Document Type : Research Paper

Authors

• Hayder Hussein Nassr ¹
• Hamzeh Didar ²
• Gholamreza Mansourfar ²

¹ PhD student of Accounting, Faculty of Economics and Management, Urmia University, Urmia, Iran

² Associate Professor of Accounting, Faculty of Economics and Management, Urmia University, Urmia, Iran

Abstract

The aim of this study is to examine the presence of motivations related to the charity, signaling, and socially responsible investment (SRI) hypotheses, as well as the role of financial reporting quality in fostering these motivations, if present. This research is applied in nature and falls within the descriptive-correlational category, as it explores the relationships between variables. Based on specific criteria and limitations, the screened sample consists of 101 companies listed on the Tehran Stock Exchange during the years 2014 to 2023, which were analyzed using multivariate regression models. The findings indicate that companies' participation in corporate social responsibility (CSR) activities is driven by motivations beyond charitable purposes. Furthermore, financial reporting quality has a positive and significant impact on optimal CSR—those activities driven by investment-related motivations—while it has a negative and significant impact on deviations from optimal CSR, which are driven by signaling motivations. Overall, the results suggest that companies with higher financial reporting quality are less likely to engage in opportunistic signaling through CSR activities. Consequently, CSR in these companies is more aligned with optimal goals, such as investment, profit generation, and enhancing firm value.

Introduction

Several theoretical frameworks explain how financial reporting quality influences corporate social responsibility (CSR) activities. Legitimacy theory suggests that companies with agency problems may disclose CSR information to rebuild trust. Signaling theory argues that high-quality financial reporting uses CSR to signal transparency and financial health. Stakeholder theory emphasizes that high-quality financial reporting motivates companies to consider stakeholder interests. Agency theory suggests that low-quality reporting may lead companies to use CSR to hide weaknesses. Lys et al. (2015) propose three hypotheses: (1) the charity hypothesis (CSR for societal benefit), (2) the investment hypothesis (CSR to improve performance), and (3) the signaling hypothesis (CSR driven by future prospects or opportunism). This study aims to examine the impact of financial reporting quality on these hypotheses.
Research hypotheses

CSR activities do not have a significant impact on the company's financial performance.
Financial reporting quality has a positive impact on CSR activities motivated by investment purposes.
Financial reporting quality has a significant impact on CSR activities driven by signaling motives.
Literature Review

Financial reporting quality can create different incentives for companies to engage in corporate social responsibility (CSR) activities, with varying motivations depending on the level of reporting quality. According to Lys et al. (2015), these motivations can be categorized into three hypotheses: the charity, investment, and signaling hypotheses.
Charity Hypothesis: High-quality financial reporting can lead to CSR activities driven by genuine philanthropic motivations, whereas companies with low-quality reporting might use CSR as a tool to mask managerial or informational weaknesses. The charitable motivation is typically seen as non-strategic in companies with high-quality reporting, but in companies with lower-quality reporting, CSR may serve as a means to manipulate stakeholders' perceptions without a true commitment to society.
Investment Hypothesis: Under this hypothesis, CSR activities are viewed as investments aimed at improving financial performance. Companies with high-quality financial reporting treat CSR as a strategic tool to enhance performance, believing it can reduce capital costs, improve reputation, and strengthen relationships with stakeholders.
Signaling Hypothesis: CSR activities are used as signals to the market and stakeholders. Companies with high-quality financial reporting use CSR to send positive signals regarding their commitment to social and environmental causes, while companies with poor reporting may use CSR as a misleading signal to compensate for weak financial transparency.

Methodology

This applied, retrospective study focuses on analyzing relationships between various variables using past data. It is descriptive-correlational in nature. A library research method was used to develop the theoretical framework and review the literature. Primary data were collected from sources such as the Rahavard Novin software database, financial statements, company notes, and board of directors' reports. The research population includes companies listed on the Tehran Stock Exchange, with data collected from 2014 to 2023. Based on specific criteria, 101 companies were selected for hypothesis testing during this period.

Results and Discussion

The results of the first hypothesis showed that CSR positively impacts company performance, indicating that motivations beyond charity should be explored in Iranian companies. Financial reporting quality was found to drive CSR activities, supporting the second and third hypotheses related to investment and signaling motives.
The second hypothesis confirmed that financial reporting quality positively impacts optimal CSR, with companies using CSR to increase value and profit. This finding is consistent with signaling and stakeholder theories, as companies with high-quality reporting are more motivated to engage in CSR for investment purposes.
The third hypothesis showed that financial reporting quality negatively impacts deviations from optimal CSR, suggesting that high-quality reporting reduces opportunistic motives and leads to more genuine CSR efforts. These findings confirm that financial reporting quality promotes investment-driven motivations and reduces opportunistic behavior.

Conclusion

Based on the results of this study, it can be concluded that companies can improve their performance by engaging in CSR activities, and these activities are driven by motivations beyond philanthropic goals. In this context, financial reporting quality has a positive and significant impact on optimal CSR. This indicates that companies with higher financial reporting quality engage in CSR activities with investment and profit-seeking objectives. Additionally, financial reporting quality has a negative and significant impact on deviations from optimal CSR. This result suggests that companies with higher financial reporting quality are less likely to send opportunistic signals through CSR. As a result, CSR in these companies is more aligned with optimal goals—namely, investment purposes, profit generation, and enhancing company value.
Acknowledgments
We would like to express our sincere gratitude to all the esteemed professors who assisted the authors in preparing this article.

Keywords

• Financial reporting quality
• charity hypothesis
• signaling hypothesis
• investment hypothesis
• social responsibility

Main Subjects

• Financial Accounting