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Corporate Social Responsibility and Investment Efficiency

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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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  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. 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. 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. 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. 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.

  6. We follow Benlemlih and Girerd-Potin (2014) by considering the definition of the National Bureau of Economic Research, which defines recession as a significant decline in economic activity that lasts more than a few months and that is visible in different macroeconomic variables. According to the National Bureau of Economic Research, the recession cycle period in the subprime crisis endured between December 2007 and June 2009.


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Correspondence to Mohammed Benlemlih.


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.





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



CEO’s Identity promotion

Controversies (e.g. fines)

Board of directors


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



Beneficial products and services

Hazardous waste

Pollution prevention

Regulatory problems


Ozone-depleting Chemicals

Clean energy

Substantial emissions


Agricultural chemicals

Property, plants, and equipment

Climate change

Management systems

Other concerns

Other strengths


Product characteristics


Product safety


Marketing/contracting Concerns

Benefits for the economically disadvantaged


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




Panel A. Dependent variables


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



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


A proxy for investment efficiency equals capital expenditure deflated by the lagged book value of assets (Chen et al. 2014)

As above


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


The human rights score equals the number of strengths minus the number of concerns in the human right issues area

Authors’ calculations based on



The employee relations score equals the number of strengths minus the number of concerns in the employee relations qualitative issues area

As above


The diversity score equals the number of strengths minus the number of concerns in the diversity qualitative issues area

As above


The community score equals the number of strengths minus the number of concerns in the community qualitative issues area

As above


The product score equals the number of strengths minus the number of concerns in the product qualitative issues area

As above


The environment score equals the number of strengths minus the number of concerns in the environment qualitative issues area

As above


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


The total number of strengths of the human rights, employee relations, diversity, community, product characteristics, and environment qualitative issues areas

As above


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


Natural logarithm of the dollar value of the total book value assets

Authors’ calculations based on



Standard deviation of cash and short-term investments from t − 3 to t

As above


Logarithmic value number of the years between the fiscal year and the Compustat listing year

As above


The ratio of tangible fixed assets to total assets

As above


Standard deviation of return on assets (ROA) from t − 4 to t

As above


Market value of equity minus book value of equity plus the book value of assets, all scaled by book value of assets

As above


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


A dummy that takes the value of one if net income before extraordinary items is negative, and zero otherwise

As above


The ratio of cash flow to total assets



The ratio of the book value of total liabilities and debt scaled by book value of total assets

As above


A dummy variable that takes a value of 1 for years 2007 and 2008 and 0 otherwise



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


The industry-year average of the overall CSR score

Authors’ calculations based on



The firm-level initial value of the overall CSR score


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Benlemlih, M., Bitar, M. Corporate Social Responsibility and Investment Efficiency. J Bus Ethics 148, 647–671 (2018).

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