Corporate social responsibility and stock price informativeness: The public interest perspective

In this paper, we propose a new theory that sheds a different light on the potential relationship between Corporate Social Responsibility (CSR) and Stock Price Informativeness (PI). More specifically, we explain why a neutral association between CSR and PI can be an indicator of high economic and social welfare, while a positive association can be an indicator of both markets and governments failure. Under a neutral relationship, we argue that mandatory disclosure is getting firms to disclose near their optimal level. Therefore, any voluntary disclosure beyond the mandatory regime (such as CSR disclosure) should not improve PI. We base our hypothesis on public interest theory that suggests that regulators promote the public interest when a market failure is identified. On the other hand, under a positive association between CSR and PI, we argue that regulators do not offer adequate incentives for firms to disclose at their socially optimal levels because the level of voluntary disclosure by socially responsible firms is optimal in comparison to the level of mandatory disclosure provided by other firms with weak CSR engagement.