Managers' aspirations and quality of CSR reports: evidence from China

Corporate Social Responsibility (CSR) reporting has become increasingly prevalent, with a significant rise in the proportion of companies engaging in it over the past decade. While the adoption of CSR reporting has been widely studied, a key research question remains: why is there considerable variation in the quality of CSR reports across different firms? This study addresses this gap by exploring the role of managers' aspirations in shaping the quality of CSR reports. The behavioral theory of the firm posits that organizational behavior is driven by discrepancies between actual performance and aspiration levels. This research integrates this theory with existing literature on aspirations to examine how discrepancies between a firm's current CSR reporting quality and its managers' aspirations affect subsequent changes in report quality. The study focuses specifically on the Chinese context, where state-owned enterprises (SOEs) and firm visibility may exert unique influences on CSR disclosure behaviors due to the complex interplay of political pressures and stakeholder expectations. The researchers hypothesize that when a firm's CSR reporting quality falls below managers' aspirations, the quality of subsequent reports will improve, and vice versa. Furthermore, they anticipate that this relationship will be stronger for state-owned firms and firms with high visibility. This study contributes to the literature by offering a novel theoretical framework that connects CSR reporting discrepancies with the growth of CSR report quality, identifying moderators of this relationship, and offering evidence from the specific context of Chinese firms.

The study draws upon the behavioral theory of the firm, which emphasizes the role of aspiration levels in driving organizational decision-making. It highlights that managers often employ a "satisficing" approach rather than a "maximizing" one, using aspiration levels to gauge whether satisfactory levels of performance have been achieved. Aspiration levels are shaped by a firm's past experiences and observations of similar organizations, particularly peer firms in the same industry. The literature review also explores how different performance feedback mechanisms (being above or below aspiration levels) impact subsequent actions. It reviews the increased focus on CSR reporting quality rather than merely its presence and examines prior research on aspiration levels influencing business behavior, with limited attention given to the domain of effective CSR communication. The study acknowledges prior research focusing on the Western organizational context, indicating a gap in understanding how aspirations influence CSR disclosure behavior in specific cultural and institutional settings such as China.

The study employs a comprehensive panel dataset covering Chinese listed firms with A-shares from 2012 to 2018. The data was collected from multiple sources, including Runling CSR Reports Ratings (RKS), company annual reports, the Chinese statistics bureau, the Wind database, and the Chinese Financial News Database (CFND). The dependent variable, growth in CSR report quality, was constructed using the growth rate of RKS rating scores. RKS ratings encompass three dimensions: macrocosm (firm's CSR strategy and structure), content (information on financial performance, employee relations, environmental performance, etc.), and technique (report transparency, consistency, reliability, readability). The independent variable, the discrepancy between a firm's CSR reporting and managers' aspiration levels, was calculated by subtracting the average CSR report quality of peer firms (defined by the same CSRC industry code) from the focal firm's CSR report quality. A spline was used to separate the effects of discrepancies above and below the aspiration level. Moderators included firm visibility (measured by media coverage using the CFND database) and state-ownership (a dummy variable). Control variables incorporated firm size, firm age, ROA, cash ratio, financial leverage, R&D intensity, and ownership concentration. To address potential sample selection bias (as the sample doesn't cover all Chinese listed firms), Heckman's sample selection procedure was applied. Fixed-effect panel regression was employed for the main analysis after assessing the suitability of different panel data methods. Mean-centering and VIF checks were undertaken to address multicollinearity issues. Finally, graphical representations were created to visualize the moderating effects.

The empirical analysis strongly supports the hypotheses. Firstly, when a firm's CSR reporting quality falls below its aspiration level, the growth in CSR report quality is positively related to the discrepancy (H1). Conversely, when CSR reporting quality exceeds the aspiration level, the growth in CSR report quality is negatively related to the discrepancy (H2). The moderating roles of state-ownership and firm visibility are also significant when the firm is below its aspiration level, but not significant when above. Specifically, the positive relationship between negative discrepancies and improved CSR report quality is stronger for state-owned firms (H3a) and firms with high visibility (H4a) than for their counterparts. The presence of state-ownership and high visibility increases the sensitivity of CSR report quality improvement to negative discrepancies. The analysis controls for various firm characteristics such as firm size, age, financial performance, and ownership structure, using Heckman's two-stage procedure to mitigate sample selection bias. Tables 1-4 present descriptive statistics, correlation matrices, and regression results. The significant coefficients in the fixed-effect panel regressions support all hypotheses. Model 5, a comprehensive model, reaffirms these findings. Figures 1 and 2 graphically illustrate the moderating effects of state-ownership and firm visibility, respectively.

The findings highlight the importance of managers' aspirations in shaping CSR reporting quality. The results suggest that discrepancies between current performance and aspirations act as a powerful motivator for firms to improve their CSR reporting, particularly when they fall below their desired levels. This is especially true for state-owned firms in China, where political pressures and the need to maintain legitimacy drive them to respond more strongly to negative discrepancies. High-visibility firms, facing increased scrutiny from stakeholders, demonstrate a similar pattern of responsiveness to negative discrepancies. The "satisficing" behavior of managers is evident, as exceeding aspirations seems to reduce the incentive for further improvements. This research expands on the behavioral theory of the firm by demonstrating its applicability in the context of CSR reporting and reveals important contextual factors (state-ownership and visibility) that moderate this relationship in the Chinese market. This study contributes to a more nuanced understanding of CSR reporting quality variation and provides managerial implications for firms operating in similar environments.

This study makes significant contributions by providing a novel theoretical framework linking managers' aspirations to CSR report quality, and by demonstrating these relationships empirically within the context of China. It highlights the significant role of aspiration-performance discrepancies, emphasizing the stronger effects for state-owned enterprises and high-visibility firms. Future research could expand the scope by examining additional dimensions of aspiration levels and by extending the study to other countries with varying institutional contexts and cultural norms. The investigation of historical aspirations and broader international comparisons could further enrich our understanding of this dynamic.

The study's focus on the Chinese context limits the generalizability of findings to other countries with different regulatory environments and cultural norms. The use of RKS ratings as a proxy for CSR report quality might introduce some limitations. Further investigation could explore other measurement tools or combine multiple methods for a more comprehensive assessment. Additionally, the study relies on publicly available data, potentially overlooking other factors that influence CSR reporting quality.