Corporate Social Responsibility and Internal Control Quality: Reducing Agency Costs by Engaging Employees

Posted: 29 Mar 2012

See all articles by Jun Guo

Jun Guo

Rutgers, The State University of New Jersey - Rutgers University, Camden

Pinghsun Huang

National Cheng Kung University

Yan Zhang

State University of New York at Binghamton - School of Management

Nan Zhou

University of Cincinnati - Lindner College of Business

Date Written: March 28, 2012

Abstract

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

Suggested Citation

Guo, Jun and Huang, Pinghsun and Zhang, Yan and Zhou, Nan, Corporate Social Responsibility and Internal Control Quality: Reducing Agency Costs by Engaging Employees (March 28, 2012). Available at SSRN: https://ssrn.com/abstract=2030416

Jun Guo

Rutgers, The State University of New Jersey - Rutgers University, Camden ( email )

Camden, NJ 08102
United States

Pinghsun Huang

National Cheng Kung University ( email )

1 Ta-Hsueh Road
Tainan, 701
Taiwan
+886 6 275 7575 ext 53441 (Phone)
+886 6 274 4104 (Fax)

Yan Zhang (Contact Author)

State University of New York at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States
607-777-6195 (Phone)
607-777-4422 (Fax)

Nan Zhou

University of Cincinnati - Lindner College of Business ( email )

P.O. Box 210211
Cincinnati, OH 45221-0211
United States

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