Does Corporate Citizenship Influence Financial Reporting Credibility?
Date
2018
Authors
Binti Azizan, Sarini
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Abstract
The role of financial reporting in the efficient functioning of
capital markets depends on investors’ perceptions of its
credibility. This thesis examines whether superior corporate
citizenship enhances the perceived credibility of financial
reporting. It argues that corporate citizenship performance
affects the accumulation of social trust, which affects the
credibility of the firm or its managers as the source of
financial reporting information. Consequently, this thesis
hypothesises a positive relation between corporate citizenship
performance and the perceived credibility of financial reporting
information. It examines three components of corporate
citizenship that are not widely considered in prior literature
that relates corporate citizenship or social responsibility to
financial reporting: tax fairness, wage unfairness and
philanthropy. Further, this study evaluates the perceived
credibility of financial reports from the perspectives of
auditors (who must assess risks attached to management’s
financial reports) and investors (as users of the audited
financial reports). The study measures differences in auditors’
perceptions of credibility, or information risk, using
differences in audit fees. It measures investors’ perceptions
of financial reporting credibility in two ways: (1) valuation
relevance, which is the extent to which reported earnings explain
stock prices (using the Ohlson Model); and (2) information risk,
which is implied by the cost of equity capital.
Consistent with source credibility hypothesis, this thesis finds
evidence that higher citizenship performance, using all three
measures, is positively related to auditors’ perceived
credibility of financial reporting information, as reflected in
audit fees. The tests using corporate citizenship performance
based on corporate philanthropy scores do not provide persuasive
evidence in relation to investors’ perceptions of financial
reporting credibility. However, the findings show that
citizenship performance based on tax fairness and wage unfairness
is significantly associated with investors’ perceived
information relevance (using the Ohlson test) and perceived
information risk (using the cost of equity test). Overall, the
analysis provides strong evidence that corporate citizenship
performance is positively associated with the credibility of
financial reporting.
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Keywords
Corporate citizenship, financial reporting credibility, audit fees, value relevance, cost of equity capital, voluntary responsibility, social trust and Theory of Source Credibility
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Thesis (PhD)
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