Global Business Review

This manuscript has been submitted to Global Business Review

Journal Name: Global Business Manuscript ID: GBR-2023-3493.RV1

Review
Manuscript Type: Original article
Manuscript Title: CSR DISCLOSURE
AND INVESTMENT EFFICIENCY IN
EMERGING MARKET: EVIDENCE
FROM MENA COUNTRIES

Keywords: Corporate Social Responsibility, Disclosure, emerging Market,

Financial Investment/Analysis

MeSH terms:

Abstract: Corporate Social Responsibility disclosure (CSRD) is often

recognized as a transparency mechanism, enabling companies to
communicate their CSR commitment. However, CSRD may amplify agency
conflicts. This study addresses these two alternative views by investigating
the impact of CSRD on investment efficiency. The analysis involves a panel of
273 firms operating in ten Middle East and North Africa (MENA) countries
from 2010 to 2022. Using regression models, the findings show that CSRD
reduces investment efficiency, due to an increase in under and over
investment. By examining the influence of topic-specific CSRDs on
investment efficiency, the results show that CSRD related to employees and
environmental issues contributes to a decrease in investment efficiency. This
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paper provides practical implications for firms that are required to reassess
their CSRD strategy, for policymakers that should transition from voluntary
disclosure strategies to mandated CSR, and investors that need to exercise
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greater diligence regarding the benefits of CSRD.

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1
2 Dear editor and reviewers,
3
4 I sincerely thank you for your valuable contribution to the review of our submission. Your feedback
5 has been very helpful in improving our work. We are grateful for your expertise and dedication to our
6 field of research.
7
8 Editor’s Comments
The abstract should be self-explanatory, providing a We rewrite the abstract based on this
comprehensive summary of the work. It must recommendation.
effectively outline the background, research
objectives, methodology, and key outcomes while also
articulating the policy or business implications of the
study. It is important to note that the abstract should
not contain any acronyms or references, and sub-
sections or paragraphs must not be created within the
abstract.
Organize the manuscript with the following sections: The manuscript was reorganized as
Introduction, Literature Review (without major sub- recommended.
sections), Materials and Methods (including data and
variable descriptions), Results and Discussions,
Conclusion, and Managerial Implications. Clearly
elaborate on the novelties or contributions of the work
within the introduction section. You can highlight the The contribution and the discussion of the
contribution of the work while discussing empirical results were added in the conclusions
results and in the conclusion section.
Please do not create separate paragraphs to show
contributions.
Keep the literature review concise, preferably We rewrite the literature review and
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summarized in a table. summarize in table 1.

Compare empirical results with previous research Done
outcomes.
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Ensure that the conclusion provides a comprehensive We summarize the paper and we include
summary of the work, emphasizing policy or policy and managerial implications,
managerial implications. Include limitations and the limitations and the future scope of research
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future scope of research within the conclusion section,

avoiding sub-sections.
Assign section and sub-section numbers, reducing sub- done
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section numbers as applicable Avoid discriminatory

use of pointers in the manuscript.
Format tables and figures according to the journal's done
guidelines.
Write the manuscript in Times New Roman font style done
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with double spacing.

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10 Reviewer 1 comments
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Data and Methods section is very unclear. Please clearly Thank you for these comments. We
specify/describe your dependent, independent and restructure this section by splitting our
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control variables. Please describe what dependent,
independent and control variables you have taken in
your studies and why. For example, you have added
various control variables following past studies. But you
have not explained why you have added these control
variables into dependent, independent and
control variables. Furthermore, we give
more explanation for control variables
based on previous studies. (page14 to 17)
variables in your study. Why these variables are
important for your studies.
You have taken data from different industries The dummy variables for the sectors were
consumer’s staples, energy, healthcare, industrials, real used in the various models, but we
estate, technology and telecommunication etc. But, you mistakenly omitted them from the tables
have not added Industry control measures in your study. and equations. We apologize for this
oversight.
Remove Table 1 A1 i.e. variable definition table. Instead Table 1 A1 was removed and variables are
of adding table, you can describe about your variables in described in the method section
data and method section only.
Please check below mentioned studies. Read how they Thank you for this recommendation. We
have written their methodology section. You will get followed these papers in presenting the
some idea about writing data and method section of your method section
study. You will get idea why we add control variables.
Control variables should be added as per the
requirements of the study.
1. Recognizing CEO personality and its impact on
business performance: Mining linguistic cues from
social media, Information & Management, Elsevier
2. CEO power, corporate social responsibility, and firm
value: a test of agency theory International Journal of
Managerial Finance, Emerald

Please follow same referencing style throughout the Done we presented the reference according
study as per the guidelines of the journal. APA style as required by the journal
No need of Table 2 - Summary Statistics. Keep one table As recommended, we added one table
only “Descriptive statistics and Correlation table”. No Descriptive statistics and correlation table.
need of separate correlation table. Instead of adding two
different tables i.e. Table 2 - Summary Statistics and
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table 3 Correlation matrix. Please add one table

Descriptive statistics and correlation table.
Add sufficient literature (at least 5 studies) which We added the results of all studies that
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indicates that CSR disclosure decreases investment explore our relation. We note that the
efficiency. Please also explain what kind of number of studies is very limited. Please
underinvestment activities leads to decrease in view table 1
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investment efficiency. Please also add sufficient

literature (at least 5 studies) which indicates that CSR
disclosure the leads to decrease in overinvestment.
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Please also justify why you have taken firms operating in

ten MENA countries as a sample size. Following which
past studies, you have taken firms operating in ten
MENA countries as a sample size.
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We explained in the introduction the
rationale behind the choice of MENA
countries and we cite in bold previous
studies that recommend this context. Page

1 and 4
What is the significance of this sample in your area of Furthermore in the sub section sample and
research (CSR). data we explain why we take these ten
countries (page 12).
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Your sample firms belongs to different countries and Thank you for your comments allowing us
different countries have different rules regarding CSR. to explain more our empirical approach.
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You have not added any control variables to mitigate this
effect. Hence, current findings of your study are absurd.
Either add appropriate control variable or provide proper
justification regarding the sample of your study.
We have controlled this concernby first,
using the sectoral average of CSRD, in
each country, as an instrumental because
CSRD at the firm level is closely
associated with its sector's norm in a given

11 Reviewer 2 comments
12
You have done well in your research. To enhance the
quality of your research, consider conducting a more
thorough literature review to identify critical
theoretical and practical gaps
. The literature review should be critically improved.
It's noted that your manuscript lacks originality,
impacting its overall contribution. Therefore,
enhancing the introduction and literature review
would significantly strengthen your work
13
country.
Secondly, we have introduced several
country level control variable to control
the investment efficiency (dependant
variable) like macroeconomic variables
and control of corruption
Thank you for your comment, we conduct
more thorough literature review to identify
critical theoretical and practical gaps
We clarify our originality and contribution in
the introduction

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 1 CSR DISCLOSURE AND INVESTMENT EFFICIENCY IN EMERGING MARKET:

2 EVIDENCE FROM MENA COUNTRIES

3 Abstract

4 Corporate Social Responsibility disclosure (CSRD) is often recognized as a transparency mechanism,

5 enabling companies to communicate their CSR commitment. However, CSRD may amplify agency

6 conflicts. This study addresses these two alternative views by investigating the impact of CSRD on

7 investment efficiency. The analysis involves a panel of 273 firms operating in ten Middle East and

8 North Africa (MENA) countries from 2010 to 2022. Using regression models, the findings show that

9 CSRD reduces investment efficiency, due to an increase in under and over investment. By examining

10 the influence of topic-specific CSRDs on investment efficiency, the results show that CSRD related to

11 employees and environmental issues contributes to a decrease in investment efficiency. This paper

12 provides practical implications for firms that are required to reassess their CSRD strategy, for

13 policymakers that should transition from voluntary disclosure strategies to mandated CSR, and

14 investors that need to exercise greater diligence regarding the benefits of CSRD.

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16 Keywords: Underinvestment; overinvestment; CSR reporting; emerging market

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26 1. INTRODUCTION

27 Corporate Social Responsibility (CSR) is emerging as a global concern, extending beyond the

28 borders of developed nations. In this context, a survey conducted by Cicero & Bernay Public

29 Relations and YouGov1 in the MENA region reveals that an impressive 86% of business

30 leaders possess a comprehensive understanding of CSR. Notably, 60% categorically refuse to

31 collaborate with companies that do not adhere to socially responsible practices. This survey

32 underscores the increasing importance assigned to CSR practices, emphasizing the necessity

33 for companies to effectively communicate their CSR initiatives to various stakeholders

34 (Kotsantonis, Pinney, and Serafeim, 2016). This trend aligns with the recent agenda of the

35 United Nations2, which indicates that by 2030, all major companies will be constrained to

36 disclose information about these activities and provide justification if they fail to do so (SSE,

37 2015).

38 Corporate Social Responsibility Disclosure (CSRD) serves as a crucial communication tool

39 for companies aiming to convince their communities that they are fulfilling their social
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40 contract. By making their CSR commitments verifiable, companies enhance credibility and
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41 provide stakeholders with a sense of a "social contract" (Mobus, 2005). This, in turn,

42 contributes to increased corporate performance (Pham and Tran, 2020; Chen, and Xie, 2022).
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43 CSRD conveys a commitment to ethical behavior by publishing CSR information that either
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44 meets or exceeds stakeholder expectations (Brooks and Oikonomou, 2018), demonstrating

45 that goals are achieved, and CSR plans are authentic (Cahan et al., 2016).
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46 By mitigating informational asymmetry, CSRD plays a role in attenuating agency conflicts—

47 a common source of inefficiencies in the investment process. Essentially, companies can

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48 minimize information asymmetries among stakeholders by providing clear information about

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49 their sustainable commitment. This, in turn, enhances investor confidence and reduces costs
1 MENA CSR Survey Report 2020 available at
https://cbpr.me/csr/Cicero_and_Bernay_x_YouGov_First_Annual_MENA_CSR_Survey_Report_2020_English.
pdf
2 Transforming our world: the 2030 Agenda for Sustainable Development

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50 associated with potential agency conflicts. The reduction in information asymmetry holds the

51 promise of fostering a more transparent environment.

52 To date, numerous empirical investigations have been conducted to examine the effects of

53 Corporate Social Responsibility Disclosure (CSRD) on various organizational outcomes (Ali

54 et al., 2023). These outcomes include enhancing corporate image (Dhaliwal et al., 2014),

55 mitigating corporate risk (Flammer, 2015), strengthening legitimacy (Marquis and Qian,

56 2014; Chan, Watson, and Woodliff), and providing a form of ‘insurance’ (Matsumura,

57 Prakash, and Vera-Mun˜oz, 2014). From this perspective, an increase in CSRD is associated

58 with an enhancement in investment efficiency.

59 Contrary to the aforementioned, another strand of literature shows a dark side of CSRD.

60 Indeed, CSRD highlights that CSR project financing does not necessarily maximize

61 shareholders' profit, as companies may allocate their resources to projects that do not

62 maximize profitability (Vance, 1975), thus creating investment inefficiency (Preston and

63 O’Bannon, 1997). Furthermore, some companies tend to focus on aspects of CSR that are
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64 easier to communicate or that improve their brand image while neglecting more important
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65 issues (Eccles et al., 2014). Moreover, companies can use CSRD to create the illusion of

66 transparency while downplaying real issues by selectively choosing the information they
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67 disclose, thereby influencing stakeholder perception. From this perspective, CSRD may serve
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68 as a source of investment inefficiency.

69 To address this controversy, this paper proposes to examine whether CSRD affects investment
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70 efficiency. Several studies have explored this question (Zhong and Gao, 2017; Anwar and

71 Malik, 2020). However, these studies have some limitations. First, most of them were carried
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72 in a relatively early period, predating the COVID-19 pandemic, which had a significant
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73 impact on CSR practices (Khanchel et al., 2023a, b). This highlights the necessity to update

74 the results of these studies to reflect changing economic and social contexts.Second, these

75 studies do not distinguish between the specific components of CSR, whereas each CSR-

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 76 related activity can have different impacts on investment decisions. It is crucial to analyze

77 each component separately to fully understand how it influences investment efficiency. Third,

78 these studies focused on a specific context (Zhong and Gao, 2017; Anwar and Malik, 2020)

79 leading to the limited applicability of their results due to variations in CSRD standards across

80 countries and the influence of each country’s institutional framework on investment

81 efficiency. Specifically, the MENA region presents an interesting context to investigate one

82 important outcome of CSRD; investment efficiency for many reasons. First, CSRD initiatives

83 in the MENA region are evolving in response to government regulations, stakeholder

84 pressure, and international best practices (ElGammal, El-Kassar and Canaan Messarra,

85 2018). Firms keep abreast of the latest CSRD requirements to align with local and

86 international standards (Lythreatis, et al, 2019; Jamali et al, 2020; El-Bassiouny,

87 2020).Second, the economies of some MENA countries (especially the Gulf Cooperation

88 Council (GCC))heavily rely on commodity prices, particularly oil. Fluctuations in oil prices

89 can influence investment decisions and their subsequent efficiency. Overinvestment is more
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90 likely to occur during periods of high prices, followed by underinvestment during periods of
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91 declining prices (Khandelwal et al., 2016; Kandil, 2016). Third, political stability in the

92 MENA region varies considerably. Some countries (such as Syria, Yemen, Libya, Iraq,
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93 Lebanon, Egypt, Tunisia, Algeria, Bahrain and Jordan) experience political instability, leading
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94 to uncertainties that can discourageinvestment. Other countries (such as United Arab Emirates

95 (UAE), Oman, Qatar, Kuwait, Morocco and Israel) are more politically stable and thus
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96 encourage investment, sometimes to excessive levels (AlShammari et al., 2023; Khanchel

97 et al., 2023; Lassoued et al., 2023). Fourth, regional conflicts, inadequate infrastructure,
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98 corruption, volatile commodity prices (such as oil), and economic uncertainty negatively
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99 affect investment efficiency (International Monetary Fund (IMF) 2018), and countries in

100 this region are still looking for solutions to this issue.

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101 Subsequently, the aim of this paper is to examine the effect of CSRD on investment efficiency

102 under the overinvestment and underinvestment scenarios in a sample of firms from MENA

103 countries.

104 Therefore, our study focuses on an analysis of 273 firms operating in ten MENA countries

105 (Qatar, Bahrain, Tunisia, Emirates, Saudi Arabia, Oman, Jordan, Morrocco, Kuwait, and

106 Egypt) during the period from 2010-2022.

107 This paper makes several contributions to the literature on CSRD. First, early research on this

108 topic focused on risk management (Khanchel and Lassoued, 2022), and financial performance

109 (Busch and Friede, 2018; Magrizos et al., 2021; Fahad and Busru, 2021), we expand upon this

110 line of research by demonstrating that CSRD also significant impacts investment efficiency.

111 Second, distinguishing between overinvestment and underinvestment, our study allows for an

112 examination of which scenario is more influenced by CSRD this provides more

113 comprehensive insights into resource allocation, risk management, and investment

114 opportunities enabling more informed decision-making and contributing to long-term

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115 financial stability and growth. Third, to the best of our knowledge, only a few studies have
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116 focused on content analysis to measure CSRD (Cannon et al., 2020), and limited studies have

117 concentrated on Topic-specific CSRD (Cannon et al., 2020). Our contribution extends these
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118 studies by relying on the Python program for measuring CSRD. Python's simplicity, extensive
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119 libraries, natural language processing and machine learning capabilities, community support,

120 and versatility make it a powerful and advantageous choice for content analysis to measure
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121 CSRD across a wide range of applications used by previous studies.

122 The remainder of this paper is structured as follows. Section 2 presents the literature review
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123 and develops the research hypotheses. Section 3 presents the empirical analysis. Section 4
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124 reports and discusses the empirical findings, and Section 5 concludes the paper.

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125 2. LITTERATURE REVIEW

126 Theoretically, two opposing viewpoints are proposed to explain the effect of CSRD on

127 investment decisions. The first perspective draws insights from legitimacy theory, while the

128 second is grounded in agency theory.

129 Legitimacy theory (Cormier and Gordon, 2001; Deegan, 2002; Haniffa and Cooke, 2005)

130 provides a suitable framework for elucidating the bright side of CSRD on investment

131 efficiency. CSRD significantly contributes to enhancing the efficiency of investments through

132 multifaceted mechanisms. Firms are motivated to maintain their perceived legitimacy within

133 society and among various stakeholders. By publicly disclosing their CSR initiatives, firms

134 can explicitly demonstrate their commitment to addressing societal and environmental

135 concerns, thereby reinforcing their perceived legitimacy (Chan, Watson and Woodliff, 2014).

136 Consequently, this enhanced legitimacy fosters greater trust and support from stakeholders,

137 including investors (Hooghiemstra 2000; Deegan, 2002).

138 Moreover, an increasing number of investors are assigning substantial importance to

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139 sustainability and social responsibility criteria in their investment decisions (Khanchel,
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140 Lassoued and Baccar, 2023). CSRD serves as a tool to alleviate legitimacy pressure for

141 socially responsible investors, attracting them to corporations dedicated to responsible

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142 practices (Holder-Webb, Cohen and Wood, 2009). This alignment often leads to more
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143 efficient financing arrangements, as these investors are more inclined to support projects

144 aligned with long-term sustainability objectives.

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145 Additionally, CSRD practices play a pivotal role in mitigating the reputational risks

146 associated with unethical or irresponsible corporate conduct (Khanchel and Lassoued, 2022).
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147 Unexpected revelations of unethical CSR practices can cause significant damage on a
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148 company's reputation, potentially dissuading investors. The strategic implementation of

149 CSRD strategies serves as a preventive measure against such risks, safeguarding corporate

150 reputations and instilling investor confidence. Moreover, CSRD imposes the imperative for

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151 companies to systematically assess and proactively manage sustainability-related risks.

152 Through the identification and mitigation of potential environmental, social, and governance

153 (ESG) risks, firms can avert costly disruptions associated with unresolved ESG issues. The

154 implementation of proactive risk management measures significantly contributes to the

155 overall efficiency of investments by preemptively addressing potential problems.

156 Conversely, following agency theory, CSRD is expected to be negatively associated with

157 investment efficiency, thus highlighting the dark side of CSRD. Specifically, CSDR may

158 increase a conflict of interest between managers and shareholders (Krüger, 2015), especially

159 if CSRD is not complete or accurate (Brooks and Oikonomou, 2018). In many cases,

160 managers control the CSRD strategy by selecting only the positive aspects of their

161 sustainability practices to disclose, which amplifies information asymmetry (Cho et al., 2010).

162 Consequently, shareholders are not fully informed about the issues and challenges the

163 company faces, and investment inefficiencies increase. Additionally, as there aren’t CSRD

164 standards in many cases, divergences in how companies report their CSR performance are
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165 observed. CSRD also may not be public or audited, especially in countries with weaker
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166 institutional frameworks. Shareholders cannot successfully evaluate CSRD, thereby

167 generating opacity that hinders decision-making (Roberts, 1992). Furthermore, CSRD is
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168 based on different pillars, and each pillar has many dimensions. This leads to many complex
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169 indicators whose shareholders find challenging to fully interpret (Khanchel and Lassoued,

170 2023), introducing enough uncertainty leading to ineffective investment choices (Brooks and
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171 Oikonomou, 2018). Then, managers have enough incentives to manipulate CSRD (Masulis

172 and Reza, 2015), creating a non-genuine perception of the firm about future investment
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173 opportunities, especially when stakeholders are confident (or naïve) (Sinclair-Desgagné and
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174 Gozlan, 2003).In line with this, to satisfy their personal interests and gain private benefits,

175 managers focus on how CSR increases short-term results (Jiraporn and Chintrakarn, 2013).

176 Subsequently, they engage in excessive CSR activities (Zhou, 2022), and consequently, they

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177 overinvest in CSRD to avoid immediate negative impacts on stock prices. However, excessive

178 CSRD is a value-destroying project as it exhausts firms’ resources (Campbell, 2007). This can

179 lead to inefficiency in resource allocation, negatively affecting investment efficiency.

180 Firms in emerging contexts such as the MENA region may not potentially benefit from CSRD

181 for various reasons. First, the advantages of CSRD may be less visible, as the MENA region

182 is characterized by a weak institutional framework (Khanchel et al., 2022). Second, CSRD is

183 not sufficiently standardized, lacking guidelines and audit or assurance of reports in most

184 countries (ElGammal, El-Kassar and Canaan Messarra, 2018). Third, CSR activities are not

185 sufficiently covered by the media in countries of this region (Elzahaby, 2023). This, in turn,

186 extends limited information, which does attenuate information asymmetry, causing negative

187 effects on investment efficiency.

188 Based on the preceding discussion, we formulate the first hypothesis:

189 H1: CSRD is negatively associated with investment efficiencyin MENA countries’firms.

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191 Previous studies show that overinvestment and under-investment are significantly negatively
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192 associated with the efficiency of the project (Liu and Bredin, 2010; Fu, 2010). Thus, it is

193 relevant to investigate the impact of CSRD on overinvestment and under-investment

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194 separately for several reasons. First, while both overinvestment and underinvestment yield
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195 inefficiencies in corporate investment, the results of overinvestment are more severe in

196 comparison to underinvestment (Fu, 2010; Cho et al., 2017). Second, overinvestment arises
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197 due to conflicts of interest in the allocation of free cash flow between CEOs and shareholders,

198 whereas underinvestment is predominantly induced by information asymmetries within the

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199 capital market (Richardson, 2006; Degryse and De Jong, 2006). Third, the consequences of
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200 the increased demand for resources for CSR activities will vary in the scenarios of under-

201 investment and over-investment (Zhong and Gao, 2017).

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202 Underinvestment occurs when managers refrain from pursuing projects with a positive net

203 present value or highly profitable opportunities. By overlooking such projects, CEOs are

204 referred to as passive managers (Goergen and Renneboog, 2001). CEOs may be inclined

205 towards minimizing risks, reducing uncertainty, or simply lacking the ability to identify,

206 assess, or secure valuable investment prospects (Brealey et al., 2008). The adoption of passive

207 managerial behaviors is typically driven by a desire to avoid uncertainty and potential errors

208 in decision-making (Voicu, 2013). Furthermore, underinvestment is caused by information

209 asymmetries in the capital market. Thus, signaling theory (Ross, 1977; Spence 1976) and

210 agency theory (Jensen and Meckling, 1976) may explain the effect of the CSRD on

211 underinvestment. According to signaling theory, CSRD decreases underinvestment by

212 reducing uncertainty surrounding a company's activities and enhances the confidence of

213 investors and stakeholders (Jizi, Nehme and Salama, 2016). Firms reporting their CSR

214 practices face reduced information asymmetry (Moratis, 2018; Yekini and Jallow, 2012).

215 Consequently, firms use CSRD to show their inherent quality, specifically their commitment
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216 to environmental and social concerns, to stakeholders (Naqvi et al., 2021).

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217 However, according to agency theory, CSRD increases underinvestment by amplifying

218 information asymmetry. More precisely, information asymmetry causes two common
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219 frictions, namely adverse selection and moral hazard, leading to underinvestment (Zhong and
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220 Gao, 2017). On one side, firms may opt for selective communication about their CSR

221 initiatives, emphasizing the positive aspects while downplaying challenges or problems
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222 (Khanchel and Lassoued, 2022). This creates an information asymmetry where external

223 stakeholders lack a complete and balanced view of the company's CSR performance (Maquis
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224 and Qian, 2014).This amplifies adverse selection, which, in turn, leads to underinvestment.
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225 On the other side, CSRD can serve as a tool for some firms to engage in greenwashing, which

226 involves misleadingly presenting initiatives as more environmentally friendly or socially

227 responsible than they truly are (Khanchel, Lassoued and Gargouri, 2023). Stakeholders,

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228 lacking a comprehensive understanding of internal operations, might be misled, leading to a

229 moral hazard that, in turn, amplifies underinvestment problems.

230 In the MENA region, initiatives for CSRD reforms are driven more by international

231 organizations' pressure than by public awareness of either CSR importance or media coverage

232 (Ghassab,Tiltand Rao, 2024). CSR in the MENA region is still in an embryonic stage and is

233 unstandardized and uncontrolled (Buallay, 2022). Consequently, CSR does not help reduce

234 information asymmetry, which amplifies underinvestment.

235 Thus, we formulate the second hypothesis.

236 H2: CSRD is associated with underinvestment in MENA countries’ firms.

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238 Overinvestment has its origins in Jensen's free cash flow theory (Jensen, 1986). Free cash

239 flow refers to the surplus cash beyond what's necessary to sustain existing assets and finance

240 all new investment projects with positive net present values when discounted at the relevant

241 cost of capital (Jensen, 1986). Overinvestment, on the other hand, can be defined as the
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242 expenditure required to maintain current assets, support all new projects with positive Net
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243 Present Value (NPVs), and cover various atypical investment endeavors, which may include

244 options for future investments. Overinvestment arises from conflicts of interest regarding the
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245 allocation of free cash flow between managers and shareholders (Richardson, 2006; Degryse
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246 and De Jong, 2006).

247
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248 According to agency theory (Jensen and Meckling 1976), excess CSR demanded by non-

249 shareholders can negatively impact firms in various ways. For example, (a) Engaging in
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250 CSRD incurs additional costs for the organization (Gupta and Das, 2022). The competition for
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251 resources between CSR activities and other company operations intensifies, potentially

252 resulting in the internalization of specific costs and the redistribution of resources within the

253 organization (Heinkel et al., 2001; Moser and Martin, 2012); (b) CSRD exerts pressure on

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254 companies to allocate investments towards environmental and social initiatives, amplifying

255 agency problems (Brooks and Oikonomou, 2018); and (c)Companies need, in many cases, to

256 implement extra environmental and social measures to meet the expectations of stakeholders

257 due to the CSRD (Hung and Wang, 2014).

258 The GCC countries heavily depend on oil and gas activities and revenues. The CSRD strategy

259 at the firm level might indicate significant investments in CSR activities (such as product

260 innovation, acquisition of non-polluting materials, philanthropic actions) that are not

261 necessarily profitable. Managers are compelled to undertake CSR to meet stakeholder

262 requirements (international organizations, regulators, activists) at the expense of shareholders.

263 This is particularly possible with the underdevelopment or even the absence of green

264 financing in these countries. Additionally, managers may be inclined to engage in eco-

265 investments to enhance their reputation or increase the firm size, using these investments to

266 expropriate shareholders. Moreover, as non-GCC countries are grappling with urgent

267 economic challenges such as financial stability, economic development, and job creation,
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268 companies are more focused on these immediate priorities rather than on CSRD, which may
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269 be perceived as a secondary concern. Consequently, firms invest free cash flows in projects

270 aimed at addressing these challenges, leading to overinvestment. Therefore, we formulate the
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271 third hypothesis.

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272 H3: CSRD is positively associated with overinvestment in MENA countries’ firms.

273 Table 1 summarizes literature focusing specifically on CSR disclosure in relation to

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274 investment efficiency.

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280 Table 1. Literature Review of the impact of CSRD on investment efficiency

Authors Sample (data) Main results

Zhong and Gao (2017) 6,546 Chinese firm-year A significant positive association between
observations (2010-2013). CSRD and investment efficiency was found,
especially for the sub-sample of firms that over-
invest and those with lower financial reporting
quality.
Fakhari et al. (2017) 90 firms listed on the Tehran CSRD enhances investment efficiency.
Stock Exchange (2010 to 2015).
Zamir et al.(2020) 381 firms across nine Asian CSRD is positively associated with investment
emerging markets: China, India, efficiency by reducing underinvestment for the
Indonesia, Malaysia, Pakistan, the largest firms. CSRD has no effect on
Philippines, South Korea, Taiwan, overinvestment.
and Thailand (2015–2017 period).
Liuand Tian (2021) 678 Chinese firms (2004 to 2013). Mandatory CSRD decreases investment
inefficiency, especially overinvestment.
Huang et al. (2023) 1843 Chinese-listed firms (2010 CSRD increases investment efficiency.
to 2019).
Makosa et al. (2020) 105,015 Chinese firm-years Mandatory CSR disclosure improves investment
(2003-2016). efficiency, particularly mitigating
overinvestment.
Kouaib (2022) 25 Saudi firms indexed on the ESG disclosure improves investment efficiency
Saudi Exchange (2014-2021). by affecting under- and over-investment.
Ellili (2022) 30 United Arab Emirates listed A significant positive association between ESG
firms (2010–2019) disclosure and investment efficiency was found,
particularly for underinvestment.
281 3. MATERIALS AND METHODS
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282 3.1. Sample and Data

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283 Our initial sample includes all publicly listed non-financial firms in the MENA region's

284 financial markets from 2010 to 2022. We selected companies from ten distinct sectors and ten
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285 different countries, namely Qatar, Bahrain, Tunisia, the United Arab Emirates, Saudi Arabia,
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286 Oman, Jordan, Morocco, Kuwait, and Egypt. Subsequently, we retained observations with

287 sufficient available data. These ten countries are included because they are at the forefront of
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288 CSRD in the MENA region. Some countries have been excluded for one main reason:

289 violation of human rights. More specifically, ongoing conflicts and wars are not in line with
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290 sustainability commitment, so Yemen, the Syrian Arab Republic, Libya, Algeria, Djibouti, the

291 Arab Republic of Iran, the Islamic Republic of Iraq, Lebanon, West Bank and Gaza, and
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292 Israel are excluded.

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293 The initial sample comprises 4,941 firm-year observations. We excluded 1,392 observations

294 that lacked either financial data or annual report information. Consistent with prior research,

295 we excluded financial and insurance firms due to their distinct investment behavior influenced

296 by regulatory factors. We then matched our hand-collected annual reports, obtained from the

297 companies' websites, with financial data sourced from DataStream. Macroeconomic data were

298 collected from the World Bank website. After this screening process, our final sample consists

299 of 273 firms observed from 2010 to 2022 (3,549 firm-year observations). Table 2 presents the

300 sample by country and by industry.

301 Table 2. Sample distribution

Panel A: Sample distribution by industry

Industries No of companies Percent
Basic Materials 22 8
Consumer discretionary 48 17.6
Consumer Staples 36 13.2
Energy 11 4
Health Care 13 4.8
Industrials 67 24.6
Real Estate 51 18.7
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Technology 6 2.2
Telecommunication 12 4.4
Utilities 7 2.57
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Total 273 100%

Panel A: Sample country
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Country No of companies Percent

Qatar 19 6.9
Bahrain 15 5.4
Kuwait 31
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11.3
Oman 2
Tunisia 29 0.7
Morocco 26 10.6
Saudi Arabia 46 9.5
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Egypt 8 16.8
Jordan 76 3
UAE 21 27.8
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Total 273 100%

Source: Authors creation
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Note: This table presents the distribution of the sample by industries and countries

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302

303 3.2. Variables measurement

304 Dependent variable: Investment efficiency

305 We adopt Richardson's approach (2006) to assess corporate investment efficiency.

306 Accordingly, we establish an investment regression model that incorporates a positive NPV

307 for new projects. We refer to this as an estimate of new investments. Additionally, we

308 consider the residual errors obtained from the model, which represent inefficient investment

309 within the total investment expenditure.

310 In this study, we focus on both the magnitude and direction of investment inefficiency

311 (INV_EFF). When assessing the intensity of investment inefficiency, we consider the absolute

312 values of the residuals (ABS_INV). The higher this absolute value, the more pronounced the

313 level of investment inefficiency.

314 Regarding the direction of investment inefficiency, we employ two variables: positive

315 residuals to measure overinvestment (OVER_INV) and the negative residuals to assess
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316 underinvestment (UNDER_INV). It's essential to note that distinguishing between

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317 overinvestment and underinvestment is valuable due to their distinct underlying causes.
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318 Overinvestment typically stems from agency problems, whereas underinvestment often arises

319 from information asymmetry in the capital market.

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320 Independent variable: CSRD

321 The independent variable, CSRD, refers to the extent of CSRD found within annual reports.
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322 We define CSR_TOPIC as topic-specific CSRD, specifically including information related to

323 the environment (CSR_ENV), social issues (CSR_SOC), human rights concerns (CSR_HR),
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324 and employee-related matters (CSR_EMPL). In addition, we introduce the variable

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325 CSR_REPORT as a proxy for overall CSRD, computed as the sum of CSRDs across all

326 topics:

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327 CSR_REPORT =CSR_ENV + CSR_SOC +CSR_HR +CSR_EMPL (1)

328 We employ textual analysis to construct a measure of CSRD across various CSR topics. The

329 use of textual analysis to assess CSRD has become increasingly prevalent in recent studies

330 (Loughran and McDonald, 2016; Cannon et al., 2020). However, only a few studies have

331 specifically focused on the disclosure of particular aspects of CSR, as seen in Cannon et al.

332 (2020).

333 In our study, we adopt a content analysis approach, which requires examining whether

334 specific variables were addressed in a company's reporting. While Nilipour et al. (2020)

335 suggest that sustainability reports may contain misleading information that shareholders might

336 perceive as an inaccurate portrayal of a company's sustainability status, Unerman (2000)

337 argues that annual reports serve as valuable sources for obtaining a company's CSR

338 information. Annual reports are highly regarded among company documents because they

339 provide valuable information for shareholders to assess a firm's performance. We employ a

340 widely used methodology found in academic literature (Pencle and Malaescu, 2016;
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341 Benlemlih and Bitar, 2018; El Ghoul et al., 2011) to calculate CSR scores by aggregating
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342 scores from various domains. We construct CSRD indexes following the method of Pencle

343 and Malaescu (2016), referring to their comprehensive list of CSR topics, including (1)
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344 Employees (319 words), (2) Social (174 words), (3) Environment (451 words), and (4)
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345 Human rights (297 words). Their approach ensures that a broader range of CSRD subjects and

346 concerns are considered in the indexing process. Furthermore, their word lists have been
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347 validated by experts. By employing this approach, we achieve a more impartial indexing

348 method, minimizing the influence of personal biases and interpretations that often arise in
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349 manual indexing procedures. Moreover, adopting topic-specific CSRDs, as suggested by

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350 Pencle and Malaescu (2016), allows for a more comprehensive understanding of CSRDs.

351 We downloaded annual and sustainability reports from the companies' websites from 2010 to

352 2022 and processed them to generate appropriate measures of CSRD, following these steps:

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353 First, we converted the PDF files into TXT files, and then we extracted CSR-related

354 keywords using a Python program. Subsequently, we computed two measures for each firm-

355 year report: (1) the total word count and (2) the total keywords for each of the five CSR items

356 according to Pencle and Malaescu's (2016) word list. The CSRD for each item in the annual

357 report is calculated using the following formula:

𝑁𝑢𝑚𝑏𝑟𝑒 𝑜𝑓 𝐾𝑒𝑦𝑤𝑜𝑟𝑑𝑠 𝑟𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑡𝑜 𝑖𝑡𝑒𝑚𝑖𝑡
358 𝐶𝑆𝑅 𝑑𝑖𝑠𝑐𝑙𝑜𝑠𝑢𝑟𝑒 𝑓𝑜𝑟 𝑖𝑡𝑒𝑚𝑖𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝑁𝑢𝑚𝑏𝑟𝑒 𝑜𝑓 𝑤𝑜𝑟𝑑𝑠 𝑖𝑛 𝑎𝑛𝑛𝑢𝑎𝑙 𝑟𝑒𝑝𝑜𝑟𝑡𝑖𝑡

359 To validate the accuracy of our Python program, we implemented a verification process in

360 which we randomly selected 20 firms. We then conducted a manual analysis of the content in

361 three specific sections: Item 1 (social), Item 2 (environment), and Item 3 (human rights). Our

362 findings demonstrated that the software accurately identified and extracted the precise number

363 of words required in over 99 percent of cases across all three sections leading us to conclude

364 that we successfully extracted words,

365 Control variables

366 We include control variables in the regression to enhance the precision of the estimates by
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367 reducing residual variance and controlling potential biases resulting from the omission of
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368 important variables. Given the international scope of our study, we incorporate two types of
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369 control variables—firm-level and country-level variables.

370 Firm-level variables include:

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371 Firm Size (SIZE): We include firm size based on the assumption that small companies are

372 more likely to invest to increase their size, potentially engaging in value-destroying projects.
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373 Large companies, on the other hand, tend to under-invest due to increased oversight by their

374 boards of directors (Richardson, 2006).

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375 Profitability (ROA): Measured by the net income to total assets ratio, profitability is
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376 considered a control variable under the assumption that companies with high performance in

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377 the previous year are more likely to avoid inefficient investments to maintain their positive

378 performance (Khiari et al., 2023).

379 Operating Cash Flow (OCF): The availability of operating cash flows can induce managers

380 to commit to inefficient projects (Lassoued and Ben Osman, 2021). Operating cash flow is

381 measured as the cash flow from operating activities to total assets ratio.

382 Leverage (LEV): Taken into account because it plays a disciplinary role (Jensen, 1986; Stulz,

383 1990), leverage prevents companies from investing in inefficient projects. LEV is calculated

384 by dividing long-term debt by total assets.

385 Growth Opportunities (GR_OPPOR): Considering that a company with low growth

386 opportunities is considered to have investment problems and can deviate from efficient

387 investment (Lassoued and Ben Osman, 2021), GR_OPPOR is measured by the market-to-

388 book value of the company scaled by total assets.

389 Stock Return (RETURN): Introduced in our model as high values indicate investor

390 confidence and the presence of alternative financing options, contributing to efficient
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391 investment. RETURN is measured by the percent change of stock prices (Richardson, 2006).
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392

393 For country-specific control variables, we include:

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394 Control of Corruption (CONT_CORRUP): Reflecting the level of corruption control in the
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395 country. Higher levels of corruption are associated with weak governance, potentially

396 deteriorating oversight channels, amplifying agency conflicts, and increasing managers'
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397 tendencies to expropriate company resources. The Corruption index compiled by Kaufman et

398 al. (2010) is used, and we anticipate that CONT_CORRUP will enhance investment
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399 efficiency (Lassoued, 2017).

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400 GDP Growth (GDP GROWTH): Measuring the economic growth of the country. Countries

401 with high economic growth are presumed to have more resources to develop and strengthen

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402 their financial systems, potentially reducing inefficiencies in corporate investment (Naeem

403 and Li, 2019).

404 Inflation Rate (INFLATION): Reflecting the inflation rate in the country. Rising prices can

405 reduce a company's real income, limiting its ability to invest efficiently during inflationary

406 periods.

407 These country-specific variables aim to capture external factors that may influence investment

408 efficiency at the national level.

409 To mitigate the potential impact of outliers, all variables are winsorized at the 1st and 99th

410 percentile levels.

411 3.3. Model specification

412 To test the impact of CSRD on investment efficiency, we perform a multivariate analysis:

413 𝐼𝑁𝑉_𝐸𝐹𝐹𝑖,𝑡 = 𝛽1𝐶𝑆𝑅_REPORT𝑖,𝑡 + 𝛽2𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝛽3𝑅𝑂𝐴𝑖,𝑡 + 𝛽4𝑂𝐶𝐹𝑖,𝑡 +

414 𝛽6𝐿𝐸𝑉𝑖,𝑡 + 𝛽7GR_OPPOR𝑖,𝑡 + 𝛽8𝑅𝐸𝑇𝑈𝑅𝑁𝑖,𝑡 + 𝛽9CONT_CORRUP𝑖,𝑡 + 𝛽10
415 𝐺𝐷𝑃𝐺𝑅𝑂𝑊𝑇𝐻𝑖,𝑡 + 𝛽11𝐼𝑁𝐹𝐿𝐴𝑇𝐼𝑂𝑁𝑖,𝑡 + ∑ Industry effects + ∑ 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝑒𝑓𝑓𝑒𝑐𝑡𝑠 +
416 ∑ 𝑦𝑒𝑎𝑟 𝑒𝑓𝑓𝑒𝑐𝑡𝑠 + 𝜀𝑖,𝑡 (2)
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417 Where:
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418 INV_EFF: Investment efficiency measured by three measures: the absolute value of residuals

of Richardson's model(ABS_INV), positive residuals (OVER_INV), and negative residuals

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419

420 (UNDER_INV).
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421 The relationship between investment efficiency and disclosure may be endogenous.

422 Investment efficiency can influence a company's decision to disclose its CSR activities, and
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423 vice versa. For example, a company that makes effective investments in sustainable projects

424 may be more inclined to disclose its CSR efforts, creating a causal link between investment
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425 efficiency and CSRD. Additionally, the disclosure of CSR activities can influence the
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426 efficiency of investments, as a company demonstrating a commitment to CSR may be better

427 perceived by stakeholders, positively impacting its long-term profitability. This, in turn, can

428 stimulate increased investment in sustainable projects, establishing a positive feedback loop.

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429 To address this issue, we use the instrumental variable technique. The instrumental variable

430 must be correlated with the endogenous variable (CSR_REPORT) and must not be correlated

431 with the regression error of the model, except for its correlation with the endogenous variable.

432 Building upon prior research, this study uses the sectoral average of CSRD as an instrument

433 (El Ghoul et al., 2011; Harjoto and Jo, 2015). CSRD at the firm level is closely associated

434 with its sector's norm, measured by the sectoral average of disclosure. However, investment

435 efficiency is not correlated with the sectoral norm of CSRD.

436 RESULTS AND DISCUSSIONS

437 Descriptive statistics

438 Table 3 provides a summary of descriptive statistics. The mean value of ABS_INV is 0.119,

439 indicating the average level of investment inefficiency. For the nature of investment

440 inefficiency, the results show that the mean value of overinvestment (OVER_INV) is 0.108,

441 while the mean value for the underinvestment scenario (UNDER_INV) (in absolute values) is
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442 0.051.The overall CSR_REPORT has a mean value of 18.4% and a standard deviation of

443 8.7%, suggesting significant variation among firms in terms of CSRD. Specifically, the
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444 distribution ranges from 0% to 38.8%. Furthermore, based on word frequency analysis, we
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445 observe that the topic-specific CSRD measure related to environmental matters (CSR_ENV)

446 is the most addressed in the annual reports of the sampled firms. Conversely, topic-specific
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447 CSRD related to human rights matters is the least frequently discussed topic in the firms'

448 annual reporting.

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449 The average firm size and ROA are 12.21 and 5.2%, respectively. The mean of operating cash

450 flow is 0.067. The firm's leverage varies from 0% to 448% of its assets, with an average of
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451 33.8%, indicating that some companies have substantial long-term debt that exceeds their
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452 total assets. The mean GR_OPPOR is 0.083, reflecting limited growth opportunities for

453 companies in the MENA region. This also suggests that the market values of these companies

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454 are lower than their book values. Furthermore, firms in our sample experience an average

455 annual stock return loss of 1.2%, reflecting the ongoing decline in the market value of these

456 companies. For the country-specific control variable, the mean for control of corruption is

457 0.067, while GDP growth is on average 2.675%. For inflation, the maximum is 11.265 and

458 the mean is 2.4.

459 Table 3 also presents the correlation matrix, demonstrating low correlations among all

460 independent variables, suggesting no serious multicollinearity issues in this study. However,

461 there is a high correlation between investment efficiency variables; therefore, these variables

462 are included in the estimations separately.

463
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464 Table 3. Descriptive statistics and Correlation matrix
Variable Mean Std. Dev. Min Max (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17)
(1) ABS_ INV 0.119 0.149 0.0007 0.782 1
(2) UNDER_INV 0.051 0.11 00.0007 0.646 0.637* 1
(3)OVER_INV 0.054 0.108 0.001 0.782 0.568* - 1
0.229*
(4) CSR_REPORT 0.184 0.087 0 0.388 -0.014 0.035 - 1
0.042*
(5) CSR EMPL 0.046 .022 0 0.096 0.005 0.051* -0.031 0.973* 1
(6) CSR ENV 0.055 0.029 0 0.129 -0.013 0.030 -0.039 0.950* 0.913* 1

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(7) CSR SOC 0.048 0.023 0 0.11 -0.023 0.029 - 0.946* 0.894* 0.830* 1
0.050*
(8) CSR HR 0.035 0.018 0 0.071 -0.027 0.024 -0.040 0.955* 0.922* 0.854* 0.915* 1
(9) SIZE 12.21 1.938 8.205 16.793 - - - 0.485* 0.440* 0.433* 0.498* 0.497* 1
0.139* 0.049* 0.107*

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(10) ROA 0.052 0.074 -0.183 0.301 0.063* 0.122* - 0.179* 0.183* 0.145* 0.181* 0.184* 0.169* 1
0.067*
(11) OCF 0.067 0.089 -0.176 0.338 -0.028 -0.032 0.019 0.131* 0.142* 0.110* 0.124* 0.130* 0.141* 0.511* 1
(12) LEV 0.338 0.69 0 4.485 - - -0.017 0.145* 0.130* 0.145* 0.146* 0.129* 0.327* - - 1
0.062* 0.051* 0.125* 0.106*

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(13)GR_OPPOR 0.083 0.074 0 0.385 0.048* 0.038* 0.054* 0.108* 0.111* 0.086* 0.111* 0.113* -0.026 0.315* 0.329* - 1
0.202*
(14) RETURN -0.012 0.325 -0.828 1.02 -0.001 0.050* - 0.091* 0.091* 0.090* 0.084* 0.080* 0.069* 0.239* 0.134* -0.021 0.225* 1
0.047*
(15)CONT_CORRUP 0.067 0.322 -0.614 1.104 -0.14* - -0.020 -0.001 -0.024 -0.004 0.007 0.023 0.178* - - 0.088* -0.019 0.047* 1
0.129* 0.066* 0.067*

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(16)GDPGROWTH 2.675 4.187 -8.855 19.047 0.033 0.027 -0.018 - - - - - 0.013 0.108* 0.019 - 0.052* 0.096* 0.079* 1.
0.134* 0.112* 0.135* 0.122* 0.147* 0.064*
(17) INFLATION 2.4 2.496 -2.425 11.265 0.138* 0.107* -0.003 - - - - - - 0.138* 0.033* -0.008 0.024 - - 0.070* 1
0.061* 0.045* 0.077* 0.042* 0.065* 0.038* 0.080* 0.305*
r re
Source: Authors creation Notes: This table presents the descriptive statistics and the correlation matrix, * denote the significance levels of 5%
e
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466 Main findings

467 Table 4 presents the results of the regression analysis, estimating the impact of CSRD on

468 investment efficiency. In Column (1), we present the results for investment efficiency

469 intensity (ABS_INV), while columns (2) and (3) display the results for investment efficiency

470 direction (UNDER_INV and OVER_INV respectively).

471 Regarding investment efficiency intensity, our findings show that the coefficient of CSRD is

472 positive and statistically significant at the 10% level, suggesting that CSRD reduces

473 investment efficiency. However, when considering investment efficiency direction, we

474 observe that CSRD increases underinvestment and decreases overinvestment.

475 Table 4. Impact of overall CSRD score on investment efficiency

Intensity of investment efficiency Direction of investment

efficiency
ABS_ INV UNDER_INV OVER_INV
(1) (2) (3)
CSR_REPORT 0.820* 0.974** -0.543*
(0.490) (0.412) (0.317)
SIZE -0.0302*** -0.0208*** -0.00549
(0.00637) (0.00537) (0.00375)
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ROA 0.0588 0.183*** -0.169***

(0.0755) (0.0681) (0.0652)
OCF -0.00415 -0.00832** 0.0974*
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(0.00444) (0.00384) (0.0510)

LEV -0.0850 -0.256*** 0.00529
(0.0998) (0.0810) (0.00398)
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GR_OPPOR -0.00479 0.00886 0.202**

(0.0138) (0.0106) (0.0820)
RETURN 0.00457*** 0.00377*** -0.0110
(0.00158) (0.00131) (0.0104)
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CONT_CORRUP 0.259*** 0.109*** 0.00122

(0.0451) (0.0390) (0.0234)
GDPGROWTH 0.00587** 0.00287 0.000410
(0.00264) (0.00216) (0.00157)
INFLATION 0.0130 0.0195 0.00305
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(0.0308) (0.0267) (0.00201)

Constant 0.820* 0.974** 0.179***
(0.490) (0.412) (0.0411)
Industry effects yes yes yes
Country effects yes yes yes
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Year effects yes yes yes

Observations 1,970 1,979 1,979
Source: Authors creation
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Notes: This table presents the results of the overall CSRD score on investment efficiency of MENA region non-
financial listed companies. Robust standard errors in parentheses, ***, **, and * denote the significance levels
of 1%, 5%, and 10% respectively.
476

22
477 These findings suggest that CSRD contributes to a decrease in investment efficiency,

478 specifically manifesting as underinvestment practices, thereby confirming hypotheses H1 and

479 H2. Our results align with the adverse impact of CSRD as posited by agency theory and

480 provide various insights into these findings. One justification arises from the additional

481 agency conflicts emerging from diverse stakeholders with conflicting objectives, leading to

482 suboptimal investments (Krüger, 2015). For instance, employees and their unions may seek to

483 maximize wages and job stability, while associations may advocate for environmentally

484 friendly practices, even if they entail additional costs (McWilliams et al., 2006).As a result,

485 CSRD highlights the need for the company to bear greater expenses, potentially reducing

486 profitability, which contradicts the shareholders' objective of profit maximization (Vance,

487 1975). Additionally, CSRD is not always public or audited, especially in the context of

488 MENA countries that encourage firms to undertake and disclose CSR activities (Elzahaby,

489 2023). However, firms in some of these countries, particularly those with weaker institutional

490 frameworks, release reports that are often vague and lack substantial information (ElGammal
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491 et al., 2018; Buallay, 2022). Moreover, unlike in developed countries, there is limited public
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492 awareness and minimal media coverage of CSR issues in MENA countries, creating
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493 informational asymmetry that provides managers with the opportunity to prioritize projects

494 aligned with their interests under the guise of social responsibility (McWilliams, Siegel and
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495 Wright, 2006). Furthermore, in connection with the informational asymmetry surrounding

496 CSR activities, firms opt for symbolic compliance, giving rise to greenwashing as a potential
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497 opportunistic behavior. Consequently, many firms emphasize environmental claims by

498 establishing an eco-friendly reputation, even when the actual actions do not align with the
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499 messages being conveyed (Jo and Na, 2012; Chatterji et al., 2009).
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500 In the context of the overinvestment scenario, CSRD exhibits positive effects, indicating that

501 it helps to avoid overinvestment and prevents MENA firms from implementing projects with

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502 negative NPVs. As a result, hypothesis H3 is rejected. One plausible explanation is that

503 CSRD enables investors to make more informed assessments of economic risks (Martínez-

504 Ferrero and García-Sànchez, 2017; Sharfman and Fernando, 2008; Suto and Takehara, 2017).

505 This heightened transparency leads to a decrease in overinvestment. Furthermore, when a

506 company publicly reports its CSR activities, it sends a signal to its shareholders (Raimo et al.,

507 2022). CSRD information is valuable for shareholders to closely monitor the company's

508 investments (Zhang and Yang, 2021). If overinvestment or excessive spending emerges,

509 shareholders react by requesting explanations or exerting pressure.

510
511 Additional evidence: Topic-specific CSRD and investment efficiency

512 To refine our analysis and provide more explanation for our findings, we conduct an

513 individual examination of Topic-specific CSRDs. It is important to note that companies may

514 exhibit varying degrees of interest in different CSR reporting activities (Gosselt et al., 2019),

515 influenced by their industry and the pressures from stakeholders (Lassoued and Khanchel,
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516 2022). For instance, a company might prioritize reporting environmental activities over social
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517 ones or vice versa. In such cases, employing an aggregated measure of CSRD could

518 potentially hide the distinct effects of each activity on investment efficiency (Dabbebi et al.,
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519 2022).
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520 Therefore, deconstructing CSRD measures provides better insight into a company's CSRD

521 strategy and enables us to assess whether firms’ reporting in some fields over others affects
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522 investment efficiency. Table 5 presents the results of Equation (2), where we regress each

523 topic-specific CSRD on investment efficiency. Our main findings reveal that, in terms of
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524 investment efficiency intensity, CSRD related to employees and environmental issues
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525 contributes to a decrease in investment efficiency. These effects hold true when considering

526 the underinvestment scenario. However, in the overinvestment scenario, the four CSR topics

527 exhibit negative signs significant at the 10% level.

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528 Table 5. Additional evidence: Impact of Topic-specific CSRDs on investment efficiency

Intensity of investment efficiency Direction of investment efficiency

ABS_ INV UNDER_INV OVER_INV
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
CSR_EMPL 2.638* 3.116** -2.080*
(1.559) (1.280) (1.213)
CSR_ENV 1.726* 2.065** -1.683*
(0.992) (0.815) (0.985)
CSR_SOC 5.630 6.662* -2.551*
(3.855) (3.604) (1.525)
CSR_HR 11.90 13.93 -2.641*
(10.31) (10.21) (1.564)
SIZE -0.0268*** -0.0253*** -0.0432*** -0.0516* -0.0168*** -0.0149*** -0.0362** -0.0458* -0.00665** -0.00751*** -0.00199 -0.00443

ion
(0.00454) (0.00382) (0.0157) (0.0269) (0.00377) (0.00314) (0.0146) (0.0267) (0.00323) (0.00291) (0.00563) (0.00431)
ROA 0.0468 0.0721 0.0536 0.0351 0.169** 0.198*** 0.180** 0.157 -0.161** -0.181*** -0.162** -0.167**
(0.0778) (0.0722) (0.0818) (0.104) (0.0683) (0.0633) (0.0804) (0.109) (0.0649) (0.0652) (0.0674) (0.0654)
OCF -0.00532 -0.00533 -0.00269 0.00632 -0.00969*** -0.00982*** -0.00641 0.00417 0.102** 0.0936* 0.0970* 0.0977*

ers
(0.00424) (0.00421) (0.00565) (0.0119) (0.0034) (0.00342) (0.00557) (0.0125) (0.0516) (0.0505) (0.0521) (0.0512)
LEV -0.0516 -0.0388 -0.191 -0.324 -0.216*** -0.200*** -0.382** -0.535* 0.00620 0.00551 0.00501 0.00410
(0.0878) (0.0842) (0.166) (0.313) (0.0698) (0.0661) (0.152) (0.310) (0.00400) (0.00407) (0.00404) (0.00404)
GR_OPPOR -0.00511 -0.00612 -0.00360 0.00307 0.00841 0.00732 0.0103 0.0181 0.190** 0.191** 0.224** 0.209**

wv
(0.0135) (0.0136) (0.0152) (0.0186) (0.0102) (0.0102) (0.0131) (0.0179) (0.0775) (0.0780) (0.0925) (0.0860)
RETURN 0.00465*** 0.00452*** 0.00449** 0.00463** 0.00386*** 0.00377*** 0.00359** 0.00369* -0.0103 -0.00961 -0.0119 -0.0129
(0.00156) (0.00154) (0.00186) (0.00204) (0.00127) (0.00125) (0.00158) (0.00212) (0.0103) (0.0104) (0.0107) (0.0107)
CONT_CORRUP (0.0203) (0.0204) (0.0326) (0.0526) (0.0175) (0.0176) (0.0309) (0.0526) 0.00714 -0.00129 -0.00457 0.00516
0.256*** 0.277*** 0.273*** 0.119 0.107*** 0.129*** 0.127** -0.0520 (0.0229) (0.0236) (0.0251) (0.0232)

vie
GDPGROWTH 0.00614** 0.00575** 0.00556* 0.00642* 0.00320 0.00277 0.00245 0.00335 0.000332 0.000387 0.000519 0.000442
(0.00260) (0.00256) (0.00302) (0.00377) (0.00207) (0.00200) (0.00277) (0.00377) (0.00159) (0.00161) (0.00154) (0.00157)
INFLATION 0.00479 0.0158 0.0257 -0.00360 0.0101 0.0225 0.0344 0.00128 0.00283 0.00309 0.00319 0.00303
(0.0299) (0.0302) (0.0372) (0.0453) (0.0254) (0.0254) (0.0358) (0.0471) (0.00203) (0.00201) (0.00207) (0.00202)
r re
Industryeffects yes yes yes yes yes yes yes yes yes yes yes yes
Country effects yes yes yes yes yes yes yes yes yes yes yes yes
Yeareffects yes yes yes yes yes yes yes yes yes yes yes yes
Observations 1,970 1,970 1,970 1,970 1,979 1,979 1,979 1,979 1,979 1,979 1,979 1,979
e

Source: Authors creation.

Note: This table presents the results of sub scores of CSRD on investment efficiency of MENA region non-financial listed companies. Robust standard errors in parentheses ***, **, and *
Pe

denote the significance levels of 1%, 5% and 10% respectively.

25
530 CONCLUSION ANDMANAGERIAL IMPLICATIONS

531 The objective of this study is to investigate the impact of CSRD on investment efficiency.

532 Specifically, we test whether CSRD influences both the magnitude and direction of

533 investment efficiency. Our analysis is based on a regression model estimating unbalanced

534 panel data of 273 firms operating in ten MENA countries over the period 2010-2022.

535 Our findings show that CSRD significantly affects all aspects of investment efficiency,

536 including efficiency magnitude, underinvestment, and overinvestment. This suggests that

537 CSRD plays a substantial role in influencing investment decisions. Specifically, our findings

538 substantiate the adverse effects of CSRD, as explained by agency theory, providing multiple

539 explanations for our observations. First, agency conflicts arising from the diverse objectives

540 of stakeholders lead to suboptimal investments. The conflicting interests of multiple

541 stakeholders result in additional costs. Consequently, by disclosing CSR, firms have to incur

542 higher costs, which affect investment efficiency. Therefore, given that any factors reducing
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543 information asymmetry contribute to enhancing investment efficiency, CSRD reduces

544 investment efficiency by weakening the economic frictions caused by information

rsi

545 asymmetry; adverse selection, and moral hazard, through a non-optimal reporting strategy.
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546 Second, the quality of CSRD is often not public or audited in MENA countries which create

547 information asymmetry. Therefore, given that any factors increasing information asymmetry
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548 contribute to reducing investment efficiency, CSRD weakens investment efficiency by

549 amplifying the economic frictions caused by information asymmetry; adverse selection, and
rev

550 moral hazard, through a non-optimal reporting strategy Third, minimal media coverage

551 provides an opportunity for managers to prioritize projects aligned with their interests Finally,
er

552 given stakeholder pressure for CSRD, many firms opt for symbolic compliance, releasing
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553 reports that are often vague and lack substantial information.

26
554 Furthermore, the present study shows that CSRD acts as a mechanism preventing

555 overinvestment and discourages MENA firms from pursuing projects with negative NPVs.

556 Thus, disclosure enables investors to make more informed assessments of economic risks,

557 enhancing transparency and leading to a decrease in overinvestment. Additionally, by

558 disclosing on CSR, firms send positive signals to their stakeholders, especially shareholders

559 who perform a cost-benefit analysis of CSR reporting, emphasizing excessive spending in

560 many cases, which dissuades companies from overinvesting. Consequently, these findings are

561 expected to make valuable contributions to both the fields of investment and CSR literature.

562 For investment literature, the inclusion of additional determinants of investment efficiency,

563 such as CSRD identified in this study, enhances the complexity of such assessments.

564 Moreover, our findings introduce CSRD as a new determinant of investment efficiency. Firms

565 emphasizing CSR may experience alterations in the quality of their reporting and may risk

566 losing stakeholder support.

567 It is hoped that the findings from this study will contribute to both the investment and CSR
on

568 literature. For the investment literature, finding additional determinants of investment
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569 efficiency beyond those identified in prior studies is expected to become increasingly
ve

570 intricate. For the CSR literature, despite extensive research on CSRD in developed countries,

571 it has been relatively underexplored in studies focusing on less developed regions.
iew

572 Furthermore, the use of textual analysis, specifically Python programming, to measure CSRD

573 provides a valuable resource for effectively handling text data.

rev

574 Our results also hold significance for policymakers, investors, and firms. Policymakers in the

575 MENA region have been actively working on strengthening disclosure capabilities and
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576 harmonizing disclosure standards at both regional and international levels. The insights
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577 derived from this study should prove informative for policymakers considering the benefits of

578 CSRD. This may encourage a shift from voluntary disclosure strategies towards mandated

27
579 CSR reporting. Our results provide additional evidence for investors, emphasizing the

580 importance of closely examining CSRD as a key factor in their investment decisions. Finally,

581 firms, especially those seeking financing for future investments, should take into account

582 CSRD.

583 We acknowledge certain limitations in our study, which can offer valuable insights for

584 guiding future research endeavors. While our examination of annual reports to measure CSRD

585 is a robust approach, it is essential to recognize some inherent weaknesses in solely relying on

586 this type of report. Future research should aim to broaden our study's scope by considering

587 alternative sources of CSR information, such as websites, social media, media outlets, news

588 reports, and third-party audits and certifications. Additionally, although the textual analysis

589 technique employed ensures data replicability and validity, our study is constrained by its

590 reliance on word-based measures. This technique has its limitations; analyzing individual

591 words lacks meaningful context without accompanying sentences. Future research may

592 explore alternative textual analysis methods based on the amount of CSRD, including
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593 sentence-based analysis and proportions of a page dedicated to CSR content. Furthermore, our
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594 current measure of CSR information is word-based. However, many firms employ various
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595 forms of information dissemination. Future studies might investigate CSRDs presented in the

596 form of photographs, tables, graphs, or charts. Another potential concern is endogeneity;
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597 while our study primarily examines the causality from CSRD to investment efficiency, the

598 reverse relationship is conceivable. Implementing projects with negative net present value or
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599 forgoing projects with a positive net present value can impact a firm's cash flows and,

600 consequently, influence CSRD. Finally, our research focuses on CSRD, yet a divergence may
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601 exist between CSR performance and CSRD, potentially affecting investment efficiency in
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602 different ways. Therefore, future research could explore the impact of CSR decoupling

603 strategies on investment efficiency.

28
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