Exposing the cracks: the hidden costs of voluntary negative CSR disclosure on internal control

Purpose The purpose of this study is to examine the impact of voluntary disclosure of negative corporate social responsibility (CSR) on corporate internal control. While nonfinancial information is gaining importance, little attention has been given to companies that voluntarily disclose their CSR deficiencies. A common assumption is that this disclosure behavior is a successful form of impression management, where companies enhance internal control quality through the feedback effect of signaling integrity. However, the findings of this study challenge this view. Design/methodology/approach This study uses a sample of A-share firms listed in mainland China from 2010 to 2020 to empirically examine how the voluntary disclosure of negative CSR information affects the quality of internal control. Findings The study reports that the voluntary disclosure of negative CSR information has a detrimental effect on firms’ internal control quality. In scenarios, where the company faces financing constraints and weak external regulation, the negative impact is exacerbated. However, when the company has greater reputational capital and redundant internal resources, this negative impact is mitigated. Originality/value For practitioners, the findings of this study highlight that disclosing CSR deficiencies, in the absence of a well-functioning internal governance feedback loop, may unintentionally reinforce stakeholders’ negative perceptions and hinder internal governance improvements. For regulators, it is essential to identify the underlying motives and intentionality behind firms’ voluntary disclosure of CSR deficiencies, and to strengthen the oversight of such impression management behaviors.