limitations of the
paper (Leone 2007).
22
for earnings management and corporate governance. Furthermore, results confirm that firms
showing a commitment toward employee relations CSR activities are associated with lower number
of IC weaknesses. Further, the signs of the coefficients on discretionary accruals earnings
management, real activities manipulation and CorpGov variables are significant and opposite to
those in the main tests, suggesting that firms engaging in earnings management or with less robust
corporate governance mechanisms are associated with higher number of material IC weaknesses.
CSR and non-effective IC firms
We further investigate whether involvement in CSR activities helps reduce the severity of IC MWs.
To this end, we limit our sample to those firms which IC continue to be non-effective in year t+1
(N = 432 observations). As dependent variable, we use total number of IC weaknesses. Untabulated
results show that the reduction of the number of IC weaknesses is marginally associated with firms’
CSR involvement. In terms of strengths and concerns, the number of IC weaknesses is significantly
reduced through a responsible involvement in CSR activities. Finally, as for specific KLD
dimensions, we observe that involvement in CSR activities related with community is the only
CSR dimension that contributes to reduce the number of IC weaknesses for non-effective IC
firms27
.
Controlling for endogeneity
Since better quality firms tend to choose CSR engagement, the contribution of CSR to IC quality
will be overstated if we do not correct for endogeneity problems (Greene 2003). Our main tests do
not account for the possibility that our dependent variables (i.e., Effective_IC, Accounting_MW,
Company_MW, and Personnel_MW) and CSR are endogenously related. One problem with
standard OLS estimations in Equation (1) is that it is assumed that error term (εj,t) is uncorrelated
with the observed covariates, CSR and our dependent variables. Our basic hypothesis is that
companies that choose to engage in CSR are not a random sample of firms. Using IV allows us to
estimate the effect of CSR on our dependent variables indirectly, without the need to use directly
our original endogenous measure of CSR. The main difficulty with IV estimation is the
identification of valid instrument variables because most of observable company characteristics are
already included in the equation. Characteristics of a good instrument variable are such that it is not
correlated with the error term in the equation but that it is correlated with the endogenous variable
of interest, CSR.
27
Prior literature refers to philanthropic activities as discretionary responsibilities (Carroll 1979; Maignan
and Ferrell 2009) linked to social or cultural projects. These activities are likely to create goodwill and offer
insurance-like protection to companies in the presence of a negative effect (Godfrey et al. 2009). Investment
in philanthropic activities, therefore, can be seen as an alternative for companies with non-effective IC but
which try to reduce IC ineffectiveness.
23
To do so, we adopt a two-stage instrumental variable approach (Rusticus and Larcker 2010)
to reexamine our main findings reported in Table 3 and columns 1 to 3 of Table 4. Specifically, we
model CSR in the first stage and then, in the second stage, we regress our dependent variables on
the probability of being a CSR company obtained from the first stage regression (CSR_IV).
Specifically, we estimate the following instrumental variable equation (2):
CSR_IVj,t = α + β1 CSRj,t-1 +β2 ABS_DAj,t-1 + β3 RAMj,t-1 + β4 CorpGovj,t-1 + β5 ROAj,t-1 + β6 MBj,t-1
+ β7 SIZEj,t-1 +β8 Marketing intensityj,t-1 + β9 R&D intensityj,t-1 + Σ k βk Control industry k,j,t
+Σ h βh Control year h,j,t +εj,t (2)
In the first stage (untabulated), we include the lagged value of CSR due to the control time
series of CSR as an instrumental variable (Ittner and Larcker 1998). Equation (2) also contents
lagged values of ABS_DA, RAM and CorpGov since firms showing that engaged in earnings
management or firms with poor corporate governance are less likely to become good corporate
citizens (Prior et al. 2008). CSR can be also affected by various factors like previous financial
performance and firm size (Orlitzky 2001; Surroca, Tribo, and Waddock 2010). To control for
these effects, we use lagged values of ROA, MB and SIZE. We also include lagged R&D intensity
and lagged Marketing intensity in Equation (2) since previous innovation and advertising intensity
can be positively associated with CSR (McWilliams and Siegel 2000; Prior et al. 2008; Surroca et
al. 2010). Finally, we also control for industry and year effects.
Table 7, columns 1 to 4, presents the results for the second stage estimation of the impact
of CSR_IV on Effective_IC, Accounting_MW, Company_MW, and Personnel_MW, respectively.
These results are qualitative similar to our main findings in Tables 3 and 4.28,29
(Insert Table 7 about here)
5. Discussion and Conclusions
Academics and practitioners recognize the relevance of IC quality to the survival of companies.
The effectiveness of IC is considered an important factor to achieve good quality financial
reporting. Section 404 of the Sarbanes-Oxley Act is aimed at reducing uncertainty about IC
effectiveness by providing a reassurance of the auditor’ opinion. Research attention has centered on
the IC disclosures and their consequences as well as the high compliance costs imposed by this
regulation. We consider the role of CSR in relation to IC because ethical behavior represented by
corporate engagement in social activities is likely to be aligned with a general perception of better
28
The results for the first stage estimation show that the coefficients of CSRt-1, SIZE t-1, Marketing intensityt-1
and R&D intensityt-1 are positive and significant, suggesting that companies with prior CSR involvement,
larger size, and higher innovation and marketing intensity are more likely to engage in CSR activities. 29
Hansen J test statistic indicates that the instruments are appropriately uncorrelated with the disturbance
process (p-value=0.711). Arellano-Bond test drives the same conclusion.
24
quality IC systems. Overall, our results contribute to signaling theory by supporting the argument
that CSR disclosures are another channel by which firms convey private information about the
quality of IC systems.
Using a sample of U.S. companies, we provide evidence of a positive association between
engagement in CSR and IC effectiveness. We control for external corporate governance
mechanisms and also consider the effect of earnings quality in this relationship. As expected,
companies engaging in earnings management are perceived as having a less effective IC system
and report higher number of weaknesses. We also find that the positive relation between CSR and
IC effectiveness derives from internal-related social engagement (such as employee relations and
product quality and safety) in line with the results found in prior literature (Jo and Harjoto 2011).
This is a particularly interesting result which seems to indicate that managers making emphasis on
the internalization of social responsible behavior by fostering an organizational culture that helps
members to understand corporate code of conduct and to learn the importance of compliance with
regulation and educational programs (rather than engaging in external-related social actions such as
environmental or community actions) sends a strong signal which contributes to achieve a positive
auditor opinion of IC effectiveness (IFAC 2012). The strongest association relates employee
relations, which is directly linked to one of the so called company-level MWs, and IC
effectiveness. Auditors assessing the occurrence of company-level MWs which are more subjective
and less auditable are likely to rely on other sources of information to form their opinion. Our
results support the notion that companies’ responsible social engagement associated to employee
relations is critical to improve the perception of IC effectiveness.
Management signaling intention is evident after observing that only strengths but not
concerns of CSR drive the results. This supports the signaling argument put forward in this study
that companies create a positive impression on auditors and affect their opinion of the IC quality by
focusing on the most positive aspects of CSR related to personnel issues. However, CR concerns
are not significantly associated with IC effectiveness.
Although, we provide some preliminary evidence, future research could further investigate
how specific CSR aspects, and in particular those linked to the core business as opposite to those
considered discretionary or supplementary (Carroll 1979), are effective in addressing different
corporate issues related to IC quality.
Moreover, it would be interesting to investigate the effect of CSR on the remediation of
previously disclosed IC weaknesses. Prior research shows a positive association between
remediation of IC weaknesses and improvements in various corporate governance and management
characteristics (Johnstone, Li, and Rupley 2011a). If the impact of CSR on remediation of IC
problems is positive this would reinforce the ethical behavior approach to justify management
investment in CSR and its connection with quality IC systems.
25
Appendix 1: Illustrating the link between CSR and IC Panel A: General reference to SOX compliance
Example 1: In order to evaluate the effectiveness of internal control over financial reporting, as
required by Section 404 of the Sarbanes- Oxley Act, management has conducted an assessment,
including testing, using the criteria in Internal Control—Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Alcoa CSR report
2007
Example 2: Reserves are reviewed and confirmed quarterly to ensure accurate reporting and to
meet Sarbanes Oxley (SOX) and Securities and Exchange Commission (SEC) requirements.
Controls were audited each quarter by DeLoitte and Touche with no issues noted.
Baker Hughes
CSR report 2008
Example 3: An integrated internal audit (U.S. SOX Act audit, financial audit, operational audit,
etc.) has been conducted to ensure the reliability of our financial reports, improve operational
efficiency, confirm compliance to laws and regulations, and check how risk management
measures are implemented.
Ricoh Group
Sustainability
report 2012
Panel B: Reference to Corporate Governance issues
Example 4: Encouraging strong and effective corporate governance from our Board of Directors.
We have an active, capable, and diligent Board that meets the required standards for
independence, and we welcome the Board’s oversight. Our Audit Committee comprises
independent directors with significant financial knowledge and experience. We review significant
accounting policies, financial reporting, and internal control matters with them and encourage
their independent discussions with external auditors. Our corporate governance guidelines, as
well as the charter of the Audit Committee and certain other committees of our Board, are
available on our website.
P&G
Sustainability
report 2007
Example 5: Audit Committee. The board established this committee to oversee the company’s
accounting and financial reporting processes, system of internal controls, and the audits of the
company's financial statements. The committee shall also assist the board in the oversight of the
company's compliance with legal and regulatory requirements; the independence, performance,
and qualifications of the independent auditor; and the performance of the company's internal
audit function.
OfficeMax CSR
report 2006
Example 6: The Board of Directors regularly reviews Oxy’s governance to ensure stringent
internal controls and exemplary business practices. The Board has a lead independent director
and seven standing committees, five of which have entirely independent membership.
These include the Audit Committee, which hires independent auditors to audit Oxy’s
consolidated financial statements, books, records and accounts; discusses the company’s
financial accounting and reporting principles and internal controls with auditors and
management; and oversees the compliance program for the Code of Business Conduct.
Oxy CSR report
2007
Panel C: References to Internal-oriented issues (personnel, product, suppliers)
References to Product issues Source
Example 7: Similar to C.A.F.E. Practices for coffee, Cocoa Practices provides guidelines for
the cultivation and processing of cocoa in a manner that is environmentally sustainable,
socially responsible, and promotes equitable relationships with farmers, workers and
communities. We learned more about the opportunities and challenges of sustainable cocoa
harvesting, such as promoting internal control systems for farmer cooperatives, which we
believe will help the implementation of Cocoa Practices in our supply chain. Starbucks
continues to deliver updates to our stakeholders on the progress of our Cocoa Practices pilot
via our website
Starbucks CSR
report 2007
Example 8: Our Supplier Expectations for Sustainability are aligned with our sustainability
framework and include environmental considerations beyond compliance. Likewise we
have taken steps to increase our supply chain due diligence measure and internal controls
with respect to conflict minerals.
Air products and
chemicals CSR
report 2012
Example 9: ITT has strong internal controls to ensure our products are used for the purpose
they are intended, and by the customer for whom they were created. We sell our defense
equipment only to countries and other third parties that the U.S. government authorizes. We
impose strict controls and restrictions on reselling the equipment in accordance with U.S.
government regulations. And we report concerns about third party use of our equipment as
appropriate to government authorities and assist in government investigations into the
proper use of equipment we produce.
ITT CSR report
2008
1
References to Personnel issues Reason description for IC MW Audit Analytics Taxonomy (Section 404 SOX)
IC MW 42: Segregation of duties/design of controls (personnel)
Example 10: Our system of internal controls includes written policies and procedures,
segregation of duties, and the careful selection and development of employees.
P&G
Sustainability
report 2007
This category covers internal control deficiencies associated with the design and
use of personnel within an organization. It primarily deals with segregation of duty
issues, such as clerks having access to both the cash receipts and the bank
reconciliation. It may also deal with more sophisticated design of control issues
relating to executives having the ability to change customer records ,etc.
IC MW 22: Information technology, software, security and access
Example 11: ITT has a team of internal auditors that assesses the design and tests the
internal controls over several cycles, including revenue, purchasing, inventory, property and
equipment, payroll, restricted access and general computer controls. In addition,
management performs independent self-tests. Self-testing and the testing by Internal Audit
are designed to ensure the internal controls are operating effectively.
ITT Global
Citizenship report
2006
Deficiencies in this category include deficient program controls, software
programs/implementation, segregation of duties associated with personnel having
access to computer accounting or financial reporting records and related problems
with oversight/access to electronic data/programs
IC MW 44: Accounting personnel resources, competency/training
Example 12: Ashland is subject to annual evaluation of internal controls as required by the
U.S. Sarbanes-Oxley Act of 2002 (SOX). An online learning course through Ashland’s
Learning Management System educates employees on the importance of SOX and the risks
of non-compliance. In 2007, Ashland’s SOX results did not include any reportable
deficiencies or material weaknesses.
Ashland CSR
report 2008
Consists of problems with accounting personnel resources, competency, training,
experience and/or adequacy in any way. To meet these criteria, such an indication
would have to be contained in the filing or in the remediation plan.
Example 13: In 2009, the Ricoh Group widely introduced a Value-Creating CSR Workshop
in its divisions, aiming to help employees better understand diverse social issues and
consider possible solutions provided by them through their business efforts, as well as
encourage them to take action towards this end. Since fiscal 2011, the workshop has been
incorporated into the annual training program for new employees.
Ricoh Group
Sustainability
report 2012
IC MW 11: Ineffective, non-existent or understaffed audit committee Example 14: Starbucks management is responsible for the preparation and integrity of the
information in this report. Through a system of internal controls, including a comprehensive
verification process involving internal subject matter experts, we believe this report fairly
represents our CSR activities and results for the fiscal year ended September 30, 2007.
Starbucks CSR
report 2007
Represents circumstances where an audit committee may not exist, have the
personnel, expert, experience and/or resources to perform their duties to the extent
required by Sarbanes Oxley or their charter. This item can also be checked when a
board has not independent directors or other oversight mechanism.
Example 15: Sarbanes-Oxley legislation in the U.S. requires that CEOs and CFOs of
publicly traded companies certify annually as to the effectiveness of their internal control
over financial reporting. To fulfil this task, Avon created an internal team of global
accounting and auditing professionals to work together to coordinate and assist Avon’s
Avon CSR report
2004
2
worldwide associates in the identification, documentation, and review of over 12,000
internal controls across all markets and key functions.
Example 16: Campbell management used a system of internal controls, including a process
of verification by internal subject matter experts, to ensure that this report fairly represents
our CSR and environmental sustainability activities and results.
Campbell CSR
report 2008
IC MW 21: Ethical or compliance issues with personnel
Example 17: By strengthening our internal control functions through proactively developing
“activities for advancing compliance and risk management” with an involvement of all
officers and employees and by augmenting and strengthening the management-oversight
functions of our Board of Directors and the audit functions of our auditors, we are creating a
transparent corporate control system that can accommodate the reliance of our shareholders
and society.
Ibiden Group
CSR report 2013
Consists of problems with personnel in the areas of compliance with policies,
maintenance of ethical standards, fraud and intentional acts that lead to (or could
lead to) misstated account balances or financial reports.
Example 18: Our internal controls and compliance procedures foster an environment of
ethical behavior. We are focused on maintaining an effective system of internal controls
over financial reporting and rigorously monitor processes to ensure the system’s
effectiveness.
Sprint Nextel
CSR report
2007
Example 19: The ERM focus is integrated within business management processes. The
Chief Risk Officer, Strategy Committee, Business Ethics and Compliance Board and
Internal Control Committees play a role in monitoring risk exposures and the effectiveness
of processes to manage significant risks.
Xerox Global
Citizenship report
2006 and 2007
IC MW 13: Senior management competency, tone, reliability issues
Example 20: Every year, internal auditors and management conduct investigations of
suspected violations of law, business practices, or internal control procedures. Violations
include incidents such as conflicts of interest, falsified expense reports, misuse of company
assets, and petty theft. Violations are identified through our formal audit mechanism,
internal operating controls, management oversight, calls to the company hotline, and
employee reports to management. ExxonMobil is committed to investigating and addressing
all allegations related to violations promptly and properly. The Board makes no exception
for cases involving an executive officer or director. Policy violations by employees lead to
disciplinary actions up to and including dismissal.
Exxon Mobil
Citizenship report
2006
This category has been established to identify circumstances where internal control
weaknesses are attributed directly to potentially improper or negligent conduct of
the current or former senior management of the company. This does not
necessarily mean that the assertion is correct, just that such language exists in the
filing.
Appendix 2: Variables definition Variable name Variable measurement
Dependent Variables
Effective_IC 1 if the auditor issues an adverse SOX 404 internal control (the auditor finds the registrant’s
internal controls over financial reporting effective), and 0 otherwise. This measure is taken from
Audit analytics. Audit analytics tracks Section 404 disclosures on internal controls over financial
reporting. It includes detailed taxonomy of MWs /failures and issues.
Accounting_MW 1 if the firm has company-level MWs including problems relating to the control environment,
management override, the financial reporting process, the audit committee, the internal audit
function, or the risk assessment function; 0 otherwise (Doyle et al. 2007b).
Company_MW 1 if the firm has account-specific MWs including problems relating to individual
accounts/transactions, such as accounts receivable, inventories, and accrued liabilities; 0
otherwise (Doyle et al. 2007b).
Personnel_MW 1 if the firm has MWs dealing with lack of key personnel (for example, chief financial officer or
controller) and evidence that management overrode internal controls or other integrity issues as
indicative of less auditable weaknesses related to ineffective personnel (Hammersley et al. 2008;
Hoitash et al. 2009).
CSR variables (Main Variables of Interest)
CSR CSP score, by aggregating total strengths minus total concerns for each of the KLD's five social
rating categories (community, diversity, employee relations, environment and product) excluding
the governance category
CSR_strengths Is total strengths of KLD’s five social rating categories (community, diversity, employee
relations, environment and product)
CSR_concerns Is total concerns of KLD’s five social rating categories (community, diversity, employee
relations, environment and product)
CSR_internal Companies engaging on employee relations and product related social activities (Godfrey et al.
2009)
CSR_external Companies engaging on environment, human rights, diversity and community related social
activities (Godfrey et al. 2009)
CSR_int_strengths Is total strengths of KLD’s social rating on employee relations and product related activities
CSR_int_concerns Is total concerns of KLD’s social ratings on employee relations and product related activities
CSR_ext_strengths Is total strengths of KLD’s social rating on environment, human rights, diversity and community
related activities
CSR_ext_concerns Is total concerns of KLD’s social ratings on environment, human rights, diversity and community
related activities
Earnings management variables (Main Control Variables)
DA
ABS_DA
Discretionary accruals are computed using the modified Jones model (Dechow, Sloan, and
Sweeney 1995).
Absolute value of discretionary accruals (signed discretionary accruals).
AB_CFO Level of abnormal cash flows from operations.
1
AB_PROD Level of abnormal production costs, where production costs are defined as the sum of cost of
goods sold and the change in inventories.
AB_EXP Level of abnormal discretionary expenses, where discretionary expenses are the sum of R&D
expenses, advertising expenses, and SG&A expenses.
COM_RAM Sum of real activities manipulation proxies, measured as AB_CFO- AB_PROD +AB_EXP.
Corporate governance variables (Main Control Variables)
CorpGov Net score of KLD ratings in the governance category, measured as the number of strengths minus
the number of concerns.
CorpGov_strengths Is total strengths of KLD’s social ratings in the governance category
CorpGov_concerns Is total concerns of KLD’s social ratings in the governance category
Other Control Variables
ROA Return on assets.
SIZE Log of market value of equity
MB Market value of equity scaled by Book value.
Big4 An indicator variable that takes a value of 1 if the firm is audited by a Big 4 auditor, and 0
otherwise.
LOSS 1 if negative net income; 0 otherwise.
LIT 1 if a firm was in a litigious industry—SIC codes 2833–2836; 3570–3577; 3600–3674; 5200–
5961; and 7370-7374, and 0 otherwise.
LEV Total debt divided by total assets.
Cash-ratio Cash to total assets.
Zmijewski Zmijewski score is calculated by applying the formula: -4.336 – 4.513 ROA + 5.679 FINL +
0.004 LIQ, where ROA is the return on assets.
2
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7
TABLE 1
Descriptive Statistics
Panel A: Full Sample
N Mean Std. Dev. P25 Median P75
Dependent Variable:
Effective IC 8,396 0.948 0.220 1 1 1
Accounting_MW 7,813 0.021 0.143 0 0 0
Company_MW 8,089 0.040 0.196 0 0 0
Personnel_MW 8,025 0.032 0.175 0 0 0
Variables of Interest:
CSR 8,396 -0.330 2.391 -2 -1 1
CSR_strengths 8,396 1.390 2.382 0 0 2
CSR_concerns 8,396 1.721 1.758 1 1 2
CSR_internal 8,396 -0.398 1.130 -1 0 0
CSR_external 8,396 0.067 2.022 -1 0 1
DA 8,396 -0.018 0.094 -0.005 -0.005 0.025
AB_CFO 8,396 0.168 0.248 -0.007 0.101 0.232
AB_PROD 8,396 -0.113 0.305 -0.324 -0.046 0.054
AB_EXP 8,396 -0.082 0.458 -0.421 -0.092 0.194
COMB_RAM 8,396 0.199 0.687 -0.321 0.063 0.648
CorpGov 8,396 -0.223 0.767 -1 0 0
CorpGov_strengths 8,396 0.204 0.446 0 0 0
CorpGov_concerns 8,396 0.428 0.613 0 0 1
Control Variables:
ROA 8,396 0.076 0.208 0.036 0.098 0.161
SIZE 8,396 7.004 1.597 5.833 6.847 7.991
MB 8,396 1.686 1.484 0.771 1.255 2.100
Big4 8,396 0.898 0.301 1 1 1
LOSS 8,396 0.221 0.415 0 0 0
LIT 8,396 0.457 0.498 0 0 1
LEV 8,396 0.367 0.266 0.157 0.343 0.550
Cash-ratio 8,396 0.570 1.153 0.091 0.227 0.585
Zmijewski 8,396 -2.237 1.808 -3.590 -2.458 -1.256
8
TABLE 1 (continued)
Panel B: Descriptive Statistics by Effective IC versus Non-Effective IC Firms
Effective IC Non-Effective IC DifferenceTest
N Mean N Mean t-test
Variables of Interest:
CSR 7,968 -0.317 436 -0.571 0.031
CSR_strengths 7,968 1.419 436 0.854 0.000
CSR_concerns 7,968 1.737 436 1.425 0.000
CSR_internal 7,968 -0.393 436 -0.495 0.067
CSR_external 7,968 0.075 436 -0.076 0.128
DA 7,968 0.016 436 0.054 0.000
AB_CFO 7,968 0.172 436 0.113 0.000
AB_PROD 7,968 -0.115 436 -0.072 0.000
AB_EXP 7,968 -0.080 436 -0.121 0.000
COMB_RAM 7,968 0.201 436 0.180 0.000
CorpGov 7,968 -0.220 436 -0.273 0.168
CorpGov_strengths 7,968 0.204 436 0.196 0.711
CorpGov_concerns 7,968 0.425 436 0.469 0.145
Control Variables:
ROA 7,968 0.076 436 0.073 0.808
SIZE 7,968 7.032 436 6.485 0.000
MB 7,968 1.705 436 1.444 0.001
Big4 7,968 0.900 436 0.861 0.008
LOSS 7,968 0.216 436 0.317 0.000
LIT 7,968 0.452 436 0.560 0.000
LEV 7,968 0.365 436 0.411 0.000
Cash-ratio 7,968 0.564 436 0.675 0.052
Zmijewski 7,968 -2.251 432 -1.976 0.002
9
TABLE 1 (continued)
Panel C: Distribution of Firm-Year Observations by Industry
Two-digit
SIC
# of
observations
% of
Sample
Cumulative %
Metal Mining, Ores 10 43 0.51 0.51
Oil and Gas 13 430 5.12 5.63
Heavy Construction, Except Building 16 44 0.52 6.16
Food, Beverage 20 245 2.92 9.08
Apparel and Other Textile Products 23 104 1.24 10.31
Furniture and Fixtures 25 92 1.10 11.41
Paper and Allied Products 26 133 1.58 12.99
Printing and Publishing 27 98 1.17 14.16
Chemicals and Allied Products 28 1,045 12.45 26.61
Petroleum 29 68 0.81 27.42
Rubber 30 101 1.20 28.62
Primary Metal Industries 33 154 1.83 30.45
Fabricated Metal Products 34 155 1.85 32.30
Industrial Machinery and Computer
Equipment
35
670 7.98 40.28
Electronic and Other Electric Equipment 36 863 10.28 50.56
Transportation Equipment 37 268 3.19 53.75
Instruments and Related Products 38 641 7.63 61.39
Miscellaneous Manufacturing 39 96 1.14 62.53
Communication 48 37 0.44 62.97
Wholesale—Durable Goods 50 239 2.85 65.82
Wholesale—Non-Durable Goods 51 108 1.29 67.10
General Merchandise Store 53 85 1.01 68.12
Food Stores 54 56 0.67 68.78
Auto Dealers, Gas Stations 55 99 1.18 69.96
Apparel and Accessory Stores 56 174 2.07 72.03
Eating and Drinking 58 149 1.77 73.81
Miscellaneous Retail 59 184 2.19 76.00
Business Services 73 973 11.59 87.59
Amusement and Recreation Services 79 124 1.48 89.07
Health Services 80 175 2.08 91.15
Engineering and Management Services 87 183 2.18 93.33
Other 560 6.67 100.00
Total 8,396 100%
11
TABLE 2
Correlations among Selected Variables
I II III IV V VI VII VIII IX X XII XII XIII XIV XV XVI XVII XVIII XIX XX XXI XXII
XXIII XXIV
XXV
XXVI
I. Effective IC 1
II. Accounting_MW -0.59 1 III. Company_MW -0.80 0.65 1
IV. Personnel_MW -0.73 0.61 0.85 1
V. CSR 0.02 -0.01 -0.02 -0.01 1 VI. CSR_strengths 0.05 -0.03 -0.04 -0.03 0.73 1
VII. CSR_concerns 0.03 -0.01 -0.02 -0.02 -0.37 0.36 1
VIII. CSR_internal 0.02 -0.02 -0.01 -0.02 0.53 0.14 -0.53 1
IX. CSR_external 0.01 -0.01 -0.01 -0.01 0.88 0.78 -0.14 0.07 1
X. DA -0.03 0.04 0.05 0.04 0.03 0.02 0.01 0.05 0.02 1
XI. AB_CFO 0.05 -0.03 -0.04 -0.04 0.07 0.06 0.01 0.08 0.03 0.09 1 XII. AB_PROD -0.04 0.01 0.02 0.02 -0.15 -0.05 -0.14 -0.09 -0.13 -0.08 -0.28 1
XIII. AB_EXP 0.05 -0.05 -0.08 -0.07 0.12 0.01 0.16 0.06 0.11 0.08 0.46 -0.48 1
XIV.COMB_RAM 0.06 -0.05 -0.07 -0.07 0.13 0.01 0.16 0.06 0.12 0.02 0.58 -0.68 0.90 1 XV. CorpGov 0.01 -0.02 0.00 -0.01 -0.03 -0.11 -0.11 0.07 -0.08 0.07 -0.01 -0.02 0.05 0.02 1
XVI. CorpGov_strengths 0.01 0.00 0.00 0.00 0.15 0.28 0.18 -0.03 0.19 0.01 0.02 0.04 0.00 -0.01 0.60 1
XVII. CorpGov_concerns -0.01 0.03 0.02 0.00 0.15 0.35 0.27 -0.11 0.25 -0.08 0.03 0.00 -0.05 -0.03 -0.81 -0.02 1 XVIII. ROA 0.05 0.00 -0.02 -0.01 0.07 0.10 0.04 0.01 0.09 0.27 0.19 0.17 0.15 0.07 -0.06 0.04 0.11 1
XIX. SIZE 0.08 -0.02 -0.06 -0.06 0.19 0.56 0.49 -0.15 0.32 0.23 0.03 -0.08 0.17 0.14 -0.29 0.11 0.45 0.23 1
XX. MB 0.00 0.00 0.00 0.00 -0.00 -0.00 0.00 0.00 -0.01 -0.03 0.03 0.03 -0.01 -0.01 0.00 0.00 0.00 -0.01 -0.01 1 XXI.Big4 0.02 0.00 -0.03 -0.03 0.08 0.13 0.06 -0.02 0.11 0.02 0.02 -0.06 0.03 0.05 -0.16 -0.06 0.15 -0.01 0.23 0.01 1
XXII. LOSS -0.08 0.04 0.05 0.04 -0.07 -0.12 -0.06 0.00 -0.09 0.28 -0.20 -0.03 -0.23 -0.19 0.02 -0.05 -0.06 -0.54 -0.21 0.00 -0.02 1
XXIII. LIT -0.06 0.04 0.04 0.05 0.13 0.06 -0.09 0.04 0.13 -0.05 0.00 0.11 -0.18 -0.15 -0.02 0.01 0.04 -0.03 -0.11 0.00 0.00 0.06 1
XXIV. LEV 0.03 0.03 0.02 0.02 -0.01 0.08 0.11 -0.14 0.07 0.06 -0.00 -0.12 0.14 0.13 -0.18 -0.07 0.17 -0.08 0.29 0.03 0.09 0.08 -0.12 1
XXV. Cash-ratio -0.00 0.00 0.02 0.01 0.01 -0.07 -0.11 0.05 -0.01 0.08 0.03 0.08 -0.17 -0.12 0.03 0.00 -0.03 -0.22 -0.30 0.02 -0.06 0.14 0.11 -0.31 1 XXVI. Zmijewski 0.01 0.03 0.04 0.03 -0.03 0.00 0.06 -0.11 0.02 0.21 -0.07 -0.14 0.05 0.07 -0.14 -0.10 0.10 -0.39 0.13 0.02 0.10 0.31 -0.06 0.91 -0.21 1
Pearson pair-wise correlations in bold indicate statistical significance at the 5 percent level.
12
TABLE 3
Probit Regression of CSR, Accrual-Based Earnings Management, Real Activities Manipulation and
Corporate Governance on Effective IC
AB_CFO AB_PROD AB_EXP COMB_RAM
Coeff.
(p-value)
Coeff.
(p-value)
Coeff.
(p-value)
Coeff.
(p-value)
Variables of Interest:
CSR 0.0225
(0.098)
0.0276
(0.044)
0.0272
(0.048)
0.0279
(0.041)
ABS_DA -0.1535
(0.026)
-0.1689
(0.015)
-0.1767
(0.013)
-0.1744
(0.013)
RAM 0.0534
(0.073)
-0.0597
(0.005)
0.0556
(0.004)
0.0408
(0.000)
CorpGov 0.1370
(0.001)
0.1297
(0.001)
0.1296
(0.001)
0.1286
(0.001)
Control Variables:
ROA 0.7575
(0.034)
0.9312
(0.011)
0.8092
(0.023)
0.8468
(0.016)
SIZE 0.1458
(0.000)
0.1389
(0.000)
0.1385
(0.000)
0.1348
(0.000)
MB 0.0001
(0.172)
0.0001
(0.269)
0.0001
(0.264)
0.0001
(0.237)
Big4 0.2106
(0.008)
0.2017
(0.012)
0.2225
(0.005)
0.2178
(0.006)
LOSS -0.3794
(0.000)
-0.4185
(0.000)
-0.3704
(0.000)
-0.3658
(0.000)
LIT -0.1245
(0.163)
-0.1114
(0.211)
-0.1035
(0.248)
-0.1039
(0.245)
LEV -1.1584
(0.029)
-1.2482
(0.016)
-1.2672
(0.017)
-1.2644
(0.016)
Cash-ratio 0.0716
(0.006)
0.0810
(0.003)
0.0773
(0.005)
0.0760
(0.005)
Zmijewski 0.1877
(0.034)
0.2030
(0.019)
0.1998
(0.025)
0.2007
(0.022)
Intercept 0.9831
(0.022)
1.3354
(0.002)
1.0174
(0.016)
1.0865
(0.009)
Industry & Year FE Yes Yes Yes Yes
Cluster firm Yes Yes Yes Yes
R2 0.1207 0.1219 0.1234 0.1248
Observations 8,396 8,396 8,396 8,396
TABLE 4
Probit Regression of CSR, Accrual-Based Earnings Management, Real Activities Manipulation and Corporate Governance on Accounting-specific,
Company-level and Personnel MWs
Accounting_MW Company_MW Personnel_MW Effective IC Accounting_MW Company_MW Personnel_MW
Coeff.
(p-value)
Coeff.
(p-value)
Coeff.
(p-value)
Coeff.
(p-value)
Coeff.
(p-value)
Coeff.
(p-value)
Coeff.
(p-value)
Variables of Interest:
CSR -0.0322
(0.105) -0.0312
(0.035)
-0.0382
(0.025)
CSR_strengths
0.0461
(0.016)
-0.1178
(0.199) -0.1327
(0.063)
-0.2044
(0.011)
CSR_concerns
-0.0117
(0.518)
0.1575
(0.108)
0.0704
(0.365)
0.0907
(0.280)
ABS_DA 0.1942
(0.068)
0.2024
(0.005)
0.2551
(0.013)
-0.1765
(0.012)
0.1960
(0.066)
0.2029
(0.005)
0.2569
(0.002)
COMB_RAM -0.0300
(0.062)
-0.0414
(0.000)
-0.0503
(0.000)
0.0403
(0.000)
-0.0281
(0.086)
-0.0404
(0.001)
-0.0790
(0.000)
CorpGov -0.1651
(0.003)
-0.1046
(0.013)
-0.1443
(0.002)
CorpGov_strengths
-0.0353
(0.558)
0.0605
(0.426)
0.0030
(0.962)
0.0449
(0.502)
CorpGov_concerns
-0.2206
(0.000)
0.2418
(0.001)
0.1409
(0.015)
0.2201
(0.000)
Control Variables Included Included Included Included Included Included Included
Intercept -2.4900
(0.000)
-1.3601
(0.001)
-1.4479
(0.004)
1.1520
(0.006)
-2.3902
(0.000)
-1.3372
(0.001)
-1.4259
(0.003)
Industry & Year
FE Yes Yes Yes Yes Yes Yes Yes
Cluster firm Yes Yes Yes Yes Yes Yes Yes
R2
Observations
0.1346
7,813
0.1088
8,089
0.1225
8,025
0.1274
8,396
0.1398
7,813
0.1093
8,089
0.1259
8,025
TABLE 5
Probit Regression of CSR (Internal vs. External by Strengths vs. Concerns), Accrual-Based Earnings Management, Real Activities Manipulation and
Corporate Governance on Effective IC, Company-level and Personnel MWs
Effective IC Company_MW Personnel_MW Effective IC Company_MW Personnel_MW
Coeff. (p-value) Coeff. (p-value) Coeff. (p-value) Coeff. (p-value) Coeff. (p-value) Coeff. (p-value)
Variables of Interest:
CSR_internal 0.0661
(0.006)
-0.0721
(0.007)
-0.0629
(0.029)
CSR_external 0.0100
(0.588)
-0.0138
(0.485)
-0.0238
(0.283)
CSR_int_strengths
0.1741
(0.001)
-0.1808
(0.002)
-0.2669
(0.001)
CSR_int_concerns
-0.0175
(0.586) 0.0309
(0.390)
0.0210
(0.599)
CSR_ext_strengths
0.0078
(0.737) -0.0099
(0.694)
-0.0153
(0.580)
CSR_ext_concerns
-0.0051
(0.865) -0.0042
(0.898)
-0.0238
(0.503)
ABS_DA -0.1743
(0.013)
-0.0138
(0.485)
0.2518
(0.002)
-0.1760
(0.012) 0.1989
(0.006)
0.2587
(0.002)
COMB_RAM 0.0395
(0.000)
0.2001
(0.005)
-0.0508
(0.000)
0.0393
(0.000) -0.0418
(0.000)
-0.0490
(0.000)
CorpGov 0.1296
(0.001)
-0.0410
(0.001)
-0.0750
(0.109)
CorpGov_ strengths
-0.0222
(0.713) -0.0079
(0.905)
0.0356
(0.612)
CorpGov_ concerns
-0.2159
(0.000) 0.1586
(0.003)
0.2473
(0.000)
Control Variables Included Included Included Included Included Included
Intercept 1.0260 -1.336 -1.4929 1.1487 -1.4273 -1.6114
(0.015) (0.002) (0.003) (0.007) (0.001) (0.002)
Industry & Year FE Yes Yes Yes Yes Yes Yes
Cluster firm Yes Yes Yes Yes Yes Yes
R2
Observations
0.1256
8,396
0.1084
8,089
0.1193
8,025
0.1295
8,396
0.1128
8,089
0.1319
8,025
TABLE 6
Probit Regression of CSR Dimensions on Effective IC, Company-level and Personnel MWs
Effective IC Company_MW Personnel_MW Effective IC Company_MW Personnel_MW
Coeff. (p-value) Coeff. (p-value) Coeff. (p-value) Coeff. (p-value) Coeff. (p-value) Coeff. (p-value)
Variables of Interest:
CSR_Com -0.0186 -0.1169 -0.1251
CSR_Div 0.0117 -0.0072 -0.0131
CSR_Emp 0.1023a
-0.0993a
-0.1075a
CSR_Env 0.0098 -0.0007 0.0019
CSR_Hum -0.0303 -0.1416 -0.1256
CSR_Prod -0.0297 0.0615 0.0588
CSR_Com_strengths -0.0246 -0.1357 -0.1330
CSR_Com_concerns 0.0481 -0.0031 0.0278
CSR_Div_strengths 0.0036 0.0329 0.0266
CSR_Div_concerns -0.0297 0.0410 0.0479
CSR_Env_strengths 0.1532 -0.0114 -0.0028
CSR_Env_concerns -0.0229 0.0066 0.0082
CSR_Emp_strengths 0.2272a -0.3038
a -0.3205
a
CSR_Emp_concerns -0.0442 0.0105 0.0177
CSR_Hum_strengths 0.0854 0.0001 0.0001
CSR_Hum_concerns 0.0645 0.1306 0.1095
CSR_Prod_strengths 0.0012 -0.0776 -0.0827
CSR_Prod_concerns 0.0544 -0.1130 -0.1122
ABS_DA -0.1731b 0.2585
a 0.2584
a -0.1741
b 0.2592
a 0.2588
a
COMB_RAM 0.0411b -0.0596
a -0.0507
a 0.0403
a 0.0506
a 0.0502
a
CorpGov 0.1320a -0.1305
a -0.1443
a
CorpGov_strengths -0.0276 0.0709 0.0506
CorpGov_concerns -0.2235a 0.2427
a 0.2678
a
Control Variables Included Included Included Included Included Included
Intercept 1.0812a 1.4085
a 1.4306
a 1.2022
a 1.6489
a 1.6676
a
Industry & Year FE Yes Yes Yes Yes Yes Yes
Cluster firm Yes Yes Yes Yes Yes Yes
R2 0.1268 0.1258 0.1255 0.1310 0.1342 0.1339
a, b,c
Significant at the 1%, 5% and 10% level, respectively.
TABLE 7
Controlling for Endogeneity with a CSR Instrumental Variable
Instrumental Variable Equation (first step):
CSR_IVj,t = α + β1 CSRj,t-1 +β2 ABS_DAj,t-1 + β3 RAMj,t-1 + β4 CorpGovj,t-1 + β5 ROAj,t-1 + β6 MBj,t-1 + β7 SIZEj,t-1
+β8 Marketing intensityj,t-1 + β9 R&D intensityj,t-1 + Σ k βk Control industry k,j,t +Σ h βh Control year h,j,t +εj,t
Re-estimated Equation (second step):
Effective IC j,t / Accounting_MWj,t / Company_MWj,t / Personnel_MWj,t = α + β1 CSR_IVj,t + β2 ABS_DAj,t + β3 RAMj,t
+ β4 CorpGovj,t + β5 ROAj,t + β6 SIZEj,t + β7 MB j,t + β8 Big4j,t + β9 LOSSj,t + β10 LITj,t + β11 LEVj,t + β12 Cash-ratioj,t
+ β13 Zmijewskij,t + Σ k βk Control industry k,j,t +Σ h βh Control year h,j,t +εj,t
Effective IC Accounting_MW Company_MW Personnel_MW
Coefficient
Estimate
(p-value)
Coeff.
(p-value)
Coeff.
(p-value)
Coeff.
(p-value)
Variables of Interest:
CSR_IV 0.0333
(0.045)
-0.0124
(0.582)
-0.0358
(0.049)
-0.0349
(0.088)
ABS_DA -0.1635
(0.020)
0.0830
(0.071)
0.0902
(0.013)
0.1123
(0.007)
RAM 0.0442
(0.000)
-0.2388
(0.033)
-0.2237
(0.010)
-0.1984
(0.023)
CorpGov 0.1711
(0.000)
-.1194
(0.034)
-0.0754
(0.082)
-0.0936
(0.054)
Control variables Included Included Included Included
Intercept 1.6036
(0.000)
-2.2372
(0.000)
-1.2251
(0.000)
-1.2328
(0.000)
Industry &Year FE Yes Yes Yes Yes
Cluster firm Yes Yes Yes Yes
R2 0.1237 0.1436 0.1133 0.1211