Corporate Social Responsibility and Capital Allocation Efficiency

Journal of Corporate Finance, Volume 43, Pages 354-377, April 2017

64 Pages Posted: 17 Oct 2017

See all articles by Avishek Bhandari

Avishek Bhandari

Florida Atlantic University - College of Business

David Javakhadze

Florida Atlantic University

Date Written: January 14, 2017

Abstract

We investigate the relationship between corporate social responsibility (CSR) and firm-level capital allocation efficiency. Using seminal investment-Q framework, we provide evidence that CSR distorts investment sensitivity to Q. We further determine that this effect of CSR is moderated by the assumed level of agency conflict, stakeholder engagement, as well as financial slack. We also document that CSR negatively affects the sensitivity of external finance to Q and aggravates investment sensitivity to cash flow. In addition, we find that the distortion in the firm-level capital allocation efficiency is reflected in firm performance. Our findings are robust to alternative variable measurement as well as tests for endogeneity.

Keywords: Corporate Social Responsibility, Investment, Tobin’s q, Cash Flow

JEL Classification: M14, G30, G32

Suggested Citation

Bhandari, Avishek and Javakhadze, David, Corporate Social Responsibility and Capital Allocation Efficiency (January 14, 2017). Journal of Corporate Finance, Volume 43, Pages 354-377, April 2017 . Available at SSRN: https://ssrn.com/abstract=3054236 or http://dx.doi.org/10.2139/ssrn.3054236

Avishek Bhandari

Florida Atlantic University - College of Business ( email )

University Tower
220 SE 2 Avenue
Fort Lauderdale, FL 33301
United States

David Javakhadze (Contact Author)

Florida Atlantic University ( email )

College of Busines
777 Glades Road
Boca Raton, FL 33433
United States
561-297-2914 (Phone)

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