Corporate Social Responsibility Disclosure And Firm Value In Nigeria
This study focuses on investigating the determinants and consequences of Corporate Social Responsibility Disclosure (CSRD) in Nigeria. A quantitative approach was adopted for this research, and a content analysis technique was used to gather CSR disclosure extent and quality from the annual reports. The sample was withdrawn from the annual reports of 118 Nigerian companies over the period of 2017-2022. A CSRD index is constructed, and includes the disclosures of the following categories; environmental, human resources, product and consumers, and Community involvement. A 7 point-scale measurement was developed to examine the quality of disclosure. This study fills the gap in the literature regarding CSRD in Nigeria, and the fact that all the previous studies have ignored charts and images as a measurement of quality. The result shows that the extent of CSRD is higher than the quality in Nigeria. With regard to CSRD consequences, the result shows that CSRD has a positive and significant impact on firm value. This result provides evidence for policy makers (Nigeria security commission) of the importance of CSRD and its impact on company’s performance, and that companies should consider this type of disclosure more in their annual reports. They also have to consider introducing new laws that mandate CSR disclosures, since it has many advantages for the companies and society in general.
Table of Content
- 1.1 Background to the Study
- 1.2 Statement of the Problem
- 1.3 Research Aim
- 1.4 Research Questions
- 1.5 Test of Hypothesis
- 1.6 Research Objectives
- 1.7 Significance of the Study
- 1.8 Scope of the Study
- 1.9 Limitation of the Study
- 1.10 Definition of Terms
- 1.11 Organization of the Study
- 2.1 Conceptual Review
- 2.2 Theoretical Review
- 2.3 Empirical Review
- 2.4 Chapter Summary
- 3.1 Research Design
- 3.2 Research Strategy
- 3.3 Sample Design
- 3.4 Data Collection Method
- 3.5 Data Analysis Technique
- 3.6 Pilot Study
- 3.7 Validation and Robustness of Disclosure Measurement
- 3.8 Research Model and Variables
Data Analysis and Result Presentation
- 4.1 Descriptive Statistics
- 4.3.2 Presentation of Regression Results
- 4.11 Conclusion and Hypotheses Testing
Conclusion and Recommendation
- 5.1 Conclusion
- 5.2 Summary
- 5.3 Research Implications
- 5.4 Further Research
1.1 Background of the Study
The demand for information and transparency from institutions has increased rapidly in the last twenty years. Public awareness in social and environmental issues and more attention from the media have resulted in more disclosures from institutions, in order to open the communication channels with their stakeholders, and demonstrate their corporate social responsibility. Currently, it is commonly believed by researchers that socially responsible firms, which contribute both ethically and economically to the community, are in a better position to have more revenue and a better reputation among their competitors (Drobetz et al., 2021). Therefore, the following question has been developed; does corporate social responsibility disclosure (CSRD) improve corporate financial performance (CFP) and firm value?
It has become a necessity for firms to communicate with its stakeholders either internally or externally, and deal with issues that concern them. However, the need to behave socially and environmentally responsible does not mean overlooking the economic goals.
Corporate social responsibility (CSR) is defined as the organisation’s contribution towards the community that it operates in (Dahlsrud, 2008). The World Bank Council for Sustainable
Development (WBCSD, 1998) has defined CSR as ‘‘the continuing commitment by businesses to behave morally and contribute to economic growth while enhancing the life quality level of the employees and their families as well as the local community and society at large’’ (Holme & Watts, 1999). It is expected that any organisation payback some of the benefits obtained from society. Some of these organisations are socially responsible because it represents their ethical side, and some of them are looking to be accepted by the community and seek legitimacy, which can help them in avoiding extra costs from losing their legitimacy.
According to Carroll (1979) the definition of CSR is not complete without addressing the entire obligations that a business has to society. These obligations were grouped into four basic categories, economic, legal, ethical, and discretionary. These four categories are not exclusive, but they represent fundamental responsibilities in any business organisation.
Corporate social responsibility has been researched for more than twenty years. Many researchers have found a positive relationship between CSR disclosure and corporate financial performance, while other researchers found either no conclusive or a negative relationship. This ongoing debate has led the study to investigate the relationship between CSRD and CFP among Nigerian firms.
Friedman (1970) pointed out that firms have one responsibility which is to maximise its profit, he expressed his view in the famous passage in which he stated, ”there is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits” (Friedman 1970: 184). In that era, Friedman also claimed that people have social responsibility, not companies. In addition, it was assumed that the sole purpose of the company was to maximise shareholders wealth (Karagiorgos, 2017). Instrumental theories also support Friedman’s beliefs, when they consider that the business fundamental activity is to generate wealth for investors and the reason behind adopting CSR is to achieve economic goals and to improve shareholders’ value (Truong, 2016).
Many researchers have found a relationship between corporate social responsibility disclosure and financial performance, which rejects what was claimed by Friedman and other researchers (Wang et al., 2021; Boesso, Kumar & Michelon, 2020; Kang, Lee & Huh, 2017; Grosbois, 2019; Rettab, Brik & Mellahi, 2009). Doing well by doing good, is what Chernev (2022) titled his article. According to Chernev, (2022), the impact of corporate social responsibility is beyond company reputation and improving firm’s image, the influence extends to include the way that consumers evaluate company’s products, which will result in increased revenue, and eventually improved financial performance. Corporations realised that to compete and survive in the worldwide market, they must change from performing well to performing better by adding societal value (Lin, Yang, & Liou, 2009). However, in some institutions, management has resisted the change, and argued that any additional investments in CSR are inconsistent with their efforts to maximize profit (Friedman, 1970).
A survey of corporate responsibility reporting that was conducted by KPMG (2022), emphasised on the importance of reporting social and environmental activities; in fact, they found that firms are improving at reporting their environmental, social, and the risks that affect their businesses. They also highlighted the fact that the quality and the quantity of CSR reporting has improved slightly in Asia Pacific since 2020, whereby the next generation of CSR reporting leaders will be coming from Asia instead of Europe, which has traditionally led the field (KPMG, 2022). On the other hand, CSR studies in developing countries are suffering from a lack of attention since it is still undertaken on voluntary basis. The higher percentage of studies was conducted in developed countries, while developing countries had the lowest level of CSR reporting. The mutual problem that has been recognised by most of the researchers regarding CSR practices in developing countries is the lack of regulations(Shiraz, 1998). Recently, a study by Ibrahim & Hanefah (2016) mentioned that even though laws were enacted, however, there is still a low level of CSR disclosure in practice by developing countries and particularly in Nigeria. In addition, authorities are facing difficulties to encourage companies to adopt this type of behaviour. Importantly, Shiraz (1998) pointed out that another problem is facing CSRD in developing countries, the need of highly qualified accountants and expertise to perform these type of disclosures, which also will be combined with high costs that most companies try to avoid. The high cost of CSR implementation and the needs for experience and knowledgeable accountants are still the main difficulties that face CSRD in developing countries alongside other factors such as culture and the voluntary emphasis.
The fact that CSRD is still not fully legitimised in most developing countries, along with the fact that social disclosures are voluntary actions, made it an interesting area for research. However, the increasing levels of awareness regarding environmental matters and stakeholder demands for information have pressurised decision-makers to include CSRD in their strategies. Nigeria as one of the developing countries is also suffering from the same problems, in fact CSRD in Nigeria is still considered weak, and Nigerian companies are not providing enough information regarding CSR. Over the past ten years, the economy of Nigeria has improved with a growing GDP rate of 4.68 % (Nigeria GDP Annual Growth Rate, 2016); this growing economy and increased political stability has helped Nigeria attract more foreign investors, and thus, led to more demand for social and environmental disclosures. In addition, the increased awareness of the importance of social and environmental issues has steered the officials to give it more attention and specify laws and regulations to satisfy this demand. The recent increased demand of CSR information by stakeholders has given CSR its importance, in fact many studies have found that financial investors tend to invest in companies that engage in CSR more than companies that are not.
Most of the developing countries have some kind of disclosure. In fact, corporate disclosures are not an issue anymore. A survey by KPMG (2020) stated that companies should no longer debate whether they should disclose, or if disclosure will improve their financial performance, but they should ask themselves what is the quality of their disclosure, and how to disclose CSR? In this context, one of the important questions that this research has is: does the quality of disclosure have higher impact on both corporate financial performance (CFP) and firm’s firm value (MV) than the extent of disclosure? Over half of the listed companies worldwide are including CSR information in their annual financial reports (The KPMG Survey of Corporate Responsibility Reporting, 2020), this rise of awareness was not expected, since the survey in 2018 that found its about 20% and 9% in 2008 (KPMG, 2018). The path that CSR is taking might be considered a global trend. Nevertheless, including CSR reports in their annual reports does not indicate that companies have an integrated report, in fact only 10% of these companies have a decent report (The KPMG Survey of Corporate Responsibility Reporting, 2020).
1.2 Statement of the Problem
Nigeria commenced several improvements to attract foreign investors. Several economic reforms were embarked upon to improve the economy, in addition, Nigeria has engaged in many treaties and initiatives with the US and EU to improve its economy.
This study will use a sample from the Nigerian market for the following reasons: Nigeria is one of the key financial centres of the West Africa (Al-Akra & Ali, 2019), immersed in the worldwide economy, the concept of corporate social responsibility is becoming prioritised and of an increasing importance. Moreover, the recent crisis that occurred in Chad and resulted in people fleeing their country to Nigeria has shed the light on the importance of CSR in a country such as Nigeria. Also the significant role that companies can play in helping the unfortunate refugees.
On the other hand, it appears that there is a gap in the literature in respect of studies that used both extent and quality measures in the Nigerian market. The majority of the previous studies have focused on the extent and ignored the quality of disclosure because of the lack of a clear measurement. In addition, most of the previous studies have investigated CSR disclosures in the industrial sector and ignored the service sector, since the manufacture sector has more impact on society and the surrounding environment due to the nature of their activities (Al-Khadash & Abhath Al-Yarmouk, 2003; Ismail & Ibrahim, 2009). However, this study will include the service sector since it plays an important role in the Nigerian economy and provides almost 67% of Nigeria’s GDP (Fanek, 2016). In addition to the aforementioned points, the researcher can easily access and obtain the financial data for this study from the Nigerian market.
This study will provide some understanding of Nigerian firm’s disclosure strategy, thus allowing the relevant stakeholders to understand and supervise the disclosure requirement as it relates to firm value. Concurrently, this study may encourage Nigerian organisations to reconsider their strategy of disclosure after understanding the results of this study.
This research is going to be the first study in Nigeria that uses the content analysis technique, and uses a 7 points scale to measure CSR disclosure quality. This new quality measurement provides a clear, specific and novel method to measure the quality of CSR disclosures, which all of the previous studies have failed to provide. This measurement also fills the gap in the literature and provides a novel technique to measure quality, since it provides detailed description of the quality of CSR disclosure. This research also seeks to provide evidence regarding the adoption of CSR behaviour and measuring the positive and negative impacts on company’s firm value. The result of this research will fill the gap in the literature regarding Nigeria as a developing country; also, it will fill the gap regarding the quality measurements in CSR studies.
1.3 Research Aim
This research aims to investigate the corporate social responsibility disclosure and firm value in Nigeria
1.4 Research Questions
- What are the determinants of corporate social responsibility disclosure (extent and quality)?
- What are the economic consequences of corporate social responsibility disclosure?
- Does the quality and extent of CSR disclosure have a higher impact on firm value?
1.5 Test of Hypothesis
- H0 CSRD extent has relationship with firm value
- H1 CSRD quality has relationship with firm value
1.6 Research Objectives
To answer the research questions, the following objectives will be undertaken
- To assess the determinants of corporate social responsibility disclosure (extent and quality)
- To assess the economic consequences of corporate social responsibility disclosure
- To assess the quality and extent of CSR disclosure on hi firm value
1.7 Significance of the Study
This study is motivated by the growing concern by management, investors and the public over the credibility and integrity of CSRD reports, and in the light of corporate failures and monitoring role of companies in administering CSR and how it affects the firm vaue. This study would be significant in revealing whether the intensive regulatory oversight in the Nigerian productive industry enhances better CSR and management practices. Therefore, this study is expected to benefit existing and potential shareholders, professional bodies, Managements, Regulators and the environment.
Hence, this study will educate the stakeholders on the implication of CSRD and how it perceived to affect the firm value.
1.8 Scope of the Study
This study is restricted to some the Nigerian productive industry and covers the period of seven years 2017-2022. This period is informed by the fact that it is immediately after the manufacturing sector consolidation, which is when the manufacturing sector witnessed intensive regulations and reforms.
1.9 Limitation of the Study
Although this study is purely quantitative, the data collection took more over than five months. Preparing the excel sheets to put the data in it was one of the challenges that the researcher has faced, since the study sample is large and spanning for 6 years. Then, the annual reports were downloaded and examined page by page. Further, some of the annual reports were not available online, so the researcher had to contact the companies in order to obtain them
1.10 Definition of Terms
Corporate Social Responsibility
Corporate Social Responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders.
A firm is a for-profit business, usually formed as a partnership that provides professional services, such as legal or accounting services. The theory of the firm posits that firms exist to maximize profits.
CSR disclosure is the information provided by corporations in association to their policies, aspirations, and activities toward community, customers, environment, and employees
1.11 Organization of the Study
The study is organized into five chapters.
- Chapter one covers; background to the study, statement of the problem, general objective of the study, specific objectives of the study, research hypotheses, significance of the study, limitation of the study, delimitations of the study, operational definition of terms and organization of the study.
- Chapter two covers review of related literature.
- Chapter Three covers research methodology which includes: introduction, research design, target population, sampling techniques and sample size, data collection instruments, validity and reliability of research instruments, data collecting procedures, data analysis techniques and ethical considerations.
- Chapter four covers research results of the study.
- Chapter five covers discussions and interpretations of research findings.
Conclusion, Summary and Implication
The increased attention that has been given to CSR over the last two decades by researchers has resulted in increased attention to the reporting of these activities (CSRD). A great amount of literature has grown over the last decades regarding CSR and CSR disclosure. Various frameworks, variables and models have been used to find the determinants and consequences of this phenomenon. However, the result is still inconclusive. The aim of this study is to find the determinants and consequences of CSR disclosure in the services and industrial sectors in Nigeria. The study begins with an introduction of the CSR phenomena, and explores the argument behind adopting such behaviour, in addition to the advantages and disadvantages that have been mentioned by previous researchers.
Then, a critical analysis of the previous literature and the stating of hypothesises. Moreover, the researcher presented a theoretical framework concerning the determinants and consequences. Then, a deductive approach has been adopted in the methodology and new measurement for the quality of CSR disclosure has been introduced, and three models have been presented. Finally, the researcher critically analysed the data and tested the models through univariate and multivariate analysis techniques.
After reviewing the literature, three limitations were found in the previous discussed studies regarding determinants and consequences of CSR disclosure.
- Most of the CSR studies are conducted in the developed countries, while the developing countries have a small share of these studies. While Nigerian studies are significantly limited.
- The previous studies did not deliver a full picture of CSR disclosures, since a high percentage of the studies were about environmental disclosures which reflects one category of CSRD. In addition, previous studies have highly focused on the extent of CSR disclosure with less concentration on its quality.
- The used variables regarding determinants and consequences in the previous literature are still limited. Moreover, the overall economic consequences studies regarding CSR disclosure are still limited and provide ambiguous and mixed results, while the Nigerian studies did not provide any empirical results regarding the consequences of CSRD.
To explain and understand the integrated theoretical framework, an index for CSRD contains 40 disclosed items which were developed and adapted to fit the Nigerian context, along with three empirical models as follows:
The first model is used to explore the determinants of CSR disclosures in the services and industrial sectors in Nigeria. The model contains sixteen variables from three categories namely (Company’s characteristics, corporate governance, and ownership structure). The underlying argument behind this model is that each firm has different characteristics that determine its disclosure activities. This results in testing the above variables.
The second and third model are used to find the economic consequences of CSR disclosure in the services and industrial sectors in Nigeria, which was measured by the return on assets (ROA) for the financial performance and market capitalisation for firm value. The argument regarding this model is that CSR disclosure has an effect on the economical position of businesses in Nigeria.
The previous models contained independent and dependent variables measured using different proxies. The main variable is CSR disclosure, which was extracted from company’s annual reports. The study used content analysis method to collect both extent and quality of firm’s CSR disclosure, by using dichotomous method for the extent of disclosures and 7 points-scale for the quality of disclosure. These models were tested by using correlation analysis and multivariate analysis.
5.2.1 What are the determinants of corporate social responsibility disclosure (extent and quality)?
The aim of this question is to find the determinants of CSR disclosure extent and quality in Nigeria. To achieve this aim, sixteen variables are examined and explored, namely (board size, Non-executive directors, age of the firm, female directors in the board, foreign directors in the board, family directors in the board, number of board meetings, audit committee availability, the type of external auditors (Big4), CEO duality, ownership concentration, government ownership, institutional ownership, size, gearing, and industry type). Using univariate analysis and panel regression on a sample from the services and industrial sectors in the spanning period from 2017-2022. The following results were found:
Out of sixteen examined variables, ten variables were found to be significant determinants for CSR disclosure extent, these variables are: board size, Non-executives, firm’s age, foreign members in the board, number of board’s meetings, audit committee, Big 4, government ownership, firm’s size, and industry type. However, the determinants of CSR disclosure quality were less, nine variables were found to be significant which are: board size, firm’s age, foreign members in the board, number of board’s meetings, audit committee, Big 4, government ownership, firm’s size, and industry type.
This result can be interpreted through the suggested integrated theoretical framework, as it explains how companies respond to stakeholder’s demands and society in various levels according to their characteristics (corporate characteristics, governance and ownership). These factors determine the degree of CSRD (extent and quality) employed in each company. Empirically, the analysis revealed that firm size followed by board size and firm age appears to have the strongest effect on CSR disclosure (Giannarakis, 2021; Muttakin & Khan, 2021; Habbash. 2017), while non-executive directors and institutional investors had the least effect on CSR disclosure by listed companies.
Contrary to our expectations, non-executive directors were found to have a negative impact on the extent of CSR disclosure, and no relationship with the quality of CSR. This result contradicts the majority of the previous literature, which claimed that non-executive directors increase the level of CSR disclosure and work as the balance mechanism between the benefits of investors and the needs of stakeholders ((Zattoni & Cuomo, 2017; Gul et al., 2018). In an ideal world, non-executive directors play a big role in monitoring the board’s activities (Jizi et al, 2021). However, according to JSC 2002 law, each company must form a board of directors with at least one third of non-executive directors. The law has made it mandatory to appoint three non-executive directors, which means these non-executive directors have no independence or control over the board’s decisions and they are there simply because it is a regulatory requirement. This finding can be seen as a new contribution to the literature of CSR determinants, and an indicator to the legislators of this misperception.
5.2.2 What are the economic consequences of corporate social responsibility disclosure?
The aim of the second question is to investigate the consequences of disclosing CSR activities in the Nigerian market, which is assessed by company performance and firm value models, and tested through univariate analysis and panel regression. The previous literature is still inconclusive regarding the impact of CSR disclosure and weather the cost higher than its benefits. However, from our results, it’s clear that CSR disclosure has a positive and significant impact on firm’s financial performance and the firm value of companies. The impact of CSR disclosure provides evidence that adopting such behaviour and baring such costs can benefit a company’s overall performance. This result indicates that CSR is a strategic investment for the companies which benefits not only the investors and shareholders but also from communicating such activities to the external stakeholders (Nekhili et al., 2017). It also encourages companies in Nigeria to provide more CSR disclosures since the benefits on firm value are exceeding the costs (Omar & Zallom, 2016). According to stakeholder theory, the firm’s success relies upon its capability to meet stakeholder’s expectations and demands for information. From a legitimacy perspective, increasing information disclosure could improve the company’s legitimacy and the ability to maintain their market position and consequently increasing its financial performance (Yusoff et al., 2020).
5.2.3 Does the quality of CSR disclosure have a higher impact on firm value?
The results confirm that the quality of CSR disclosure has higher correlation and impact on company’s firm value than the extent of CSR disclosure. This is good evidence that providing higher quality CSR disclosure has a much stronger impact upon a company’s firm value compared with mere extent. In fact, the result shows that investors are evaluating the companies with higher quality of CSR disclosure with more than 9% from the extent one.
Empirically, these findings demonstrate the significance of providing higher quality of CSR disclosures. The economic benefits can motivate companies in adopting better policies and strategies to provide higher and better-quality disclosures regardless of the cost. Companies can also explain to their shareholders the benefits behind spending funds on CSR, by demonstrating the economic advantages that they are receiving in return.
5.3 Research Implications
The research findings have further implications on practitioners and policy makers as well as academics. The next section will present each category:
5.3.1 Implications for Practitioners
Firms should develop new disclosure strategies and ensure including CSR within their annual reports. In addition, companies should make more efforts to maintain and improve the disclosure quality of their reports in order to benefit from the relationship between disclosure quality and firm value.
Another implication of the research is for companies which are looking to improve their legitimacy and legitimise their activities in the eyes of government and other stakeholders. Industrial firms which have high influence on the surrounding environment can benefit from this research to achieve legitimacy for its products and activities.
5.3.2 Implications for Policy Makers
Nigeria security commission is the main body in Nigeria that pursues the commitment of public shareholding companies to disclose their business results and annual reports. They are also responsible of implementing the laws and regulations that control Nigerian stocks exchange. The policy makers in Nigeria should consider the importance of this research, since it sheds light on the importance CSR disclosures. They also have to consider introducing new laws that mandate CSR disclosures, since it has many advantages for the companies and society.
Regarding corporate governance, the findings of this research suggest amending the law that require companies to have 33% of its directors to be non-executives, since its removing the director’s independence and causing a negative effect on CSR disclosure.
The finding of this research recommends policy makers think about issuing a new law that requires companies to start providing standalone corporate social responsibility reports, because of the positive implications that has been found on firm value of firms. In addition to emphasising the importance of disclosure quality and proposing guidelines and frameworks of how to present your disclosures in an interactive way, by using images, charts and pictures, it is easier to illustrate and understand such disclosures.
5.3.3 Implications for Academics
This research has shed the light on the importance of CSR disclosures extent and quality and its relationship with firm value. This area of research has not previously received adequate amount of investigation, and particularly the quality of disclosure and its relationship with firm value. More research should be done using our methodology and quality measurement to explore the consequences of using images on the quality of CSR disclosures.
5.4 Further Research
Further research can be done regarding foreigner directors by differentiate between males and females regarding these variables. This study did not distinguish between their genders because of the time limitation and difficulties to obtain such information which can be considered in the future research. However, regarding the female directors, the study did not distinguish between executives and non-executives which can be a rich topic in the future research.
Future research can also investigate the opposite direction of the variables effect, for example: the effect of firm value and financial performance on CSRD, and test whether firms with high value and better performance disclose more CSR information.
Further research could investigate the financial sector and compare it to the industrial and services sector in Nigeria. Moreover, further research can be done on developing a new measurement for the quality of CSR disclosure.
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