Corporate Social Responsibility and Investment Efficiency

Abstract

Using a sample of 21,030 US firm-year observations that represents more than 3000 individual firms over the 1998–2012 period, we investigate the relationship between Corporate Social Responsibility (CSR) and investment efficiency. We provide strong and robust evidence that high CSR involvement decreases investment inefficiency and consequently increases investment efficiency. This result is consistent with our expectations that high CSR firms enjoy low information asymmetry and high stakeholder solidarity (stakeholder theory). Moreover, our findings suggest that CSR components that are directly related to firms’ primary stakeholders (e.g. employee relations, product characteristics, environment, and diversity) are more relevant in reducing investment inefficiency compared with those related to secondary stakeholders (e.g. human rights and community involvement). Finally, additional results show that the effect of CSR on investment efficiency is more pronounced during the subprime crisis. Taken together, our results highlight the important role that CSR plays in shaping firms’ investment behaviour and efficiency.

Appendices

Appendix 1: Qualitative Issue Area Definitions

We use six qualitative issue areas from KLD: community, diversity, employee relations, environment, product characteristics, and human rights. Each area has several strengths and concerns, as illustrated below. We calculate a score for each area equal to the number of strengths minus the number of concerns. The overall CSR score is equal to the sum of all areas’ scores.

Dimension	Strengths	Concerns
Community	Charitable giving	Investment controversies
	Innovative giving	Negative economic impacts
	Non-US charitable giving	Indigenous peoples relations
	Support for housing	Tax disputes
	Support for education	Other concerns
	Indigenous peoples Relations
	Volunteer programmes
	Other strengths
Diversity	CEO’s Identity promotion	Controversies (e.g. fines)
	Board of directors	Non-representation
	Women and minority contracting	Other concerns
	Employment of the disabled
	Gay and lesbian policies other strengths
Employee relations	Union relations	Union relations
	No-layoff policy	Health and safety concerns
	Cash profit sharing	Workforce reductions
	Employee involvement	Retirement benefits concerns
	Retirement benefits Strengths	Other concerns
	Health and safety strengths
	Other strengths
Environment	Beneficial products and services	Hazardous waste
	Pollution prevention	Regulatory problems
	Recycling	Ozone-depleting Chemicals
	Clean energy	Substantial emissions
	Communications	Agricultural chemicals
	Property, plants, and equipment	Climate change
	Management systems	Other concerns
	Other strengths
Product characteristics	Quality	Product safety
	R&D/innovation	Marketing/contracting Concerns
	Benefits for the economically disadvantaged	Antitrust
	Other strengths	Other concerns
Human rights	Positive record in South Africa	South Africa concerns
	Indigenous peoples relations strengths	Northern Ireland concerns
	Labour rights strengths	Burma concerns
	Other strengths	Mexico concerns
		Labour Rights Concerns
		Indigenous peoples relations concerns other concerns

Appendix 2: Variable Definitions and Data Sources

Variables	Definition	Source
Panel A. Dependent variables
INV_INEFF	Investment inefficiency is measured as the residual from a simple investment model (Biddle et al. 2009) that predicts the level of investment based on growth opportunities (measured by sales growth). Deviations from the model, as reflected in the error terms of the investment model, represent the investment inefficiency $Investment_{i, \, t} = \beta_{0} + \beta_{1} Sales\,Growth_{i, \, t - 1} + n_{I,t}$ Investment i, t is the total investment of firm i in year t, defined as the net increase in tangible and intangible assets and scaled by lagged total assets. Sales Growth i,t−1 is the rate of change in sales from year t − 2 to year t − 1 of firm i. The estimation of the model is made cross-sectionally for each year and industry	Authors’ calculations based on COMPUSTATdata
I	A proxy for investment efficiency equals the sum of yearly growth in property, plants, and equipment, plus growth in inventory, plus R&D expenditure, deflated by the lagged book value of assets (Chen et al. 2014)	As above
CAPX_RAT	A proxy for investment efficiency equals capital expenditure deflated by the lagged book value of assets (Chen et al. 2014)	As above
CAPX_XRD	A proxy for investment efficiency equals capital expenditure plus R&D deflated by the lagged book value of assets (Chen et al. 2014)
Panel B. CSR variables
HUM_NET	The human rights score equals the number of strengths minus the number of concerns in the human right issues area	Authors’ calculations based on MSCI ESG STATS data
EMPL_NET	The employee relations score equals the number of strengths minus the number of concerns in the employee relations qualitative issues area	As above
DIV_NET	The diversity score equals the number of strengths minus the number of concerns in the diversity qualitative issues area	As above
COM_NET	The community score equals the number of strengths minus the number of concerns in the community qualitative issues area	As above
PRO_NET	The product score equals the number of strengths minus the number of concerns in the product qualitative issues area	As above
ENV_NET	The environment score equals the number of strengths minus the number of concerns in the environment qualitative issues area	As above
CSR_NET	The overall CSR score equals the sum of the human rights, employee relations, diversity, community, product characteristics, and environment qualitative issues areas’ scores	As above
CSR_STR	The total number of strengths of the human rights, employee relations, diversity, community, product characteristics, and environment qualitative issues areas	As above
CSR_CON	The total number of concerns of the human rights, employee relations, diversity, community, product characteristics, and environment qualitative issues areas	As above
Panel C. Control variables
SIZE	Natural logarithm of the dollar value of the total book value assets	Authors’ calculations based on COMPUSTAT data
S_CASH	Standard deviation of cash and short-term investments from t − 3 to t	As above
LN_AGE	Logarithmic value number of the years between the fiscal year and the Compustat listing year	As above
TANG	The ratio of tangible fixed assets to total assets	As above
S_ROA	Standard deviation of return on assets (ROA) from t − 4 to t	As above
TOB_Q	Market value of equity minus book value of equity plus the book value of assets, all scaled by book value of assets	As above
F_CONS	An index of financial constraints developed by Hadlock and Pierce (2010) as: $- 0.0 7 3 7*{\text{SIZE}} + 0.0 4 3*{\text{SIZE}}^{ 2} - 0.0 40*{\text{AGE}}.$	As above
LOSS	A dummy that takes the value of one if net income before extraordinary items is negative, and zero otherwise	As above
CASH_AT	The ratio of cash flow to total assets	COMPUSTAT data
LEV	The ratio of the book value of total liabilities and debt scaled by book value of total assets	As above
CRISE	A dummy variable that takes a value of 1 for years 2007 and 2008 and 0 otherwise
INDUSTRY FE	A dummy that takes a value of 1 if the firm is active in one of the two-digit Standard Industrial Classification codes and otherwise
Panel D. Instrumental variables
CSR_IND	The industry-year average of the overall CSR score	Authors’ calculations based on MSCI ESG STATS data
CSR_INI	The firm-level initial value of the overall CSR score	KLD STATS data