Do Economic Incentives of Controlling Shareholders Influence Corporate Social Responsibility Disclosure? A Natural Experiment

We evaluate whether voluntary corporate social responsibility (CSR) disclosure is influenced by the economic incentives of controlling shareholders. To examine this research question, we apply the natural experiment setting based on the Split Share Structure Reform in China. Following this Reform, Chinese state shareholders are allowed to trade their shares in the stock market, which increases their incentives to maximize the market value of the firms that they control. We present empirical evidence of increased CSR disclosure among listed state-owned enterprises after this Reform. This evidence suggests that the economic incentives of key stakeholders are associated with voluntary CSR disclosures.     

Corporate Social Responsibility: Is Too Much Bad?—Evidence from India

Asia-Pacific Financial Markets - Over the years, firms have been using Corporate Social Responsibility (CSR) as a strategic tool to improve their competitiveness and ultimately benefit their...     

Shareholder Value Maximization—Is There a Role for Corporate Social Responsibility?

Although often viewed as inconsistent with the corporate goal of value maximization, the corporate social responsibility (CSR) movement can add value by helping companies develop and maintain their reputations for fair dealing with each of their important non-investor stakeholder groups, including employees, suppliers, and local communities. Such reputational capital in turn helps reinforce the commitment of those stakeholders through what amount to informal or implicit contracts—contracts that are often critical to a company's long-run success.
Nevertheless, the importance and difficulty of balancing stakeholder interests against the overarching goal of efficiency and value maximization cannot be overstated. As with any corporate investment, each dollar of investment in a corporate stakeholder group should be justified by at least a dollar of expected return over a finite time horizon. By practicing this kind of enlightened value maximization, to borrow Michael Jensen's phrase, management is likely to end up increasing not only its returns to shareholders, but the size of the corporate pie that is divided among all its stakeholders. Viewed in this light, CSR and value maximization have the potential to be complementary undertakings that result in a virtuous circle in which doing good helps companies do well, and doing well provides the wherewithal to do more good.     

Do Financial Markets Care about Corporate Social Responsibility Disclosure? Further Evidence from China

Corporations increasingly define their corporate social responsibility (CSR) activities as a part of their business. However, is this trend beneficial to investors? Based on an event study methodology and a sample of Chinese listed companies, we extend the literature on voluntary disclosure by exploring the role of CSR disclosure in reducing stock market information asymmetry, as proxied by share price volatility and liquidity. Our results show that the share price volatility after CSR disclosure is lower than before CSR disclosure; however, the trend is that it decreases first and then increases for three months following disclosure. Stock liquidity also significantly improves after CSR disclosure; however, it increases first and then decreases. Additionally, by dividing CSR disclosure into economic (hard) disclosure and generic (soft) disclosure, we find that the reduction in information asymmetry is higher for hard disclosure than soft disclosure, suggesting that although CSR disclosure does indeed have an impact on investors’ behaviour in China, an economic‐based disclosure contributes more substantially. Finally, to better understand the characteristics of the Chinese financial market, we also explore the role of marketisation with results that show that the effect in reducing information asymmetry is greater for companies located in a region with a higher degree of marketisation.     

Do Female Executives Prioritize Corporate Social Responsibility?

How do female executives view corporate social responsibility (CSR)? Previous studies have reported mixed findings on the relationship between female executives and CSR. We select a sample of Chinese listed firms and use propensity score matching to construct a new sample of firms and evaluate the gender transition (from male to female) of chief executive officers or board chairpersons (executives) who are randomly assigned to firms (i.e., the gender transition of executives is regarded as an exogenous event). Subsequently, we use a difference-in-differences approach to identify the pure effect of female executives on CSR. Our results indicate that female executives are more likely to encourage CSR reporting. Moreover, we suggest that the mechanism behind female executives prioritizing CSR is altruism preference rather than risk aversion preference.     

Does Corporate Social Responsibility Affect the Cost of Bank Loans? Evidence from China

This article examines the link between corporate social responsibility (CSR) and cost of bank loans (CBL) in China. We find that there exists an inverse U-shape relationship between CSR and CBL. In addition, CSR threshold for state-owned enterprises (SOEs) is higher than for non-SOEs. In particular, CSR threshold for SOEs is lower in regions with high degree of marketization than in regions with low degree of marketization. The findings indicate that value-destroying effect occurs during CSR underinvestment phase, which is different from the overinvestment view. Moreover, the effect of CSR on CBL also depends on contextual factors such as firm ownership and marketization level.     

Does Earnings Quality Influence Corporate Social Responsibility Performance? Empirical Evidence of the Causal Link

The study examines the causal links between earnings quality and corporate social responsibility (CSR) performance using a large sample of United States (US) firms from 1992 to 2013. We first find that the association between earnings quality and CSR performance is positive and significant. We then test the flow of causality using Granger's (1969) lead–lag analysis to determine whether changes in earnings quality cause changes in CSR performance or vice versa. Our findings show that changes in earnings quality cause changes in a firm's CSR performance but not vice versa. Further analysis shows that earnings quality reduces the cost of equity capital for firms with higher CSR performance. These findings suggest that one plausible means by which firms with higher earnings quality can maintain better CSR performance is to reduce their cost of equity capital.     

Some Evidence on Executives’ views of Corporate Social Responsibility

This paper draws upon the concepts of organizational legitimacy, political economy of accounting and agency theory, and subsequently combines these with stakeholder analysis, in an attempt to analyse the attitudes towards their perceived social responsibility on the part of the executives of a small sample of large, UK companies.In the conceptual model developed, organizational legitimacy is perceived as a way of examining corporate behaviour, whereby a business is visualized as operating under a mandate from society, withdrawable were the organization be seen not to be doing the things society expects of it. There is, however, an alternative political economy of accounting view, suggesting corporate behaviour might be perceived as more proactive, with company directors attempting to ‘set the agenda’, such as to manipulate societal opinion towards a favourable view of corporate activity.Agency theory is then utilized in an attempt to establish the connection between organizations and the various interest groups with whom they interact, whilst, finally,stakeholder analysis is resorted to as a way of establishing the relevant societal interest groups to which businesses might either be considered ‘accountable’, or alternatively whose views they might wish to ‘manipulate’ favourably regarding their (i.e. corporate) actions.The underpinning theory, as delineated, is then examined for validity via interviews with executives representing eight prominent UK companies in four business sectors. The model outlined enables the nature of perceived accountability/influence by the company to be linked to perceived/manipulated stakeholder expectations of the company, with the tentative conclusion being reached that support can be found for both organizational legitimacy and political economy of accounting perspectives, although which predominates is impossible to determine.     

Does a Government Mandate Crowd Out Voluntary Corporate Social Responsibility? Evidence from India

This study investigates the implementation of a Government of India mandate that requires firms to spend at least 2% of their profits on corporate social responsibility (CSR). The results show that qualifying firms that voluntarily engaged in CSR before the mandate reduce their CSR spending afterward. Despite increasing advertisement expenditure likely to offset the lost signaling value of voluntary CSR, stock prices and operating performance of former voluntary CSR spenders who qualify under the law decline. Our results suggest that regulatory intervention in CSR can both diminish its signaling value and lead to a reduction in voluntary CSR spending.     

Out of Site,Out of Mind? The Role of the Government-Appointed Corporate Monitor

We study the role of a relatively new type of external firm monitor, an on-site government-appointed Corporate Monitor, and assess whether such appointments reduce firms' propensity to violate laws. Using a sample of deferred and nonprosecution agreements, we first document the determinants of Monitor appointment. We find firms that voluntarily disclose wrongdoing and have more independent directors are less likely to have Corporate Monitors, whereas those with more severe infractions, mandated board changes, and increased cooperation requirements are more likely to have Monitors. We find such appointments are associated with an 18%–25% reduction in violations while the Monitor is on site, however, the effect does not persist after the Monitorship ends. Using a semisupervised machine learning method to measure changes in firms' ethics and compliance norms, we find that the reduction in violations is associated with changes in ethics and compliance that also do not persist. Finally, we document that firms under Monitorship experience a persistent reduction in innovation, highlighting a previously unexplored cost of these interventions. Overall, our results suggest that, although Corporate Monitors on site are associated with fewer violations, firms revert to previous levels of violations following Monitors' departure.     

Can Investors Identify Managerial Discretion in Corporate Social Responsibility Practices? The Moderate Role of Investor Protection

This paper analyses investors’ ability to identify if managers use corporate social responsibility as an entrenchment practice to conceal the risk of dismissal associated with managerial discretion and if this detection is determined by the level of investor protection orientation. Results based on an international database of 1949 companies show that investors and markets do not identify managerial entrenchment based on the promotion of sustainable practices, except when such entrenchment is developed by companies located in countries with strong investor protection. In these countries, investors identify and penalise such companies with lower financial performance.     

Discussion of “Bridging the Information Gap: Quarterly Conference Calls as a Medium for Voluntary Disclosure”

Review of Accounting Studies -     

Does Corporate Social Responsibility (CSR) Create Shareholder Value? Evidence from the Indian Companies Act 2013

In 2013, a new law required Indian firms, which satisfy certain profitability, net worth, and size thresholds, to spend at least 2% of their net income on corporate social responsibility (CSR). We exploit this regulatory change to isolate the shareholder value implications of CSR activities. Using an event study approach coupled with a regression discontinuity design, we find that the law, on average, caused a 4.1% drop in the stock price of firms forced to spend money on CSR. However, firms that spend more on advertising are not negatively affected by the mandatory CSR rule. These results suggest that firms voluntarily choose CSR to maximize shareholder value. Therefore, forcing a firm to spend on CSR is likely to be sub‐optimal for the firm with a consequent negative impact on shareholder value.     

Does Corporate Social Responsibility (CSR) Improve Credit Ratings? Evidence from Geographic Identification

We show that a firm's CSR policy is significantly influenced by the CSR policies of firms in the same three‐digit zip code, an effect possibly due to investor clienteles, local competition, and/or social interactions. We then exploit the variation in CSR across the zip codes to estimate the effect of CSR on credit ratings under the assumption that zip code assignments are exogenous. We find that more socially responsible firms enjoy more favorable credit ratings. In particular, an increase in CSR by one standard deviation improves the firm's credit rating by as much as 4.5%.     

Is the Risk of Bankruptcy a Systematic Risk?

Several studies suggest that a firm distress risk factor could be behind the size and the book-to-market effects. A natural proxy for firm distress is bankruptcy risk. If bankruptcy risk is systematic, one would expect a positive association between bankruptcy risk and subsequent realized returns. However, results demonstrate that bankruptcy risk is not rewarded by higher returns. Thus, a distress factor is unlikely to account for the size and book-to-market effects. Surprisingly, firms with high bankruptcy risk earn lower than average returns since 1980. A risk-based explanation cannot fully explain the anomalous evidence.     

Promotion Incentives and Corporate Performance: Is There a Bright Side to “Overpaying” the CEO?

Earlier studies have shown that stronger equity-based incentives for CEOs are generally associated with better corporate performance and higher values. In this article, the authors report the findings of their recent study of the effects of promotion-based "tournament" incentives for non-CEO executives (or "VPs") on corporate performance for a large sample of companies during the 12-year period from 1993-2004.
The study's main finding is that such tournament incentives, as measured by the pay differential between the CEO and VPs, were associated with better corporate operating performance and higher corporate stock returns. Moreover, tournament incentives, as one would expect, appeared to be more effective when CEOs were nearing retirement—but less effective when the firm had a new CEO (and even weaker when the new CEO was an outsider).     

EFA Keynote Speech: “Corporate Governance and Corporate Social Responsibility: What Do Investors Care about? What Should Investors Care about?”

This article is the keynote address from the Eastern Finance Association meeting in New Orleans in March 2007 with updated references and examples. In this keynote address, I discuss what we can learn about institutional investors' views on corporate governance and corporate social responsibility from research and surveys.     

Climate Change and Asset Prices: Are Corporate Carbon Disclosure and Performance Priced Appropriately?

This paper empirically assesses the relevance of information on corporate climate change disclosure and performance to asset prices, and discusses whether this information is priced appropriately. Findings indicate that corporate disclosures of quantitative greenhouse gas (GHG) emissions and, to a lesser extent, carbon performance are value relevant. We use hand‐collected information on quantitative GHG emissions for 433 European companies and build portfolios based on GHG disclosure and performance. We regress portfolios on a standard four factor model extended for industry effects over the years 2005 to 2009. Results show that investors achieved abnormal risk‐adjusted returns of up to 13.05% annually by exploiting inefficiently priced positive effects of (complete) GHG emissions disclosure and good corporate climate change performance in terms of GHG efficiency. Results imply that, firstly, information costs involved in carbon disclosure and management do not present a burden on corporate financial resources. Secondly, investors should not neglect carbon disclosure and performance when making investment decisions. Thirdly, during the period analysed, financial markets were inefficient in pricing publicly available information on carbon disclosure and performance. Mandatory and standardised information on carbon performance would consequently not only increase market efficiency but result in better allocation of capital within the real economy.     

How Different Is the Efficiency of Public and Private Water Companies in Asia?

Several studies have compared the efficiency of publicly andprivately owned water utilities and reached conflicting conclusionson the impact of ownership on efficiency. This article providesfurther evidence by estimating a stochastic cost frontier fora sample of Asian and Pacific regional water companies. Theresults show that efficiency is not significantly differentin private companies than in public ones.