Does it pay to be forthcoming? Evidence from CSR disclosure and equity market liquidity

We examine the impact of corporate social responsibility (CSR) disclosure strategies on equity market liquidity. Using data on CSR disclosure from Bloomberg, we find that equity market liquidity improves as firms increase their CSR disclosure transparency. Specifically, firms with more transparent CSR disclosure strategies have narrower spreads and exhibit improvements in common measures of equity market liquidity. Additionally, we document that improvements in equity market liquidity occur contemporaneously with changes in firms' CSR disclosure strategies, suggesting that markets respond to the transparent disclosure of CSR initiatives without necessarily knowing the ultimate efficacy of the initiative itself. We condition our findings on firm transparency and provide evidence that CSR disclosure transparency acts to reduce information asymmetry, thus acting as the mechanism to improve equity market liquidity. Overall, our results suggest that CSR disclosure transparency leads to reductions in asymmetric information, ultimately making financial markets more equitable.