Corporate social responsibility and investment efficiency: Does business strategy matter?

This study investigates how business strategy moderates the effect of Corporate Social Responsibility (CSR) on over-investment. We provide new evidence on the moderating effect of business strategy between CSR and over-investment. Using a sample of over 3000 US firms with 14,375 observations for the period 1996–2016, we show that high CSR involvement firms tend to over-invest. We demonstrate that both Defend and Prospect strategies can mitigate over-investment by interacting with high CSR firms. The Defend strategy effect on over-investment CSR firms is more pronounced for non-immorality stressed and non-high tech industry firms. We find that the strategy's moderating effect is channeled through agency problems and information asymmetry. The results show that business strategy plays an important role in shaping firms' investment behavior and efficiency.     

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.

A research note on standalone corporate social responsibility reports: Signaling or greenwashing?

Over the past two decades, more and more U.S. firms are voluntarily issuing costly standalone Corporate Social Responsibility (CSR) Reports. Nevertheless, firms’ motivations for issuing standalone CSR Reports are not clear. In this paper, we consider two different explanations: signaling and greenwashing. The first explanation, signaling, proposes that firms use standalone CSR Reports as a signal of their superior commitment to CSR, which suggests firms with stronger social and environmental records will be more likely to issue standalone CSR Reports as compared to those without. The second explanation, greenwashing, proposes that firms use standalone CSR Reports to pose as “good” corporate citizens even when they do not have stronger social and environmental records. To provide insight into these explanations we compare the CSR performance scores of firms that issue CSR reports to those firms that do not. We control for firm size, leverage, profitability and industry. We find that firms that voluntarily issue standalone CSR Reports generally have higher CSR performance scores, which suggests that firms are using voluntary CSR Reports to publicize stronger social and environmental records to stakeholders.     

Corporate social responsibility: An umbrella or a puddle on a rainy day? Evidence surrounding corporate financial misconduct

We examine the way a fraudulent firm's pre‐ and post‐misconduct corporate social responsibility engagement is associated with its stock performance to investigate the reputational role of corporate social responsibility (CSR). In the short term, firms with good CSR performance suffer smaller market penalties upon the revelation of financial wrongdoing, supporting the buffer effect, as opposed to the backfire effect, of a good social image. We also find that the misbehaving firms’ post‐misconduct CSR efforts are negatively associated with delisting probabilities, and positively with stock returns. These findings support the argument that increasing post‐crisis CSR engagement can be an effective remedy for a damaged reputation.     

New development: A game of responsibility? The regulation of health and social care professionals

The UK's law commissions in a recent joint report have recommended that individual regulatory bodies for medical and other healthcare professions receive more decision-making power and that procedural regulation (for example fitness to practice proceedings) be standardized. Patient wellbeing and professional standing of practitioners are likely to be deeply affected. The legislative process needs to be scrutinized closely to ascertain that government and regulatory bodies do not use the reform to shirk accountability and engage in a blame game.     

Do climate risk beliefs shape corporate social responsibility?

Global climate change is one of the most pressing issues of our time, potentially affecting everyone, both individuals and businesses. This paper examines whether differences in beliefs about climate change affect firms' decision-making in Corporate Social Responsibility (CSR) commitment. Using county-level climate change beliefs data from Yale Climate Opinion Maps, we find that firms' Environmental, Social, and Governance (ESG) scores are higher if they are located in counties where more people believe in global climate change. We then use natural disasters as exogenous shocks to the beliefs about climate risk and continue to find a positive association between CSR and perceptions of climate risks. Furthermore, we discover a stronger correlation between CSR and climate risk beliefs when firms have more local investors.     

Does corporate social responsibility impact equity risk? International evidence

Review of Quantitative Finance and Accounting - Based on a large panel of listed firms from 52 countries in the period 2002–2020, we investigate the relationship between corporate social...     

Does corporate social responsibility affect the cost of capital?

We examine the effect of corporate social responsibility (CSR) on the cost of equity capital for a large sample of US firms. Using several approaches to estimate firms’ ex ante cost of equity, we find that firms with better CSR scores exhibit cheaper equity financing. In particular, our findings suggest that investment in improving responsible employee relations, environmental policies, and product strategies contributes substantially to reducing firms’ cost of equity. Our results also show that participation in two “sin” industries, namely, tobacco and nuclear power, increases firms’ cost of equity. These findings support arguments in the literature that firms with socially responsible practices have higher valuation and lower risk.     

Strange bedfellows? Voluntary corporate social responsibility disclosure and politics

We show a reliable association between voluntary corporate social responsibility (CSR) disclosure and company political interests, which we proxy by company employees’ contributions to political action committees and statewide voting in presidential elections. This relation is most pronounced for the contributions of Democratic employees at companies in states that vote for the Democratic presidential candidate. We also show a positive association between corporate political contributions and excess stock returns. A portfolio strategy of investing based on company size, CSR disclosure intensity and corporate political contributions produces a significant positive mean excess stock return of 4.5 per cent over 3 months following CSR disclosure.     

Do institutional investors drive corporate social responsibility? International evidence

This paper assesses whether shareholders drive the environmental and social (E&S) performance of firms worldwide. Across 41 countries, institutional ownership is positively associated with E&S performance with additional tests suggesting this relation is causal. Institutions are motivated by both financial and social returns. Investors increase firms’ E&S performance following shocks that reveal financial benefits to E&S improvements. In cross section, investors increase firms’ E&S performance when they come from countries with a strong community belief in the importance of E&S issues, but not otherwise. As such, these institutional investors transplant their social norms regarding E&S issues around the world.     

The IPO corporate social responsibility information disclosure: Does the stock market care?

We create textual information indices using corporate social responsibility (CSR) information extracted from IPO prospectuses in China. We use the indices to measure the issuers’ corporate social performance (CSP) and corporate environmental performance (CEP) and assess how the stock market reacts. We find that CSP disclosure is significantly related to the post‐market performance of the firm. Specifically, better CSP disclosure is correlated with higher post‐IPO listing holding period returns among firms that do not disclose donations or environmental expenditures, although the association does not hold for firms that make donations and environmental expenditures. In addition, institutional investors seem to care more about the CEP information for a firm than the CSP information.     

Does reporting position affect the pricing of the volatility of comprehensive income?

The FASB changed the reporting policy for comprehensive income (CI) by issuing ASU No. 2011-05, which requires CI be reported in performance statements (i.e., either a single income statement with net income or a separate statement of CI following the income statement) rather than the previously allowed equity statements. We examine whether the change in reporting position of CI led to higher market pricing of CI volatility incremental to NI volatility (“incremental CI volatility”), as measured by the price-earnings relationship. We find that the market pricing of incremental CI volatility increased from the pre- to the post-ASU period for non-financial firms forced to change the reporting position of CI from equity to performance statements. The increase is more prominent for firms that switched to the income statement than for firms that switched to a separate statement of CI. Further, we find that the increased market pricing of incremental CI volatility translates into lower valuation weights on other comprehensive income.     

The wages of social responsibility — where are they? A critical review of ESG investing

This paper contributes both to investigating the link between the corporate social and financial performance based on environmental, social and corporate governance (ESG) ratings and to reviewing the existing empirical evidence pertaining to this relationship. The sample used includes ESG data of ASSET4, Bloomberg and KLD for the U.S. market from 1991 to 2012. The econometrical framework applies an ESG portfolio approach using the Carhart (1997) four-factor model as well as cross-sectional Fama and MacBeth (1973) regressions. Previous empirical research indicates a relationship between ESG ratings and returns. As against this, the ESG portfolios do not state a significant return difference between companies with high and low ESG ratings. Although the Fama and MacBeth (1973) regressions reveal a significant influence of several ESG variables, investors are hardly able to exploit this relationship. The magnitude and direction of the impact are substantially dependent on the rating provider, the company sample and the particular subperiod. The results suggest that investors should no longer expect abnormal returns by trading a difference portfolio of high and low rated firms with regard to ESG aspects.     

Does corporate social responsibility affect mutual fund performance and flows?

We use an asset-weighted composite corporate social responsibility (CSR) fund score to study the effects of CSR on fund performance and flows. Compared to low-CSR funds, high-CSR funds display poorer performance, stronger performance persistence, a weaker performance-flow relationship, and comparable persistence in flows. These findings are consistent with investors in high-CSR funds deriving utility from non-performance attributes.     

Does social responsibility begin at home? The relation between firms’ pension policies and corporate social responsibility (CSR) activities

Review of Accounting Studies - Pension freezes are highly visible corporate actions with the potential to hurt the firms’ reputation as “responsible” employers. We document that...     

Equity market response to natural disasters: Does firm's corporate social responsibility make difference?

This study investigates the role of corporate social responsibility (CSR) in explaining firms' stock performance in the wake of natural disasters in the United States. Using event study and multivariate regression analyses, we find that market performance of CSR firms is better than that of non-CSR firms when such disasters occur. We also highlight the importance of environmentally friendly practices in driving the performance of CSR firms. Our results indicate that firms practicing environmental CSR are more resilient to such disasters than nonenvironmental CSR firms. Cross-sectional analyses show that such positive market reaction of CSR firms is more pronounced when firms have low financial constraints, low information asymmetry, and high social capital.     

Do common owners influence corporate social responsibility? Firm-level evidence from China

Using a sample of Chinese A-share listed companies from 2007 to 2018, this article explores the influence of common owners on corporate social responsibility (CSR). The results show that common owners significantly promote CSR investment, indicating that increased CSR represents a bright side to common owners, in contrast to their anticompetitive effect. Further analysis shows that the nature of state ownership significantly weakens the positive relationship between common owners and CSR investment. Prospector firms strengthen the positive influence of common owners on CSR investment, whereas defender firms weaken the effect. Moreover, common owners benefit from increasing CSR investment, and co-owned firms benefit by easing their financial constraints when they invest or increase their investment in social responsibility. The findings enhance the outstanding of how common owners affect corporate behavior and enrich the literature on common ownership and CSR investment.     

Does corporate social responsibility help the survivorship of SMEs and large firms?

Using a sample of 2480 firms from 51 countries covering the period 2010–2015, we find that firms with more effective corporate governance mechanisms are more likely to be more engaged in CSR. Consistent with the stakeholder theory and the conflict resolution model, this result suggests that managers adopt effective governance mechanisms together with CSR engagement in an attempt to mitigate conflicts among stakeholders. Moreover, after controlling for endogeneity and simultaneity issues, we find that both CSR engagement and corporate governance mechanisms have a significantly negative influence on the firms' risk of financial distress measured by the Altman et al. model (1995). Our results also show that the favorable influence of CSR on the firms' capability of survivorship is more pronounced in SMEs than in large firms.     

Reactive or proactive? Investor sentiment as a driver of corporate social responsibility

Investors and financial markets have been a neglected stakeholder group in studies on a firm’s motivations to be socially and environmentally responsible. Despite being a strong driving force behind firm value, no study has investigated the influence of market and investor sentiments on CSR behaviour. Using a global sample, we investigate the effects of market and investor sentiments on firm CSR performance. We find negative market and investor sentiments in the prior year motivate firms to improve their CSR performance in the next year. We also find the magnitude of improvement in CSR performance differs not only by country, but by CSR sub-category as well. These findings imply that a firm’s motivation to improve its CSR performance is reactionary, rather than being driven by altruism. Regulators and proponents of CSR should thus seek to persuade investors and financial markets to put pressure on firms to further advance the CSR agenda.     

Is corporate social responsibility engagement influenced by nearby firms? Evidence from China

This paper explores whether the CSR engagement of a focal firm is influenced by the CSR density formed by nearby firms. Using a sample of listed firms from 2010 to 2019 in China, we find a positive relationship between the local CSR density and the CSR engagement of a focal firm. Based on the heterogeneous analysis, we find that the impact of local CSR density is more pronounced for firms with worse financial conditions (i.e., lower profits, cash to debt, sales to inventory, and higher leverage), less corporate investment (i.e., lower capital expenditure growth, organization capital investment, employee growth) and fewer market shares. The primary findings are robust after addressing potential concerns. Overall, our findings provide evidence of the effect of firms' locations in the context of CSR engagement and have insightful implications for managers and governments seeking CSR improvement in emerging markets.