Corporate Social Responsibility and Imperfect Regulatory Oversight: Theory and Evidence from Greenhouse Gas Emissions Disclosures
68 Pages Posted: 7 Dec 2020 Last revised: 18 Nov 2021
Date Written: December 2020
This paper develops and tests a model in which 1) purpose-driven firms emerge as an optimal organizational form even for profit-maximizing entrepreneurs; and 2) CSR arises endogenously as a response to imperfect regulatory oversight. Purpose-driven organizations allow entrepreneurs to create rents for socially responsible (e.g. environmentally concerned) workers by allowing them to reduce the negative externalities (e.g. pollution) that would be generated without them, and to extract these rents through lower wages. Through this rent extraction entrepreneurs internalize the pro-social preferences of their responsible workers, and in turn engage in CSR through self-regulation, provided that regulatory oversight is poor enough - and hence regulation is loose enough - to make self-regulation worthwhile. The key prediction of the model is a negative impact of regulatory oversight on CSR activity. To test this, we exploit the UK's 2012 decision to mandate greenhouse gas emissions disclosure in all public firms. Consistent with our theory, we find that firms in the UK receive lower CSR ratings after increased regulatory oversight compared to firms from the other 15 European countries which did not experience mandatory disclosure requirements. We also perform a number of robustness checks and explore the interaction between oversight, wages and CSR. These empirical findings provide further support for the model.
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