Corporate social responsibility signalling under external transparency demands

Drawing on the premise that Corporate Social Responsibility (CSR) expenditures may contain valuable private information about future financial outcomes, we explore the conditions necessary to decode this signalling component. Given that monitoring fosters credibility and trust, we posit that increased external pressures for transparency encourage investors and creditors to perceive the private information embedded in CSR reports. Given the heterogeneity of external transparency within and across countries, we employ both a firm-level proxy that minimizes firm-specific incentives as well as country-level proxy based on two exogenous shocks. We resort to the adoption of the International Financial Reporting Standards (IFRS) and the implementation of the EU's mandatory CSR transparency regulation, Directive 2014/95/EU, to capture country-level external transparency. Our findings indicate that the positive signalling effect of CSR expenditures is strongly linked to a reduced likelihood of financial constraints, with external transparency playing the driving role.