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The Effects of Materiality and Disclosure Transparency on Nonprofessional Investors’ Reactions to CSR Restatements: An Experimental Investigation

Investors are demanding more Corporate Social Responsibility (CSR) reporting, but these disclosures are being restated at a high rate. The ramifications of such restatements are unknown. This study conducts three experiments to shed light on how nonprofessional investors react to CSR reporting inaccuracies. We find that the current practice of disclosing CSR restatements as prior period adjustments in the footnotes of subsequent reports significantly dilutes investors’ reactions to otherwise important information. That is, characteristics of CSR restatements, such as the quantitative and qualitative materiality of the reporting errors, matter to investors only when the restatement is transparent — e.g., prominently disclosed and timely. Further, we find evidence of a “contagion effect” whereby CSR restatements affect investment-related judgments via their effect on investors’ inferences about management credibility, perceived CSR reporting reliability, and financial reporting reliability. These results inform academics, regulators, and practitioners concerned about the consequences of errors in CSR reporting.