Abstract
This study investigates the effects of internal and external corporate governance and monitoring mechanisms on the choice of corporate social responsibility (CSR) engagement and the value of firms engaging in CSR activities. The study finds the CSR choice is positively associated with the internal and external corporate governance and monitoring mechanisms, including board leadership, board independence, institutional ownership, analyst following, and anti- takeover provisions, after controlling for various firm characteristics. After correcting for endogeneity and simultaneity issues, the results show that CSR engagement positively influences firm value measured by industry-adjusted Tobin’s q. We find that the impact of analyst following for firms that engage in CSR on firm value is strongly positive, while the board leadership, board independence, blockholders’ ownership, and institutional ownership play a relatively weaker role in enhancing firm value. Furthermore, we find that CSR activities that address internal social enhancement within the firm, such as employees diversity, firm relationship with its employees, and product quality, enhance the value of firm more than other CSR subcategories for broader external social enhancement such as community relation and environmental concerns.
References
Aggrawal, R. and D. Nanda: 2004, ‘Access, Common Agency, and Board Size’, Working paper, University of Virginia.
Agrawal, A. and C. Knoeber: 1996, ‘Firm performance and mechanisms to control agency problems between managers and shareholders’, Journal of Financial and Quantitative Analysis 31, 377-397.
Allen, F., A. Bernardo and I. Welch: 2001, ‘A theory of dividends based on tax clientele’, Journal of Finance 55, 2499-2536.
Anderson, R. and David M. Reeb: 2003, ‘Founding family ownership and firm performance: Evidence from the S&P 500’, Journal of Finance, 58 (3), 1301-1327.
Angrist, J. D.: 2000, ‘Estimation of Limited-Dependent Variable Models with Dummy Endogenous Regressors: Simple Strategies for Empirical Practice’, NBER#248.
Barnea, A. and A. Rubin: 2010, ‘Corporate Social Responsibility as a Conflict between Shareholders’, Journal of Business Ethics 97, 71-86.
Bebchuk, L. and A. Cohen: 2005, ‘The costs of entrenched boards’, Journal of Financial Economics 78, 409-433.
Bebchuk, L., A. Cohen and A. Ferrell: 2009, ‘What matters in corporate governance?’ Review of Financial Studies 22(2), 783-827.
Bebchuk, L., R. Kraakman and G. Triantis: 2000, ‘Stock Pyramids, Cross-Ownership and Dual Class Equity: The Mechanisms and Agency Costs of Separating Control from Cash-Flow Rights’, in R. Morck (ed.), Concentrated Corporate Ownership, pp. 445–460.
Bertrand, M. and S. Mullainathan: 2003, ‘Enjoying the quiet life? Corporate governance and managerial preferences’, Journal of Political Economy 111, 1043-1075.
Bhagat, S. and B. Black: 2001, ‘The non-correlation between board independence and long term performance’, Journal of Corporation Law 27, 231-274.
Bowen, H.: 1953, ‘Social Responsibilities of the Business-Man’ (Harper & Row, New York).
Brown, W., E. Helland and J. Smith: 2006, ‘Corporate philanthropic practices’, Journal of Corporate Finance 12, 855-877.
Bushman, R., J. Piotroski, and A. Smith: 2005, ‘Insider trading restrictions and analysts’ incentives to follow firms’, Journal of Finance 60, 35-66.
Calton, J., and S. Payne: 2003, ‘Coping with paradox’, Business and Society 42, 7-42.
Campbell, H.: 1996, ‘Understanding risk and return’, Journal of Political Economy 104, 298-345.
Carroll, A. B.: 1979, ‘A Three Dimensional Conceptual Model of Corporate Social Performance’, Academy of Management Review 4, 497–505.
Chung, K., and H. Jo: 1996, ‘The impact of security analysts’ monitoring and marketing functions on the market value of firms’, Journal of Financial and Quantitative Analysis 31, 493-512.
Chung, K. and S. A. Pruitt: 1994, ‘A Simple Approximation of Tobin's Q.’, Financial Management 23, 70–74
Coleman, J.: 1990, ‘Foundations of social theory’, Cambridge, MA: Harvard University Press.
Coles, J., N. Daniel, and L. Naveen: 2008, ‘Boards: Does one size fit all, Journal of Financial Economics 87, 329-356.
Cremers, M. and V.B. Nair: 2005, ‘Governance mechanisms and equity prices’, Journal of Finance 60, 2859-2894.
Dechow, P., A. Hutton, and R. Sloan: 2000. ‘The relation between analysts’ forecasts of long-term earnings growth and stock price performance following equity offerings’, Contemporary Accounting Research 17, 1-32.
Demsetz, H. and K. Lehn: 1985, ‘The structure of corporate ownership: causes and consequences’, Journal of Political Economy 93, 1155-1177.
Donham, W.: 1927, ‘The social significance of business’, Harvard Business Review 4, 406-419.
Fama, E. F. and M. C. Jensen: 1983, ‘Separation of ownership and control’, Journal of Law and Economics26, 301-325.
Fisman, R., G. Heal and V. Nair: 2005, ‘Corporate Social Responsibility: Doing Well by Doing Good?’ Working paper, Wharton School, University of Pennsylvania.
Fisman, R., G. Heal and V. Nair: 2006, ‘A Model of Corporate Philanthropy’, Working paper, Wharton School, University of Pennsylvania.
Friedman, M.: 1970, ‘Money and income: comment on Tobin’, Quarterly Journal of Economics84, 318-327.
Goel, A. and A. Thakor: 2008, ‘Overconfidence, CEO selection, and corporate governance’, Journal of Finance63(6), 2737-2784.
Gompers, P., J. Ishii, and A. Metrick: 2003, ‘Corporate governance and equity prices’, Quarterly Journal of Economics 118 , 107-155.
Gompers, P., J. Ishii, and A. Metrick: 2010, ‘Extreme governance: an analysis of dual-class firms in United States’, Review of Financial Studies 23 (3), 1051-1088.
Goss, A. and G. Roberts: 2007, ‘Corporate Social Responsibility and the Cost of Debt Financing’, Working paper, York University.
Goyal, A., 2006, Corporate social responsibility as a signaling device for FDI, International Journal of the Economics of Business 13, 145-163.
Greene W.: 1993, ‘Econometric Analysis’, 5th edition, Prentice-Hall.
Guiso, L., P. Sapienza, and L. Zingales: 2004, ‘The role of social capital in financial development’, American Economic Review 94, 526-556.
Harjoto, M. and H. Jo: 2011, ‘Corporate Governance and CSR Nexus’, Journal of Business Ethics (forthcoming). Published Online at http://www.springerlink.com/content/g57k226m54w2036g/fulltext.pdf
Harris, M. and A. Raviv: 2008, ‘A theory of board control and size’, Review of Financial Studies 21(4), 1797-1832.
Heckman, J.: 1976, ‘The common structure of statistical models of truncation, sample selection and limited dependent variables and a simple estimator for such models’, Annals of Economic and Social Measurement 5, 475-492.
Heckman, J.: 1979, ‘Sample selection as a specification error’, Econometrica 47, 153-161.
Heckman, J. and R. Robb, Jr.: 1985, ‘Alternative Methods for Evaluating the Impact of Interventions’, Ch. 4, in J. Heckman and B. Singer (ed.), Longitudinal Analysis of Labor Market Data (Cambridge University Press, New York).
Hermalin, B.: 2005, ‘Trends in corporate governance’, Journal of Finance 60, 2351-2384.
Hermalin, B., and M. Weisbach: 1991, ‘The effects of board composition and direct incentives on firm value’, Financial Management 20, 101-112.
Hermalin, B. and M. Weisbach: 1998, ‘Endogenously chosen boards of directors and their monitoring of the CEO’, American Economic Review 88, 96-118.
Hermalin, B. and M. Weisbach: 2003, ‘Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature’, FRBNY Economic Policy Review, 7–26.
Hill, R. P., T. Ainscough, T. Shank, and D. Manullang: 2007, ‘Corporate social responsibility and socially responsible investing: A global perspective’, Journal of Business Ethics 70, 165-174.
Hong, H. and M. Kacperczyk: 2009, ‘The price of sin: The effects of social norms on markets’, Journal of Financial Economics 93, 15-36.
Jensen, M.: 1986. ‘Agency costs of free cash flow, corporate finance, and takeovers’, American Economic Review 76, 323-329.
Jensen, M.: 1993, ‘The modern industrial revolution, exit, and the failure of internal control systems’, Journal of Finance 48, 831- 880.
Jensen, M.: 2002, ‘Value Maximization, Stakeholder Theory, and the Corporate Objective Function’, Business Ethics Quarterly 12, 235–256
Jensen, M. C. and W. Meckling: 1976, ‘Theory of firm: Managerial behavior, agency costs, and capital structure’, Journal of Financial Economics 3, 305-360.
Jo, H. and M. Harjoto: 2011, ‘The Causal Effect of Corporate Governance on Corporate Social Responsibility’, Working paper, Santa Clara University.
Jo, H., and Y. Kim: 2007, ‘Disclosure frequency and earnings management’, Journal of Financial Economics 84, 561-590.
Jo, H. and Y. Kim: 2008, ‘Ethics and disclosure: a study of the financial performance of firms in the seasoned equity offerings market’, Journal of Business Ethics 80 , 855-878.
Knack, S., and P. Keefer: 1997, ‘Does social capital have an economic payoff? A cross-country investigation’, Quarterly Journal of Economics 112, 295-321.
Knyazeva, D.: 2007, ‘Corporate Governance, Analyst Following, and Firm Behavior’, Working paper, New York University.
La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny: 1997a, ‘Legal determinants of external finance’, Journal of Finance 52, 1131-1150.
La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny: 1997b, ‘Trust in large organizations’, American Economic Review 87 (papers and proceedings), 333-338.
La Porta, R., F. Lopez-de-Silanes, and A. Shleifer: 1999, ‘Corporate ownership around the world’, Journal of Finance 54, 471-517.
Lim, T.: 2001, ‘Rationality and Analysts’ Forecast Bias’, Journal of Finance56, 369-385.
Lin, H., and M. McNichols: 1998, ‘Underwriting relationships and analysts’ forecasts and investment recommendations’, Journal of Accounting and Economics 25, 101-127.
Linck, J., J. Netter, and T. Yang: 2008, ‘The determinants of board structure’, Journal of Financial Economics87(2), 308-328.
Maddala, G.: 1983, ‘Limited dependent and quantitative variables in econometrics’, Cambridge, England: Cambridge University Press.
Malmendier, U., and G. Tate: 2005, ‘CEO overconfidence and corporate investment’, Journal of Finance 60, 2661-2700.
Margolis, J. D., and J. P. Walsh: 2003, ‘Misery loves companies: rethinking social initiatives by business’, Administrative Science Quarterly 48, 268-305.
Mehran, H.: 1995, ‘Executive compensation structure, ownership, and firm performance’, Journal of Financial Economics 38, 163-184.
Miller, M.: 2005, ‘Is American Corporate Governance Fatally Flawed?’ In Corporate Governance at the Crossroads: A Book of Readings, D. Chew and S. Gillan eds., Irwin Mcgraw-Hill, Boston, MA.
Moffitt, R.: 1999, ‘New Developments In Econometric Methods for Labor Market Analysis’, Ch. 24, in O. Ashenfelter and D. Card (eds.), The Handbook of Labor Economics, Vol. IIIA (North-Holland, Amsterdam).
Morck, R. and F. Yang: 2001, ‘The Mysterious Growing Value of the S&P 500 Membership’, Working paper, University of Alberta.
Morck, R., A. Shleifer, and R. Vishny: 1988, ‘Management ownership and market valuation: An empirical analysis’, Journal of Financial Economics 20, 293-316.
Navarro, P.: 1988, ‘Why do corporations give to charity?’ Journal of Business 61, 65-93.
Putnam, R.: 1993, ‘Making democracy work: Civic traditions in modern Italy’, Princeton, NJ: Princeton University Press.
Raheja, C.: 2005, ‘Determinants of board size and composition: A theory of corporate boards’, Journal of Financial and Quantitative Analysis 40, 283 - 306.
Schwart, R.: 1968, ‘Corporate philanthropic contributions’, Journal of Finance 23, 479-497.
Sherere, A., G. Palazzo, and D. Baumann: 2006,’Global rules and private actors, Toward a new role of the TNC in global governance’, Business Ethics Quarterly 16, 502-532.
Shin, H. and R. Stulz: 2000, ‘Firm Value, Risk, and Growth Opportunities’, NBER working paper #7808.
Shleifer, A. and R. Vishny: 1986, ‘Large shareholders and corporate control’, Journal of Political Economy 94, 461-488.
Tobin, J.: 1958, ‘Estimation of relationships for limited dependent variables’, Econometrica 26, 24-36.
Villalonga, B., and R. Amit: 2006, ‘How do family ownership, control, and management affect firm value?’ Journal of Financial Economics 80, 385-417.
Whetten, D., G. Rands, and P. Godfrey: 2002, ‘What are the responsibilities of business to society?’ In Pettigrew, A. Thomas, and R. Whittingen (Eds), Handbook of Strategy and Management, London: Sage, 373-408.
Yu, F.: 2008, ‘Analyst Coverage and Earnings Management’, Journal of Financial Economics 88, 245-271.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Jo, H., Harjoto, M.A. Corporate Governance and Firm Value: The Impact of Corporate Social Responsibility. J Bus Ethics 103, 351–383 (2011). https://doi.org/10.1007/s10551-011-0869-y
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10551-011-0869-y