Corporate Social Responsibility and Internal Control Quality: Reducing Agency Costs by Engaging Employees
Posted: 29 Mar 2012
Date Written: March 28, 2012
We study the relation between corporate social responsibility (CSR) and internal control quality by empirically testing that CSR can be used to reduce managers’ agency behaviors. Consistent with this agency cost hypothesis, we find that CSR indeed improves the firms' internal control environment by inducing managers to exert a high level of efforts. Especially, we find that the relation between CSR and internal controls is driven by the employee relations. Firms with CSR programs are able to engage their employees by providing more benefits and training to their employees. This in turn will lead to greater employee satisfaction and thus better internal controls. While extant studies on CSR tend to focus on CSR’s impact on external factors, our study contributes to the CSR literature by examining CSR’s impact on internal governance. While previous studies on internal controls have found that the management or the board are associated with the strength of internal controls, our paper contributes to the internal control literature by identifying that employee relation also contributes to internal control quality.
Keywords: Corporate Social Responsibility, Internal Control Weakness, Employee Relations, Agency Costs
JEL Classification: M42
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