Do Investors Value a Firm's Commitment to Social Activities? The Moderating Role of Intangibles and the Impact of the Sarbanes-Oxley Act

Abstract

Previous empirical research has found mixed results of the impact of corporate social responsibility (CSR) investments on financial performance. In this paper we contribute to the literature by exploring the complex relationship between intangibles, CSR, and financial performance. In a two stage investor decision-making model we control for firms' investing in intangibles in our analysis of the impact of CSR on both accounting and market-based measures of financial performance. In addition, we study how a change in the legal environment, the passage of the Sarbanes-Oxley Act, affects the role of intangibles and its impact on the relation between CSR and firm value. Both Partial Least Squares and traditional OLS regression analyses were carried out to measure the impact of CSR intangibles, and its interaction, for a sample of the top corporate citizens as complied by KLD Research and Analytics. Our findings suggest that (1) a firm's commitment to social activities (CSR) contributes to its financial performance; (2) intangibles moderate the relation between CSR and firm value; and (3) an increase of the impact of intangibles on firm value in the post-SOX period to the detriment of CSR which is no longer significant.

Keywords: Intangibles, Corporate Social Responsibility, Investor decision-making, Sarbanes Oxley Act

JEL Classification: G12, G38, M14, M41, D81