Asymmetric Information and Corporate Social Responsibility

Abstract

This article addresses the question whether companies benefit from their commitment to corporate social responsibility (CSR). The authors argue that firms which score high on CSR activities build investor confidence and find evidence that they benefit from lower information asymmetry. The authors measure information asymmetry by insider trading, which is defined as the trading of a company’s shares by corporate insiders who have an information advantage with the aim to reap gains or avoid losses. Using a sample of U.S. firms listed in the MSCI World Index during the period 2004 to 2013 and the firm- and industry-level CSR rating from Global Engagement Service (GES), the authors show that insider transactions in firms with a high score on CSR activities lead to lower abnormal returns. This investigation extends current literature on the business case for CSR by explaining the influence of CSR activities on asymmetric information.

Sustainable development and corporate governance in the financial system: Are environmentally friendly banks less risky?

“…This is a strictly operational motive, as the prevention of environmental risk may generate economic value. Banks' increased attention to the environment may be reflected in the selection of more sustainable and competitive firms that are equipped with a higher capacity for stakeholder influence (Barnett, 2007) and high earnings quality, a high degree of transparency, and high moral standards (Lopatta et al, 2016). In this sense, banks have a relevant social impact.…”

“…Banks' level of care for the environment may reflect additional requirements, such as lower environmental risk, which relates to how an entrepreneur designs and manages a business (Weber, 2012). Banks' increased attention to the environment may be reflected in the selection of more sustainable and competitive firms that are equipped with a higher capacity for stakeholder influence (Barnett, 2007) and high earnings quality, a high degree of transparency, and high moral standards (Lopatta et al, 2016). Of course, these factors help banks to mitigate the adverse selection arising from an ex-ante information gap and the moral hazard caused by an ex-post information gap.…”

“…At the same time, Mason (2012) argues that green customers are willing to pay a premium price for environmentally products. Indeed, as determined by various studies (Kim, Park, & Wier, 2012;Lopatta, Buchholz, & Kaspereit, 2016), a higher level of firm environmental activism is associated with higher earnings quality, a greater degree of transparency, and higher moral standards. In addition, a firm may be forced to stop its activity because of an inability to bear the costs of complying with increasingly onerous environmental regulations.…”

“…Banks that include environmental considerations as part of the credit appraisal process should be better able to mitigate the information asymmetry that is among the main causes of banks' nonperforming loans. Indeed, as determined by various studies (Kim, Park, & Wier, 2012;Lopatta, Buchholz, & Kaspereit, 2016), a higher level of firm environmental activism is associated with higher earnings quality, a greater degree of transparency, and higher moral standards.…”

The Impact of Board Structure on Corporate Social Responsibility: A Temporal View

“…GES has been used in a variety of CSR studies (e.g. Lopatta and Kaspereit, ; Semenova and Hassel, ; Lopatta et al , ), and is a top three global CSR rating research agency (Schäfer et al , ). In all, 300 firms were analyzed.…”