External corporate governance and assurance of corporate social responsibility reports: evidence from China

Abstract

Purpose This paper aims to verify whether the legitimate pressure of external forces on heavily polluting firms’ corporate social responsibility (CSR)-related behaviors affect firms’ assurance strategy in the Chinese context. The authors argue that, under external pressure, as a source of legitimacy, the assurance over CSR reports allows the business behaviors of heavy polluters to be recognized by society. Design/methodology/approach This paper sampled listed heavy polluters in China from 2011 to 2018 and used the multiperiod logit model to examine the effects of external corporate governance on firms’ assurance decisions. Principal component analysis methods were used to construct a comprehensive framework of external corporate governance. The indicators were obtained from the China Stock Market and Accounting Research databases, the NERI Report and the China Urban Statistical Yearbook. Findings This paper confirms that external corporate governance positively affects firms’ assurance decisions, and good financial conditions, well-governed internal controls and sufficient government subsidies positively moderate this effect. Practical implications The findings provide feasible ways to encourage firms’ high-quality corporate environmental information disclosure, thus providing valuable guidance for policymakers and other stakeholders to effectively supervise firms’ CSR behaviors. Social implications The findings are of great importance in encouraging high-quality corporate environmental information disclosures, improving the support of capital markets among developing countries and drawing social attention to the environmental protection and social responsibility of heavy polluters. Originality/value The research extends the current research in the field of social environmental accounting by using legitimacy theory to explain firms’ assurance motivations. Additionally, this paper focuses on the practices of assurance services in the emerging economy and provides suggestions for developing assurance over CSR reports.

Research on extended external reporting assurance: An update on recent developments

“…Two recent studies investigate Chinese companies' decisions regarding whether to provide assurance, Khalid et al (2022) and Liu et al (2023). The uptake on CSR assurance in China has been exceptionally low.…”

“…The uptake on CSR assurance in China has been exceptionally low. Liu et al (2023) examine the effects of external corporate governance on companies' assurance decisions for a sample 4217 company‐years of heavy polluting companies from 2011 to 2018 (the assurance rate for the sample is only one percent). Five dimensions of external corporate governance are measured: (1) law and regulation (laws and their enforcement vary across provinces and municipalities in China), (2) various markets (e.g., monitoring by institutional investors, intensity of corporate control and managerial labor markets, and product market competition), (3) providers of capital market information (e.g., analyst following and ESG rating agencies), (4) external accounting, financial and legal firms (e.g., audit fees, Big 4 auditor, number of professional lawyers), and (5) the media (e.g., media coverage).…”

Assessing the impact of financing decisions and ownership structure on green accounting disclosure: Evidence from developing economies

“…Drivers encompass investor requisites for transparency, the management of environmental liabilities as a risk mitigation strategy, and the pursuit of competitive advantages through sustainability leadership [ 2 ]. However, while green accounting and environmental reporting offer numerous benefits, they also come with challenges and obstacles [ 14 ]. These impediments may comprise the absence of standardized reporting frameworks, intricacies in data collection, and apprehensions regarding the divulgence of sensitive ecological data [ 18 ].…”

“…Studies have revealed that businesses in developing economies particularly Sub-Saharan Africa often report less environmental information than those in developed economies despite the rising trend toward green accounting [ [9] , [10] , [11] ]. Earlier studies focused on the interplay between financing decisions and sustainability performance Wahyuningrum, Budihardjo [ 12 , 13 ], financing choices and environmental information disclosure Liu, Li [ 14 , 15 ], ownership structure and corporate social responsibility [ 16 ], ownership diversity and environmental performance Gonzalez and Peña-Vinces [ 17 , 18 ], and corporate governance and ESG performance [ 19 ]. Moreover, most prior studies are based on institutional theory, legitimacy theory, agency theory, and resource dependence theory to investigate the relationship between financing decisions and sustainable development Zhang, Tang [ 20 ], as well as financing decisions and sustainable performance [ 21 ].…”

The Moderating Effects of Corporate Social Responsibility on Corporate Financial Performance: Evidence from OECD Countries

“…Investors and financial institutions are increasingly considering environmental, social, and governance (ESG) factors, including CSR disclosure, in their investment decisions [50,51]. Consequently, companies with strong corporate governance practices and robust CSR disclosure are often regarded as less risky and more attractive to investors, resulting in improved access to capital [52]. This improved access to capital leads to a lower cost of capital, better credit ratings, and increased investment opportunities, all of which can positively impact a company's financial performance.…”