Socially Responsible Firms
CentER Discussion Paper Series No. 2014-043
43 Pages Posted: 30 Jul 2014 Last revised: 12 Aug 2014
Date Written: July 29, 2014
In the corporate finance tradition starting with Berle & Means (1923), corporations should generally be run so as to maximize shareholder value. The agency view of corporate social responsibility (CSR) generally considers CSR as a managerial agency problem and a waste of corporate resources, since corporate insiders do good with other people’s money. We evaluate this agency view using large-scale datasets with global coverage (59 countries) on firm-level corporate engagement and compliance with respect to environmental, social, and governance issues. Using an instrumental variable approach, we document that CSR ratings are higher for companies with fewer agency problems (using standard proxies such as having lower levels of free cash flow and higher dividend payout and leverage ratios). Moreover, certain aspects of CSR (e.g., environmental, labor and social protection) are associated with increased executive pay-for-performance sensitivity and the maximization of shareholder value.
Keywords: corporate social responsibility, agency problems, value enhancement, corporate
JEL Classification: G30, G32, M14
Suggested Citation: Suggested Citation