CSR Performance and the Value of Cash Holdings: International Evidence

Abstract

Using a worldwide sample, we examine whether corporate social responsibility (CSR) performance has an impact on the value of cash holdings. We find that investors assign a higher value to cash held by firms that have a high CSR rating. This result is consistent with the idea that CSR policies are a means for managers to act in the shareholders’ interests by mitigating conflicts with stakeholders. Finally, we reveal that CSR performance has a positive impact on the value of cash holdings only for firms which operate in countries where shareholders are well protected from expropriation by managers and in countries where the institutional quality is high.

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Notes

  1. 1.

    It is possible that the level of excess cash has an influence on CSR performance: firms with high value of cash holdings may invest more in CSR. Hence, we acknowledge that some of our empirical tests may suffer from some potential forms of endogeneity and/or multicollinearity. To check for this, we have computed variance inflation factors (VIFs). The VIFs of our variables are below 10, which is a usual threshold to determine whether there is multicollinearity concern. Thus, we can reasonably assume that we are not exposed to multicollinearity problems. This result is available upon request.

  2. 2.

    We have tested that the difference between the two estimated coefficients of XCash i,t  × IVA i,t is not statistically different from zero. This result is available upon request.

  3. 3.

    For the sake of brevity, we did not report alternative estimations of our instrumental variables regressions. For instance, we have re-estimated our regressions, using the actual level of cash holdings instead of excess cash, or restricting our sample to the top quartile of the population by excess cash. Results of these estimations are similar of those reported in Table 7. These results are available upon request.

  4. 4.

    Djankov et al. (2008) explain that “both the original and the revised anti-director rights indices summarize the protection of minority shareholders in the corporate decision-making process, including the right to vote. The index covers the following six areas: (1) vote by mail; (2) obstacles to the actual exercise of the right to vote (i.e., the requirement that shares be deposited before the shareholders’ meeting); (3) minority representation on the board of directors through cumulative voting or proportional representation; (4) an oppressed minority mechanism to seek redress in case of expropriation; (5) preemptive rights to subscribe to new securities issued by the company; and (6) the right to call a special shareholder meeting.”

  5. 5.

    Djankov et al. (2008) argues that “earlier index of anti-director rights (La Porta et al. 1997, 1998) is based on an ad hoc collection of variables meant to capture the stance of corporate law toward shareholder protection. The present index addresses the ways in which the law deals with corporate self-dealing in a more theoretically grounded way.”

  6. 6.

    For the methodology see Kaufmann et al. (2010).

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Acknowledgments

The authors would like to thank Sylvain Marsat, Benjamin Williams, and the “Valeur et RSE” chair for their support and helpful comments, the authors would also like to thank MSCI ESG Research and the Alter-Governance chair for providing the ESG data used in this research, the author is also grateful to Xavier Hollandts and Bertrand Valiorgue, founders of the Alter-Governance chair, for their help and support.

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Correspondence to Guillaume Pijourlet.

Appendix: Calculation of Excess Cash

Appendix: Calculation of Excess Cash

To estimate the “normal” level of cash, we regress the firm’s actual level of cash on variables that control for the usual motives to hold cash, following previous literature (Dittmar and Mahrt-Smith 2007; Drobetz et al. 2010; Frésard and Salva 2010; Gao et al. 2013; Schauten et al. 2013). We use the following model, which is an adaptation of that of Opler et al. (1999):

$$\begin{aligned} Ln(Cash_{i,t} ) = & \beta_{0} + \beta_{1} \;PSG_{i,t} + \beta_{2} Size_{i,t} + \beta_{3} FCF_{i,t} + \beta_{4} NWC_{i,t} + \beta_{5} Industry\;Sigma_{i,t} + \beta_{6} RD_{i,t} \\ \quad + \beta_{7} Dividend_{i,t} + \beta_{8} Leverage_{i,t} + \beta_{9} Capex_{i,t} + Year\;effects + Industry\;effects + Country\;effects \\ + \varepsilon_{i,t} {\kern 1pt} , \\ \end{aligned}$$
(2)

where Cash i,t is cash and cash equivalents scaled by net assets, defined as total assets minus cash and cash equivalents. PSG i,t is the sales growth over the past 3 years. We use PSG i,t in our model to proxy investment opportunities, instead of the market value of firms. As pointed out by Dittmar and Mahrt-Smith (2007), Frésard and Salva (2010), or Drobetz et al. (2010), the use of a firm’s market value as a proxy of investment opportunities to predict the optimal level of cash is problematic. If cash holdings have an impact on the market value of firms, an endogenous issue may occur if we use market value to predict the level of cash. Size i,t is the natural logarithm of net assets. FCF i,t is defined as earnings after interest, dividends, and taxes, but before depreciation, scaled by net assets. NWC i,t is net working capital, calculated as the difference between current assets (net of cash) and current liabilities, divided by net assets. Industry Sigma i,t is a proxy for cash-flow risk. It is the industry average of the standard deviation over the previous 10 years of cash flow to net assets. For each observation, we calculate the standard deviation of firm-level cash flow to net assets for the previous 10 years only if we have at least three observations in the period (Bates et al. 2009). RD i,t is the ratio of R&D expenses scaled by net assets, and is set to zero when R&D expenses are missing, following Bates et al. (2009). Dividend i,t is the ratio of dividends to net assets. Leverage i,t is the ratio of total debt to net assets. CAPEX i,t is the ratio of capital expenditures to net assets. Our estimations also include country, industry, and year effects. Standard errors are clustered at the firm-level.

We report the estimation of Eq. (2) in Table 11, and summary statistics of variables that we used in Tables 9 and 10.

Table 10 Correlation matrix
Table 11 Calculation of excess cash

Our calculation of excess cash is based on results of the model presented in column 1. We define excess cash as the difference between the actual level of cash and our predicted optimal level of cash, consistent with Dittmar and Mahrt-Smith (2007), Drobetz et al. (2010), or Frésard and Salva (2010). We observe that the explanatory power of our regressions is satisfactory. R 2 is 32.07 %. Most of our control variables have the expected signs. More specifically, we observe a positive and statistically significant relationship between cash holdings and past sales growth, suggesting that firms with higher growth opportunities hold less cash because these firms have greater financing needs (Bates et al. 2009; Boubaker et al. 2013). Moreover, we confirm that cash holdings are lower in large firms because of economies of scale in cash management (Miller and Orr 1966; Opler et al. 1999). We also find a negative and significant relationship between the level of cash holdings and net working capital, because net working capital is a substitute for cash (Opler et al. 1999; Gao et al. 2013). In addition, firms seem to hold less cash when their leverage is high because firms may use their cash reserves to repay debt. We also observe that higher research and development expenses are positively and significantly linked to cash holdings. This result is consistent with the idea that firms with higher R&D expenses may have higher financial distress costs, and thus hold more cash (John 1993; Opler et al. 1999). We find a positive relationship between dividends and the level of cash holdings. This result can be appeared surprising. Indeed, Opler et al. (1999) and Bates et al. (2009) argue that firms paying higher dividends are less financially constrained, and thus may have lower precautionary motive for holding cash. Thus, a negative relationship between dividends and cash holdings can be expected. However, Ozkan and Ozkan (2004) explain that firms that pay dividends may hold more cash than other firms in order to ensure themselves that they are able to pay dividends.

In columns 2–6, we add the overall CSR performance measure (column 2) and the four pillars of CSR performance (column 3–6) in our baseline model. Indeed, if we consider that CSR performance is a consequence of agency problems and that CSR performance is related to managerial entrenchment (Cespa and Cestone 2007; Surroca and Tribó 2008; Fabrizi et al. 2014), we can expect that CSR performance impacts negatively the level of firms’ cash holdings. In fact, Jensen (1986) explains that entrenched managers are more inclined to extract private benefits and to waste a firm’s financial resources. Results presented in columns 2–6 seem to show that CSR performance does not have a significant impact on the level of cash holdings. Coupled with the others results of this article, it implies that CSR performance has no impact on the decision to accumulate a firm’s cash holdings, but has an impact on how firms use their cash resources. This is consistent with Dittmar and Mahrt-Smith (2007), who underline that the level of cash is mainly driven by external factors such as shocks to profitability or competitive pressures. However, it is possible that CSR performance has an impact on how firms use their cash resources. Hence, high CSR firms may have investment policies different from those of low CSR firms. In this way, Erhemjamts et al. (2013) examine the relationship between CSR commitment and a firm’s investment policy. These authors explain that the level of CSR performance impacts firms’ investment practices. It would be interesting in future research to study how socially responsible firms use cash held in excess.

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Arouri, M., Pijourlet, G. CSR Performance and the Value of Cash Holdings: International Evidence. J Bus Ethics 140, 263–284 (2017). https://doi.org/10.1007/s10551-015-2658-5

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Keywords

  • Corporate social responsibility
  • Cash holdings
  • Investor protection
  • Value of cash

JEL Classification

  • G32
  • G34
  • M14