Download This PaperCorporate Social Responsibility and Capital Allocation Efficiency
Journal of Corporate Finance, Volume 43, Pages 354-377, April 2017
64 Pages Posted: 17 Oct 2017
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
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