Abstract
This study examines the determinants of corporate social responsibility (CSR) and its implications on firms’ investment policy, organizational strategy, and performance. First, we find that firms with better performance, higher R&D intensity, better financial health, and firms in new economy industries are more likely to engage in CSR activities, while riskier firms are less likely to do so. We also find U-shaped relation between firm size and CSR, indicating that either very small or very large firms exhibit high levels of CSR strengths and concerns. Next, we find that firms’ CSR strengths relate favorably with their investments, organizational strategy, and performance, whereas CSR concerns and firm attributes are by and large negatively related. Using a 2SLS procedure, we verify that the CSR–performance relation is robust to corrections for endogeneity through reverse causation and/or biases introduced by time varying omitted variables. Finally, we find that the CSR–firm attributes relation is strengthened when the CEO’s incentives are below the sample median, suggesting that CSR participation is especially important when monetary incentives are lower than benchmark levels.
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Bertrand and Schoar (2003) note that there are considerable disagreements as to the roots of wide variation in financial policies across firms. Therefore, without arguing that corporate decisions are solely based on firms’ CSR commitment, we present evidence showing that CSR involvement can in part account for the unexplained heterogeneity in corporate practices.
Recent research shows that by investing in CSR, companies can enjoy lower cost of capital and attract more institutional investors and greater analyst coverage (e.g., El Ghoul et al. 2011; Dhaliwal et al. 2011), which increases stakeholder demand for CSR even further. In addition, lower cost of capital enables companies to accept more investment proposals during investment screening process, pleasing investors (shareholders).
KLD was acquired by RiskMetrics Group in 2009, and RiskMetrics Group was later acquired by MSCI in 2010.
Approximate number of companies covered by the database was 3,100 as of 2007. For more current statistics, visit http://web.kld.com/.
Here, examples of firms with more than ten strengths and concerns that have an overall KLD score of 0 include firms such as Pfizer, Bank of America, and Dow Chemical. On the other hand, firms with one strength and one concern that have an overall KLD score of 0 include firms such as Ecollege.com and Alexion Pharmaceuticals.
For instance, the extent to which firms are subject to external scrutiny on their methods and practices may vary by industry. Industries such as food, textiles, and apparel, receive greater external scrutiny for product-related concerns, while others such as refining, rubber, plastic, or utilities, invite attention for their environmental and energy practices (Rehbein et al. 2004). Similarly, Siegel and Vitaliano (2007) find that firms selling experience or credence goods (e.g., food, automobiles, entertainment, and health care) are more likely to be socially responsible than firms in the business of search goods (e.g., furniture, clothing, and footwear).
Following Murphy (2003), new economy firms are those belonging to industries with the following SIC codes: 3570, 3571, 3572, 3576, 3577, 3661, 3674, 4812, 4813, 5045, 5961, 7370, 7371, 7372, and 7373.
Firms’ ability to make investments either in the form of capital expenditures or in acquisitions as well as ability to incur costs related to socially responsible activities depends on their financial performance.
Anecdotal examples may provide an explanation for this result. In particular, companies with high levels of CSR concerns may face protests from various groups for their use of advertising. For example, regulations imposed on tobacco advertising limit its reach in the traditional media. Tobacco companies agreed to restrictions outlawing Joe Camel and other cartoon animals, banning outdoor advertisements everywhere and banning ads in magazines that are aimed at younger readers. See http://www.nytimes.com/2006/03/10/business/media/10adco.html.
We follow Murphy (1999) and determine an average exercise price for all previously granted options based on their year-end intrinsic value. We treat all option holdings as a single grant with a 5-year time to maturity and obtain the risk-free rate from the 5-year treasury bills constant maturity series. We compute the average delta of prior option grants using the modified Black–Scholes formula.
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Erhemjamts, O., Li, Q. & Venkateswaran, A. Corporate Social Responsibility and Its Impact on Firms’ Investment Policy, Organizational Structure, and Performance. J Bus Ethics 118, 395–412 (2013). https://doi.org/10.1007/s10551-012-1594-x
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DOI: https://doi.org/10.1007/s10551-012-1594-x