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.

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Notes

  1. 1.

    In 2014, the plenary of the European Parliament adopted a directive on extra-financial information disclosure that concerns large companies and groups. The companies concerned will have the obligation of disclosing information on policies, risks, and outcomes as regards environmental-, social-, and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity in their board of directors. These new extra-financial information disclosure rules will be applied to some large companies with more than 500 employees.

  2. 2.

    Several other studies provide similar results regarding the negative effect of CSR on information asymmetry and earnings management. For instance, Hong and Kacperczyk (2009) provide similar findings by analysing sin companies; Cohen et al. (2011) show that investors expressed an interest in increasing their use of non-financial information in the future, and Dhaliwal et al. (2012) demonstrate that the benefits associated with high CSR disclosure exceed the reduction of information asymmetry and generate a reduction in the cost of equity.

  3. 3.

    The mechanism through which CSR increases firms’ competitive advantages are multiple, namely, firm’s image, firm’s reputation, segmentation, and long-term cost saving.

  4. 4.

    As in Servaes and Tamayo (2013), we do not believe that corporate governance is a part of CSR. Corporate governance concerns the mechanisms that allow shareholders to reward and exert control on agents. CSR deals with the social and environmental objectives of the company and stakeholders other than shareholders. We thus follow Servaes and Tamayo (2013) by the excluding corporate governance component when constructing our overall CSR score. However, our results remain unchanged when we include the corporate governance area in the calculation of our overall CSR measure.

  5. 5.

    Previous literature shows alternative methods for creating a single CSR score. For example, Cai el al. (2015) calculate a CSR index by dividing the net of strengths and concerns by the total maximum possible number of strengths and concerns. In unreported results we calculate the overall CSR score using this alternative approach and re-run our main analysis. Our findings fully confirm the preliminary results and suggest that our results are not driven by the choice of the CSR measure.

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Correspondence to Mohammed Benlemlih.

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

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Benlemlih, M., Bitar, M. Corporate Social Responsibility and Investment Efficiency. J Bus Ethics 148, 647–671 (2018). https://doi.org/10.1007/s10551-016-3020-2

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Keywords

  • Corporate social responsibility
  • Corporate governance
  • Investment efficiency
  • Stakeholders theory

JEL Classification

  • G32
  • O16
  • M14