Abstract
In recent years, firms have greatly increased the amount of resources allocated to activities classified as Corporate Social Responsibility (CSR). While an increase in CSR expenditure may be consistent with firm value maximization if it is a response to changes in stakeholders’ preferences, we argue that a firm’s insiders (managers and large blockholders) may seek to over- invest in CSR for their private benefit to the extent that doing so improves their reputations as good global citizens and has a “warm-glow” effect. We test this hypothesis by investigating the relation between firms’ CSR ratings and their ownership and capital structures. Employing a unique data set that categorizes the largest 3000 U.S. corporations as either socially responsible (SR) or socially irresponsible (SI), we find that on average, insiders’ ownership and leverage are negatively related to the firm’s social rating, while institutional ownership is uncorrelated with it. Assuming that higher CSR ratings is associated with higher CSR expenditure level, these results support our hypothesis that insiders induce firms to over-invest in CSR when they bear little of the cost of doing so.
Similar content being viewed by others
References
Adams, R. B., A. Heitor and D. Ferreira: 2005, ‘Powerful CEOs and Their Impact on Corporate Performance’, Review of Financial Studies 18, 1403–1432.
Aggarwal, R. K. and D. Nanda: 2004, Access, Common Agency, and Board Size. Working Paper, The University of Virginia.
Andreoni, J.: 1990, ‘Impure Altruism and Donations to Public Goods: A Theory of Warm-Glow Giving’, Economic Journal 100(401), 464–477.
Bennett, J., R. Sias and L. T. Starks: 2003, ‘Greener Pastures and the Impact of Dynamic Institutional Preferences’, Review of Financial Studies 16, 1199–1234.
Bhojrarj, S. and P. Sengupta: 2003, `Effect of Corporate Governance on Bond Ratings and Yields: The Role of Institutional Investors and Outside Directors', The Journal of Business, 76, 455–475.
Black, B.: 1992, ‘Agents Watching Agents: The Promise of Institutional Investor Voice’, UCLA Law Review 39, 811–893.
Brickley, J., R. Lease and C. Smith: 1988, ‘Ownership Structure and Voting on Antitakeover Amendments’, Journal of Financial Economics 20, 267–291.
Demsetz, H.: 1983, ‘The Structure of Ownership and the Theory of the Firm’, Journal of Law and Economics 26, 375–390.
Diamond, D.: 1991, ‘Monitoring and Reputation: The Choice Between Bank Loans and Directly Placed Debt’, Journal of Political Economy 99, 689–721.
Fama, E. and M. Jensen: 1983, ‘Separation of Ownership and Control’, Journal of Law and Economics 26, 301–325.
Fisman, R., G. Heal and V. B. Nair: 2006, A Model of Corporate Philanthropy. Working Paper, The Wharton School, University of Pennsylvania.
Gilson, S.: 1990, ‘Bankruptcy, Boards, Banks, and Block Holders’, Journal of Financial Economics 27, 355–387.
Griffin, J. and J. Mahon: 1997, ‘The Corporate Social Performance and Corporate Financial Performance Debate. Twenty-Five Years of Incomparable Research’, Business and Society 36, 5–31.
Hartzell, J. C. and L. T. Starks: 2003, ‘Institutional Investors and Executive Compensation’, Journal of Finance 58, 2351–2374.
Harvey, C. R., K. V. Lins and A. H. Roper: 2004, ‘The Effect of Capital Structure when Expected Agency Costs are Extreme’, Journal of Financial Economics 74, 3–30.
Jensen, M. C.: 1986, `Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers', American Economic Review, 76, 323–329.
Jensen, M. C. and W. H. Meckling: 1976, ‘Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure’, Journal of Financial Economics 3, 305–360.
Margolis, J. D. and J. P. Walsh: 2003, ‘Misery Loves Companies: Rethinking Social Initiatives by Business’, Administrative Science Quarterly 48, 268–305.
Mattingly, J. E. and S. L. Berman: 2006, ‘Measurement of Corporate Social Action: Discovering Taxonomy in the Kinder Lyndenburg Domini Ratings Data’, Business and Society 45, 20–46.
McConnell, J. J. and H. Servaes: 1990, ‘Additional Evidence on Equity Ownership and Corporate Value’, Journal of Financial Economics 27, 595–612.
McConnell, J. J. and H. Servaes: 1995, ‘Equity Ownership and the Two Faces of Debt’, Journal of Financial Economics 39, 131–157.
McWilliams, A. and D. S. Siegel: 2000, ‘Corporate Social Responsibility and Financial Performance: Correlation or Misspecification?’, Strategic Management Journal 21, 603–609.
McWilliams, A., D. S. Siegel and P. M. Wright: 2006, ‘Corporate Social Responsibility: International Perspectives’, Journal of Business Strategies 23, 1–8.
Morck, R., A. Shleifer and R. Vishny: 1988, ‘Management Ownership and Market Valuation: An Empirical Analysis’, Journal of Financial Economics 20, 293–315.
Navarro, P.: 1988, ‘Why do Corporations Give to Charity?’, Journal of Business 61, 65–93.
Orlitzky, M., F. L. Schmidt and S. L. Rynes: 2003, ‘Corporate Social and Financial Performance: A Meta-Analysis’, Organization Studies 24, 403–441.
Qui, L. and H. Wan: 2005, Selection or Influence? Institutional Investors and Acquisition Targets, 2006. Brown Economics Working Paper.
Ryan, H. and R. Wiggins: 2004, ‘Who is in Whose Pocket? Director Compensation, Board Independence, Barriers to Effective Monitoring’, Journal of Financial Economics 73, 497–524.
Sethi, P.: 2005, ‘Investing in Socially Responsible Companies is a Must for Public Pension Funds – Because There is no Better Alternative’, Journal of Business Ethics 56, 99–129.
Shleifer, A. and R. Vishny: 1986, ‘Large Shareholders and Corporate Control’, Journal of Political Economy 94, 461–488.
Videras, J. R. and A. L. Owen: 2006, ‘Public Goods Provision and Well-Being: Empirical Evidence Consistent with the Warm Glow Theory’, Contributions to Economic Analysis & Policy 5(1), Article 9.
Woidtke, T.: 2002, ‘Agents Watching Agents? Evidence from Pension Fund Ownership and Firm Value’, Journal of Financial Economics 63, 99–131.
Zweibel, J.: 1996, ‘Dynamic Capital Structure Under Managerial Entrenchment’, American Economic Review 86, 1197–1215.
Acknowledgements
We thank Ron Giammarino, Rob Heinkel, Alan Kraus, Kai Li, Chris Perignon, Ralph Winter, and seminar participants at Concordia University, Imperial College, Lancaster University, McGill, Simon Fraser University, The University of British Columbia, University of Alberta, University of Colorado at Boulder, VU Amsterdam, Wake Forest University, Wilfrid Laurier University, the 2003 Finance and Accounting in Tel-Aviv conference, the 2004 NFA meetings, the 2005 Metrics Conference at UC Berkeley, the Second Annual Conference on Corporate Governance at Washington University in St. Louis, and the 2006 European Finance Association meeting in Zurich for helpful comments. We want to express our deepest gratitude to Justin Bellew from KLD Research & Analytics, Inc. for providing us data. We also gratefully acknowledge the research support of the Social Sciences and Humanities Research Council of Canada.
Author information
Authors and Affiliations
Corresponding author
Additional information
Earlier versions of this paper were presented with the title “Corporate Social Responsibility as a conflict between owners.”
Rights and permissions
About this article
Cite this article
Barnea, A., Rubin, A. Corporate Social Responsibility as a Conflict Between Shareholders. J Bus Ethics 97, 71–86 (2010). https://doi.org/10.1007/s10551-010-0496-z
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10551-010-0496-z