Relationship between quality of sustainability report and corporate financial performance

In the past decade, there has been decreasing trust in businesses and an increasing stakeholder’s demand for better corporate governance, transparency and accountability. Hence, there is an increasing trend for firms to report high credible non-financial information in the sustainability report for the public to assess firms' social performance. The aim of this study is to help the organisations and public to understand the relationship between the quality of the sustainability report (QSR) and corporate financial performance (CFP) to facilitate their decision making. In this paper, relationship between QSR and CFP for the year and over years and the impact of CSR in QSR-CFP relationship are examined by a quantitative method. To examine the relationship, both cross-sectional and longitudinal multiple regressions and paired sample t-tests are conducted. Samples are obtained from GRI report list in the reporting period from 2009 to 2013. GRI application levels obtained from GRI report list are used to measure QSR. Four financial ratios under accounting-based and market based measures are used to measure CFP. The investigation has demonstrated an inverted U-shaped relationship between QSR and CFP under accounting-based measures and a decrease in CFP when QSR keeps constant over years. The findings also suggest CSR plays a role in QSR-CFP relationship. The findings explain the inconsistent results in prior studies and help management and public to gain more understanding of the effects of QSR and CSR on CFP. Large scale samples provide comprehensive information for different parties to examine the effect of QSR on different industries and countries. As the updated GRI reporting guidelines have recently been launched, the findings can provide directions to future research on the examination of QSR under the new reporting guidelines and its impacts on CFP.