Product Market Competition, Corporate Social Responsibility Disclosure, and Sustainability Governance: Evidence from Australia

SynopsisThe research problemWe investigated the relationship between product market competition and the textual characteristics of corporate social responsibility (CSR) disclosures. Specifically, we investigated three textual characteristics: tone of optimism, tone of tangibility (matter-of-factness), and readability.Motivation or theoretical reasoningOn the one hand, the three ways in which CSR disclosure can enhance corporate success in competitive product market situations are as follows: (1) More readable disclosures with more optimistic and matter-of-fact tones help firms attract new customers while enhancing customer loyalty and brand value. (2) Increased market competition is expected to encourage firms to provide more-readable CSR disclosures with optimistic and matter-of-fact tones to enhance their access to external financing at lower costs. (3) CSR disclosure may strengthen a firm's connections with business stakeholders (e.g., employees and suppliers). These connections are conducive to corporate success in competitive product market situations. On the other hand, it is well established that firms find CSR disclosure to be costly.The test hypothesesA significant relationship exists between product market competition and the three textual characteristics of CSR disclosures, namely, tone of optimism, tone of tangibility (matter-of-factness), and readability.Target populationOur sample comprised 2,018 firm-year observations (2002-2020) of listed firms in Australia.FindingsOur study found that firms facing an increase in product market competition tend to publish less-readable CSR disclosures with less use of optimism and matter-of-fact tones of language, and vice versa. In practical terms, this indicates that firms fail to leverage CSR disclosure in managing their product market competition, even though CSR disclosure is recognized as an effective marketing and brand strategy. Therefore, our study examined whether or not the CSR committee, as a key sustainability governance mechanism on CSR disclosure, could contribute to mitigating this missed opportunity. We found that the negative relationship between the two variables is attenuated by the presence of a CSR committee and by the CSR committee's effectiveness. Our study should be of interest to firms, users of CSR disclosures, and regulators.