The influence of corporate social responsibility on investment efficiency and innovation

We examine two important channels through which corporate social responsibility (CSR) affects firm value: investment efficiency and innovation. We find that firms with higher CSR performance invest more efficiently: these firms are less prone to invest in negative net present value (NPV) projects (overinvestment) and less prone to forego positive NPV projects (underinvestment). We also find that firms with higher CSR performance generate more patents and patent citations. Mediation analysis indicates that firms with higher CSR performance are more profitable and valuable, consequences partially attributable to efficient investments and innovation. These results, robust to alternate model specifications, lend support to enlightened stakeholder theory.     

Corporate social responsibility and financial performance: the “virtuous circle” revisited

We examine the causal relation between corporate social responsibility (CSR) and financial performance. Consistent with past studies, we find that the two variables appear to be related when we use traditional statistical techniques. However, using a time series fixed effects approach, we find that the relation between CSR and financial performance is much weaker than previously thought. We also find little evidence of causality between financial performance and narrower measures of social performance that focus on stakeholder management. Our results suggest that strong stock market performance leads to greater firm investment in aspects of CSR devoted to employee relations, but that CSR activities do not affect financial performance. We conclude that CSR is driven more by unobservable firm characteristics than by financial performance.

Stock repurchasing and corporate social responsibility

Stock repurchases are controversial. Researchers often view the positive association between free cash flow and the volume of the stock repurchases to be in the shareholders’ interest and the positive association between executive options and stock repurchases to be in the managers’ interest. Using firms’ corporate social responsibility (CSR) ratings as a measure of ethical culture—one that increases the cost of self-serving behavior for managers— we examine whether a firm’s CSR rating is related to its stock repurchase decisions. Although the baseline regression shows a positive association between CSR and repurchases, we find that CSR amplifies the positive association between free cash flow and stock repurchases and lessens the positive association between executive options and stock repurchases. These results indicate that ethical culture might play a role in repurchase decisions: it may encourage repurchases aligned with shareholders’ interests and discourage those primarily in managers’ interest. Furthermore, we also find that high CSR firms are associated with a greater completion rate of announced repurchase programs and receive more favorable stock market reaction to their repurchase announcements.     

Corporate social responsibility and firm financial risk reduction: On the moderating role of the legal environment

Approaching the institutional environment through its regulative component, we distinguish between shareholder‐oriented and stakeholder‐oriented countries. Identifying first this classification with the distinction between common law versus civil law countries and using a large sample of 5,716 firm‐year observations that represents 1,169 individual firms in 25 countries between 2001 and 2011, we show that Corporate Social Responsibility (CSR) significantly reduces firms’ idiosyncratic risk in civil law countries but not in common law countries. Using then a more direct classification based on shareholder and employee protection scores, our findings suggest that CSR negatively affects firms’ idiosyncratic and systematic risks only in less shareholder‐oriented and more stakeholder‐oriented countries, respectively. These findings are similar in the different components of CSR with two notable exceptions: a high score in corporate governance reduces firm risk only in common law countries, and community involvement increases idiosyncratic risk in more shareholder‐oriented and less stakeholder‐oriented countries, respectively. Taken together, our results strongly support the view that the relationship between CSR and financial risk is moderated by the institutional context of the firm.     

Accounting fundamentals and CEO bonus compensation

Research indicates that there is a positive association between accounting earnings and chief executive officer (CEO) cash compensation; however, evidence also suggests that this positive association ceases to exist when earnings performance is poor or declining. This latter result has led some critics of corporate compensation policies to conclude that CEOs are not penalized for poor or declining firm performance. The purpose of this study is to further illuminate the pay-performance debate by expanding the traditional executive bonus compensation model to include a set of accounting fundamentals that prior research indicates are related to both current and future firm performance. Our results indicate that there is a highly significant relationship between accounting fundamentals and the level of and change in CEO bonus compensation. Moreover, we find a highly significant relationship between accounting fundamentals and both bonus omissions and bonus reductions. When earnings are negative or declining, we find that the above relationships remain intact. In contrast, when earnings are negative or declining, we find that the relationship between aggregate earnings and bonus compensation is weak or insignificant in most of our analyses. Taken together, our results suggest that the apparently weak relationship between accounting earnings and CEO bonus compensation (particularly when earnings are negative or declining) is partly due to the fact that the bonus compensation model excludes accounting fundamentals which are strongly associated with bonus compensation. Thus, we conclude that (i) bonus compensation is more closely tied to firm performance than critics sometimes claim and (ii) bonus compensation awarded to CEOs when earnings performance is poor is at least partially explained by the presence of favorable accounting fundamentals.     

How does the executive pay gap influence audit fees? The roles of R&D investment and institutional ownership

Using a sample of US firms from 2003–2014, this study examines how the executive pay gap affects audit fees for firms with different levels of R&D investment and institutional ownership. Consistent with managerial power theory, we find that the executive pay gap is positively associated with audit fees, and that the positive association is attenuated by intense R&D investment and higher institutional ownership. We also find that the executive pay gap more strongly affects audit fees after the passage of the 2010 Dodd–Frank Act and the PCAOB's 2012 call to identify the audit risk related to executive incentive compensation. Additional analyses show that the moderating effects of R&D investment and institutional ownership on the pay gap–audit fees association are not conditional on auditor tenure, but the moderating effect of institutional ownership is stronger for firms hiring specialist auditors. Collectively, our findings suggest that auditors consider the business context, such as innovation initiative and external monitoring, when assessing audit risk related to the executive pay gap.     

Corporate social responsibility and stakeholder governance around the world

In this paper, we examine the impact of stakeholder governance on corporate social responsibility (CSR) around the world to determine whether CSR is employed as a mechanism to mitigate conflicts of interest between managers and diverse stakeholders, or used as managerial perquisites. To examine this relation properly, we not only employ a large and extensive sample of international firms, but also control for endogeneity by using dynamic panel generalized method of moments (GMM), propensity score matching, and difference-in-difference approach. Our results suggest that stakeholder governance positively influences firms’ CSR engagement with a greater magnitude than board governance after controlling for endogeneity and other confounding factors of traditional corporate governance mechanisms, firm characteristics and national factors. Stakeholders’ influence in CSR engagement is more prevalent when investor protections and board governance are relatively weak.     

The efficiency of compensation contracting in China: Do better CEOs get better paid?

Over recent years, China adopted a number of ‘western-style’ reforms of corporate governance and executive compensation. We investigate whether boards of Chinese firms evaluate CEO ability and remunerate their CEOs accordingly, an essential tenet of efficient compensation contracting. Using Data Envelopment Analysis to measure CEO ability, we do not find any evidence that CEO ability matters in compensation contracting decisions—it does not lead to either higher pay, stronger pay-for-performance sensitivity, or a higher likelihood of equity grants. This is surprising, since we find evidence that higher ability CEOs achieve superior firm performance. In contrast, we find that powerful CEOs do not overperform, while they enjoy large abnormal pay. Overall, our results suggest that Chinese firms fail to embrace new corporate governance reforms and are unable to fully utilize the reforms’ benefits.

     

Shareholder protection and bank executive compensation after the global financial crisis

We use a hand-collected international database to analyze the change in the risk-taking incentives embedded in bank executive compensation after the onset of the global financial crisis. Our results reveal a reduction in both the risk sensitivity of stock option grants (vega) and total and cash pay-risk sensitivities in countries suffering systemic banking crises. This reduction is greater in countries with strong shareholder protection, especially in banks with good corporate governance, solvent banks, and banks that suffered a reduction in their specific investment opportunity set. The regressions control for government intervention, banking development, and crisis intensity. Our results confirm that the contracting hypothesis is more relevant in countries with stronger shareholder protection, and provide support for measures improving shareholder rights in the approval of bank executive compensation.     

Does CSR matter in times of crisis? Evidence from the COVID-19 pandemic

The debate over how firm stakeholder engagement is tied to preserving shareholder wealth has received growing attention in recent years, especially in the wake of the COVID-19 crisis. Against this backdrop, we examine the relation between corporate social responsibility (CSR) and stock market returns during the COVID-19 pandemic-induced market crash and the post-crash recovery. Using a sample of 1750 U.S. firms and two major sources of CSR ratings, we find no evidence that CSR affected stock returns during the crash period. This result is robust to various sensitivity tests. In additional cross-sectional analysis, we find some supporting evidence, albeit weak, that the relation between CSR and stock returns during the pandemic-related crisis is more positive when CSR is congruent with a firm's institutional environment. We also find that Business Roundtable companies, which committed to protecting stakeholder interests prior to the pandemic, do not outperform during the pandemic crisis. We conclude that pre-crisis CSR is not effective at shielding shareholder wealth from the adverse effects of a crisis, suggesting a potential disconnect between firms' CSR orientation (ratings) and actual actions. Our evidence suggests that investors can distinguish between genuine CSR and firms engaging in cheap talk.     

Corporate responsibility towards employees and innovation: Evidence from an emerging market

Against a background of rising labor costs and the need to build a harmonious labor–capital relationship in China, this paper focuses on non-pecuniary incentives for employees and discusses the impact of corporate social responsibility (CSR) towards employees on innovation performance. The empirical results show that CSR towards employees significantly promotes corporate innovation, and that this effect remains robust after accounting for alternative proxies and endogeneity issues. In addition, the positive effect of CSR towards employees on innovation is more significant for firms in high-tech industries, with high levels of R&D inputs and high valuation of employee collaboration. Further analysis indicates that CSR towards employees does not promote R&D investment, but does significantly improve innovation efficiency and the marginal output of R&D investment and reduces the turnover rate of management-level staff with production and R&D backgrounds, which is conducive to stability of the innovation team. In addition, this paper also finds that for companies with high R&D expenditures, CSR towards employees significantly eases the sensitivity between executive turnover and performance, which helps executives resist pressure arising from a decline in short-term performance. The findings of this paper have implications for improving labor–capital relations and enhancing firm innovation capabilities.     

The investment opportunity set,director ownership,and corporate policies: evidence from an emerging market

This paper provides evidence of the association between a firm's investment opportunity set (IOS), director ownership, and corporate policy choices. Using a sample of growth and non-growth firms in an emerging Asian market, we find that the IOS theory has significant explanatory power in the financing, dividend, executive compensation, and leasing aspects of corporate policies. Growth firms have lower debt-to-equity ratios and dividend yields, pay higher cash compensation and bonus amounts to their top executives, and finance a higher proportion of their asset acquisitions through operating leases. We also find that director ownership moderates and counteracts the association between IOS and corporate policies. Our results are consistent with contracting theory predictions that high director ownership mitigates the need for incentive or bonus compensation plans in growth firms.     

Stakeholder demands and corporate social responsibility: Evidence from the Olympic Games

We propose that stakeholder demand can explain firms’ corporate social responsibility (CSR) activities and empirically test our proposition using 2002–2016 panel data from multiple countries. We select the Olympic Games as our experimental context and use a difference-in-differences design. We find that firms domiciled in countries that host the Olympic Games subsequently experience a significantly smaller increase in CSR commitment than firms in countries that unsuccessfully bid to host the Olympics. We also find that firms domiciled in cities that host the Olympic Games exhibit a significantly smaller increase in CSR than those domiciled in other cities in the same country. Additional tests indicate that firms in host countries with greater increases in the levels of happiness tend to experience an even smaller increase in CSR. Our findings are consistent with the stakeholder demand explanation, as stakeholders are less likely to require local firms to invest in CSR if utilities, such as those from environmental improvement, increase.Running head: Olympic Games and CSR.     

Institutional Investors and Executive Compensation

We find that institutional ownership concentration is positively related to the pay‐for‐performance sensitivity of executive compensation and negatively related to the level of compensation, even after controlling for firm size, industry, investment opportunities, and performance. These results suggest that the institutions serve a monitoring role in mitigating the agency problem between shareholders and managers. Additionally, we find that clientele effects exist among institutions for firms with certain compensation structures, suggesting that institutions also influence compensation structures through their preferences.     

Corporate social responsibility and stakeholder governance around the world

This paper examines the impact of stakeholder governance on corporate social responsibility (CSR) to determine whether CSR is employed as a mechanism to mitigate conflicts of interest between managers and diverse stakeholders, or used as managerial perquisites. To examine this relation properly, we not only employ an extensive sample of international firms, but also mitigate endogeneity by using various econometric methods. We find that stakeholder governance positively influences firms' CSR engagement with a greater magnitude than board governance after controlling for confounding factors. Stakeholders' influence in CSR engagement is more pronounced when investor protections and board governance are relatively weak.     

The Relation between Stakeholder Management,Firm Value,and CEO Compensation: A Test of Enlightened Value Maximization

Whether firms pursue shareholder value maximization or the maximization of stakeholder welfare is a controversial issue whose outcomes seem irreconcilable. We propose that firms are likely to compensate their executives for pursuing the firm's goal be it shareholder value maximization or the maximization of stakeholder welfare. In this paper, we examine the correlation between firm value, stakeholder management, and compensation. We find that stakeholder management is positively related to firm value. However, firms do not compensate managers for having good relationships with its stakeholders. These results do not support stakeholder theory. We also find an endogenous association between compensation and firm value. Our results are consistent with Jensen's (2001) enlightened value maximization theory. Managers are compensated for achieving the firm's ultimate goal, value maximization. However, managers optimize interaction with stakeholders to accomplish this objective.     

The costs of intense board monitoring

We study the effects of the intensity of board monitoring on directors' effectiveness in performing their monitoring and advising duties. We find that monitoring quality improves when a majority of independent directors serve on at least two of the three principal monitoring committees. These firms exhibit greater sensitivity of CEO turnover to firm performance, lower excess executive compensation, and reduced earnings management. The improvement in monitoring quality comes at the significant cost of weaker strategic advising and greater managerial myopia. Firms with boards that monitor intensely exhibit worse acquisition performance and diminished corporate innovation. Firm value results suggest that the negative advising effects outweigh the benefits of improved monitoring, especially when acquisitions or corporate innovation are significant value drivers or the firm's operations are complex.     

Determinants of the levels and changes in non‐executive director compensation

This study examines the economic and director‐specific determinants of non‐executive director (NED) compensation in the Australian setting. We find that NED compensation is associated with firm size, complexity, growth, risk and liquidity. It is also associated with director reputation, experience, connectedness and the directors' involvement with the firm. The additional compensation paid to the chairperson is positively associated with their prior experience and negatively associated with NED reputation and involvement. We find inconclusive evidence on the association between changes in NED compensation and firm performance.     

Executive cash compensation and tax aggressiveness of Chinese firms

We examine the influence of corporate compensation policies on firms’ tax aggressiveness in an emerging market where executive compensation is primarily in cash form. Based on a hand-collected dataset of 958 firm-year observations of Chinese listed firms for the 2006–2012 period, we find that firms paying higher executive cash compensation are associated with lower tax aggressiveness. This relationship also holds for the excess cash compensation measures which control for executive shareholding, firm profitability, size, growth opportunity, and board independence. We further document that mutual funds ownership pressure firms paying higher compensation to reduce their tax aggressiveness, suggesting adverse selection by mutual funds on firms exhibiting risky tax avoidance activities. High leverage offsets the negative link between cash compensation and tax aggressiveness, indicating a complementary effect between debt and tax avoidance, and, hence, suggesting that creditor monitoring is weak. These results are robust to the system-GMM estimation, which simultaneously account for the endogeneity of executive compensation, tax aggressiveness, ownership and control, leverage, and corporate governance. Our findings on Chinese firms have important policy implications for developing countries around the world with concentrated ownership structure, weak institutional environment, widespread corruption, ineffective rule of law, and ongoing significant social and political transformation.     

国企高管薪酬影响企业社会绩效的实证研究

基于利益相关者理论,将社会绩效引入高管薪酬显性契约缔约过程,构建了高管薪酬与企业社会绩效关系模型,并以137家国有上市公司为实证样本,采用因子分析、回归分析方法检验了模型的假设关系。研究发现:年薪与企业强社会绩效和企业总体社会绩效显著正相关,与企业弱社会绩效负相关;高管持股与企业社会绩效没有显著相关性。