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AbstractThis study investigates the association between CSR and the market pricing of accounting income numbers' persistence. More specifically, we examine whether the market evaluation of earnings persistence relies on the firm's CSR activities. We find that the market overestimates the persistence of earnings, leading the market to overprice the earnings for CSR companies in Korean setting. We also find that market overprices components of earnings, which are accruals and cash flow from operations, for CSR companies. However, results show that the level of CSR activities does not affect investors' rational pricing of earnings. This study suggests that market participants prefer companies engaging in CSR activities because they are more likely to provide better financial performance and earnings quality. This preference leads investors to overestimate the persistence of earnings and its components for CSR companies.

AbstractRecent research finds that affective reactions elicited from exposure to Sustainability reports unintentionally influence investors' decisions and that this bias is mitigated through explicit assessment of Corporate Social Responsibility (CSR) performance. An unexplored implication is whether this bias can also affect lenders' decisions, where this bias may have serious unintended consequences on the efficient allocation of credit. While investing decisions' main concern relies on stock return maximization, the borrower's ability to pay back the debt is central in lending decisions and may help lenders to compensate for information asymmetry and assess creditworthiness. Using an experimental method, we find that CSR performance reports do elicit affective reactions but, contrary to the case of investing, they do not provoke unintended effects on credit judgments and lending decisions. Our findings suggest that lenders are likely to attribute their CSR affects to its source and use CSR performance as a proxy for borrowers' integrity.