Measuring the Impact of the Transition to Mandatory CSR Reporting in Europe

We examine the transition to mandatory corporate social responsibility (CSR) reporting by large European listed companies around Directive 2014/95/EU. The new Directive defines quality reporting principles establishing minimum topic coverage and setting the same rules for all member states. However, the Directive’s framework leaves much room for managerial discretion. We conduct our study in two stages. We start with evaluating the effect of the first mandatory CSR regulation in Europe on firms’ disclosure strategies, followed by the analysis of the Directive’s impact on the financial market. We resort to automated textual analysis as our primary tool which allows us to capture quality dimensions explicitly targeted by the Directive. Using a difference-in-difference model where countries already having mandatory reporting rules serve as controls, we show that the Directive increased the number of reporters, the volume of disclosures and led to significant changes in various qualitative dimensions for those that did not. Some qualitative changes are positive (less biased, broader coverage of CSR-specific topics, and more long-term oriented discussions). Others are difficult to interpret before analyzing the impact on financial users. We next analyze the market’s perception by combining textual attributes into an index. Overall, bid-ask spreads are negatively related to the index over the entire pre- and post-periods. The change in our index indicates a decrease in the bid-ask spread, greater transparency, but only as of 2017 the year of adoption