This study provides evidence on the relationship between corporate social responsibility and firms’ credit ratings. We find that credit rating agencies tend to award relatively high ratings to firms with good social performance. This pattern is robust to controlling for key firm characteristics as well as endogeneity between CSR and credit ratings. We also find that CSR strengths and concerns influence credit ratings and that the individual components of CSR that relate to primary stakeholder management matter most in explaining firms’ (...) creditworthiness. Overall, our results suggest that CSR performance conveys important non-financial information that rating agencies are likely to use in their evaluation of firms’ creditworthiness, and that CSR investments—particularly those that extend beyond compliance behavior to reflect what is desired by society—can lead to lower financing costs resulting from higher credit ratings. (shrink)

In this article, we examine the empirical association between corporate governance (CG) and corporate social responsibility (CSR) engagement by investigating their causal effects. Employing a large and extensive US sample, we first find that while the lag of CSR does not affect CG variables, the lag of CG variables positively affects firms’ CSR engagement, after controlling for various firm characteristics. In addition, to examine the relative importance of stakeholder theory and agency theory regarding the associations among CSR, CG, and corporate (...) financial performance (CFP), we also examine the relation between CSR and CFP. After correcting for endogeneity bias, our results show that CSR engagement positively influences CFP, supporting the conflict-resolution hypothesis based on stakeholder theory, but not the CSR overinvestment argument based on agency theory. Furthermore, firms’ CSR engagement with the community, environment, diversity, and employees plays a significantly positive role in enhancing CFP. (shrink)

This study investigates the effects of internal and external corporate governance and monitoring mechanisms on the choice of corporate social responsibility (CSR) engagement and the value of firms engaging in CSR activities. The study finds the CSR choice is positively associated with the internal and external corporate governance and monitoring mechanisms, including board leadership, board independence, institutional ownership, analyst following, and anti- takeover provisions, after controlling for various firm characteristics. After correcting for endogeneity and simultaneity issues, the results show that (...) CSR engagement positively influences firm value measured by industry-adjusted Tobin’s q. We find that the impact of analyst following for firms that engage in CSR on firm value is strongly positive, while the board leadership, board independence, blockholders’ ownership, and institutional ownership play a relatively weaker role in enhancing firm value. Furthermore, we find that CSR activities that address internal social enhancement within the firm, such as employees diversity, firm relationship with its employees, and product quality, enhance the value of firm more than other CSR subcategories for broader external social enhancement such as community relation and environmental concerns. (shrink)

In recent years, firms have greatly increased the amount of resources allocated to activities classified as Corporate Social Responsibility (CSR). While an increase in CSR expenditure may be consistent with firm value maximization if it is a response to changes in stakeholders' preferences, we argue that a firm's insiders (managers and large blockholders) may seek to overinvest in CSR for their private benefit to the extent that doing so improves their reputations as good global citizens and has a "warm-glow" effect. (...) We test this hypothesis by investigating the relation between firms' CSR ratings and their ownership and capital structures. Employing a unique data set that categorizes the largest 3000 U. S. corporations as either socially responsible (SR) or socially irresponsible (SI), we find that on average, insiders' ownership and leverage are negatively related to the firm's social rating, while institutional ownership is uncorrelated with it. Assuming that higher CSR ratings is associated with higher CSR expenditure level, these results support our hypothesis that insiders induce firms to over-invest in CSR when they bear little of the cost of doing so. (shrink)

Carroll (1991) encouraged researchers in Social Issues Management (SIM) to continue to measure Corporate Social Performance (CSP) from a variety of different perspectives utilizing a variety of different measures. In addition, Wolfe and Aupperle (1991) (and others) have asserted that there is no, single best way to measure CSP and that multiple measures and perspectives help develop the field. However, Pfeffer (1993) suggest that a lack of consistent measurement has constrained organization studies (and by implication, the field of social issues (...) management,) in its development as a field. It may be in the best interest of social issues management researchers to try to development a common body of measures and data. Recently, Kinder, Lydenberg and Domini & Co. (KLD — a social choice investment advisory firm) has made available their social performance database. The KLD data have potential to become a widely accepted set of CSP measures. The purpose of this paper is to present a construct validity study comparing the KLD data to other measures of CSP. (shrink)

To many, recent allegations of accounting fraud (or earnings management; EM) at Enron, coupled with similar ones at many other corporations, are a strong indication of a serious decay in business ethics. In academics, this raises the concern between EM and corporate social responsibility (CSR). Since it has neither been documented, nor globally tested whether CSR mitigates or increases the extent of EM, three kinds of EM are studied: earnings smoothing, earnings aggressiveness, and earnings losses and decreases avoidance. The extents (...) to which financial characteristics and institutional variables have an impact on the extent to which companies conduct EM are also tested. Our study investigates whether the CSR-related features of 1,653 corporations in 46 countries had a positive or negative effect on the quality of their publicly released financial information during the 1993-2002 period. There is no question that with a greater commitment to CSR, the extent of earnings smoothing is mitigated, that of earnings losses and decreases avoidance is reduced, but the extent of earnings aggressiveness is increased. (shrink)

Drawing on risk mitigation theory, this article examines whether the improvement of firms’ social performance reduces debt financing costs (CDFs) in China, the world’s largest emerging market. Employing both the ordinary least square (OLS) and the two-stage instrumental variable regression methods, we find that improved corporate social responsibility (CSR) reduces the CDF when firms’ CSR investment is lower than an optimal level; however, this relationship is reversed after the CSR investment exceeds the optimal level. Firms with extremely low or extremely (...) high CSR are subject to a higher CDF. The results also suggest that the optimal CSR level for small firms is higher than that for large firms. This study is the first to document a U-shaped relationship between CSR and CDF and also the first to investigate this relationship within an emerging market context. (shrink)

Most definitions of the concept of stakeholder include only human entities. This paper advances the argument that the non-human natural environment can be integrated into the stakeholder management concept. This argument includes the observations that the natural environment is finally becoming recognized as a vital component of the business environment, that the stakeholder concept is more than a human political/economic one, and that non-human nature currently is not adequately represented by other stakeholder groups. In addition, this paper asserts that any (...) of several stakeholder management processes can readily include the natural environment as one or more stakeholders of organizations. Finally, the point is made that this integration would provide a more holistic, value-oriented, focused and strategic approach to stakeholder management, potentially benefitting both nature and organizations. (shrink)

This research note analyzes the relationship between indicators of corporate social and financial performance within a comprehensive theoretical framework. The results, based on data for 67 large U.S. corporations for 1982-1992, reveal no significant negative social-financial performance relationships and strong positive correlations in both contemporaneous and lead-lag formulations.

Social and environmental ratings provided by social rating agencies are multidimensional. The first goal of our paper is to identify a small number of independent and relevant socially responsible (SR) dimensions reflecting a firms’ coherent posture toward social issues. We put forward that these dimensions are not exactly the same as the ESG ones (Environment, Social, and Governance). Using the six sub-ratings provided by the Vigeo rating agency, we perform a principal component analysis and we highlight three main independent SR (...) dimensions related to (1) business stakeholders (employees, customers, and suppliers), (2) societal stakeholders (environment and society), and (3) financial stakeholders (stockholders and debt holders). The second objective of our paper is to explore the link between stock returns and these three SR dimensions. Our most notable finding is that for each SR dimension, investors ask for an additional risk premium when they accept to hold non-socially responsible stocks. The cost of equity is thus lower for SR firms. The average premium over the period 2003–2010 is larger for the components “business stakeholders” and “financial stakeholders” than for the component “societal stakeholders.” The premium for this last component has only existed since the end of 2008. Since that time, environment and community involvement have become important risk factors strongly considered by investors. For the three dimensions, investors notably penalize large non-social firms and reward small social firms. (shrink)

In this study, we examine the empirical association between corporate social responsibility and information asymmetry by investigating their simultaneous and endogenous effects. Employing an extensive U.S. sample, we find an inverse association between CSR engagement and the proxies of information asymmetry after controlling for various firm characteristics. The results hold using 2SLS considering the reverse side of information asymmetry influencing CSR activities. The results also hold after mitigating endogeneity based on the dynamic panel system generalized method of moment. Furthermore, the (...) CSR–information asymmetry relation is amplified in high-risk firms due to managers’ efforts to build a good reputation. Last, we find that CSR engagement is inversely associated with reputational risk measure and lower predicted value of reputational risk is positively associated with lower information asymmetry measures. We interpret these results as supporting the stakeholder theory-based, reputation-building explanation that considers CSR engagement as a vehicle to build and maintain firm reputation thereby enhancing the information environment. (shrink)

In this study, we examine the relation between corporate environmental responsibility and risk in U.S. public firms. We develop and test the risk-reduction, resource-constraint, and cross-industry variation hypotheses. Using an extensive U.S. sample during the 1991–2012 period, we find that for U.S. industries as a whole, CER engagement inversely affects firm risk after controlling for various firm characteristics. The result remains robust when we use firm fixed effect or an alternative measure of CER using principal component analysis or downside risk (...) measures. To address the concern of endogeneity bias, we use a system equations approach and dynamic system generalized methods of moment regressions, and continue to find that environmentally responsible firms experience lower risk. These findings support the risk-reduction hypothesis, but not the resource-constraint hypothesis, along with the notion that the top management in U.S. firms is generally risk averse and that their CER engagement facilitates their risk management efforts. Our cross-industry analysis further reveals that the inverse CER-risk association mainly comes from the manufacturing sector, whereas in the service sector, CER tends to increase firm risk. (shrink)

In this article, we extend the streams of research on the capital structure of socially responsible firms by investigating the impact of corporate social responsibility on firm debt maturity. Using a large sample of US firms, we provide evidence that high CSR firms significantly reduce their debt maturity. In particular, our results suggest that diversity and community are the dimensions that matter the most in explaining debt maturity. In additional analyses that use a seemingly unrelated regression approach, our results show (...) that CSR decreases the extent to which investments are financed with long-term debt and increases the extent to which investments are financed with short-term debt and shareholders’ equity. Overall, these findings support the view that high CSR firms use debt maturity to manage CSR overinvestment problems and to signal their high quality and their access to the debt market. (shrink)