Abstract
This study examines whether socially responsible companies are likely to conduct a stock split. We argue that these companies, compared to their counterparts, could use their strong corporate social responsibility (CSR) performance to reduce information asymmetry with shareholders, and therefore, are less likely to rely on stock splits to signal their future growth potentials. We find empirical evidence to support our hypothesis and investigate the reasons for the lower frequency of stock splits among CSR oriented firms. We find that more socially responsible firms experience a smaller increase in trading volume and a greater increase in bid-ask spread following a stock split than less socially responsible firms. Furthermore, our study finds that, when more socially responsible firms decide to conduct a stock split, they attract a greater proportion of institutional investors with long-term investment horizons.
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Notes
See http://money.cnn.com/2018/04/17/news/companies/starbucks-ceo-meeting-arrested-men/index.html for the Starbuck CEO’s response to the incident in a Philadelphia Starbucks store. See https://www.jnj.com/our-company/statement-on-recent-talc-verdict for Johnson & Johnson’s formal response to concerns about the safety of its talcum powder. Both Starbucks and Johnson & Johnson have relatively higher CSR performance than an average firm does in our sample.
Preston and Post (1966) indicate that firms have full accountability to address social issues. Sethi (1971) provides cases corporate actions adversely affect the society and argues that there is a need for corporate social responsibility and accountability to address social issues that corporations create. Carroll (1979) indicates that there are four levels of corporate social responsibility (CSR): economic responsibility, legal responsibility, ethical responsibility, and discretionary responsibility. McWilliams and Siegel (2011) define corporate social responsibility as corporate actions that are not required by laws to support societal needs beyond the shareholders’ interest.
MSCI ESG methodology is available at https://www.msci.com/eqb/methodology/meth_docs/Executive_Summary_MSCI_ESG_Ratings_Methodology.pdf.
We winsorize all the variables below 5 percentile and above 95 percentile to eliminate outliers.
This finding is also consistent with Minnick and Raman (2014) that demonstrate the relationship between increasing percentage of institutional investors with long-term investment horizons and the declining trend of stock split.
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Acknowledgments
The authors thank the Editor, Cheng-Few Lee, and anonymous reviewer for their constructive comments and recommendations. Harjoto acknowledges the release time and financial support from the 2015–2017 Denney Professorship Award for this research. Kim recognizes the release time from the 2016–2018 Julian Virtue Award and Walton recognizes the release time from the 2017–2019 Julian Virtue Award for this research. Laksmana acknowledges the research funding provided by the College of Business Administration at Kent State University.
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Appendix
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Harjoto, M.A., Kim, D., Laksmana, I. et al. Corporate social responsibility and stock split. Rev Quant Finan Acc 53, 575–600 (2019). https://doi.org/10.1007/s11156-018-0759-9
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DOI: https://doi.org/10.1007/s11156-018-0759-9