The influence of corporate social responsibility on investment efficiency and innovation

Abstract

We examine two important channels through which corporate social responsibility (CSR) affects firm value: investment efficiency and innovation. We find that firms with higher CSR performance invest more efficiently: these firms are less prone to invest in negative net present value (NPV) projects (overinvestment) and less prone to forego positive NPV projects (underinvestment). We also find that firms with higher CSR performance generate more patents and patent citations. Mediation analysis indicates that firms with higher CSR performance are more profitable and valuable, consequences partially attributable to efficient investments and innovation. These results, robust to alternate model specifications, lend support to enlightened stakeholder theory. K E Y W O R D Scorporate social responsibility, firm performance, innovation, investment efficiency, mediation ory. Porter and Kramer (2011) refer to a similar strategy as shared value creation. We refer to enlightened stakeholder theory throughout the paper to remain consistent and attribute this terminology to the similar ideas proposed by both sets of authors. 494

Powerful CEOs, cash bonus contracts and firm performance

“…Second, we find that the proportion of cash bonus weighted against non-financial performance targets is not related to subsequent firm performance; however, non-financial targets that are quantitative or related to CSR are positively related to subsequent firm performance. These results support the view that measurable targets, which are less easily manipulated, as well as targets related to CSR, translate to increased subsequent firm performance (e.g., Cook et al, 2019;Edmans, 2011;Ittner & Larcker, 1998;Lev et al, 2010). Furthermore, firms that do not provide any information regarding the types of non-financial performance targets used in cash bonus contracts experience lower subsequent firm performance, which suggests that these firms are attempting to camouflage high CEO compensation levels.…”

“…We find that the use of non-financial targets, which are quantitative, and consequently verifiable, is positively associated with industry-adjusted return on assets, as are performance targets linked to corporate social responsibility (CSR). These findings support the view that the use of objective performance targets (Ittner et al, 1997) and CSR performance targets (e.g., Cook, Romi, Sánchez, & Sánchez, 2019;Dhaliwal, Li, Tsang, & Yang, 2011;Lev, Petrovits, & Radhakrishnan, 2010) has positive firm performance implications. Interestingly, the use of performance targets that are not defined in annual reports (i.e., when a firm mentions using non-financial performance targets but does not provide any information as to what these targets are) is negatively related to subsequent firm performance.…”

“…Third, our study contributes to the literature on CSR reporting and firm performance (e.g. Cook et al, 2019;Dhaliwal et al, 2011;Lev et al, 2010). Prior studies argue that CSR reporting provides information about firm performance beyond the information contained in accounting numbers such as earnings.…”

“…Finally, prior studies document that focusing on the wellbeing of customers, employees and the environment has a positive impact on firm performance (e.g., Cook et al, 2019;Edmans, 2011;Ittner & Lacker, 1998;Lev et al, 2010).…”

“…Socially responsible firms can also attract and retain high-quality employees, which contributes to firm value (Edmans, 2011;Mao & Weathers, 2019). Furthermore, commitment to social and environmental activities can decrease lawsuits and environmental costs (Dhaliwal et al, 2011) and increase investment efficiency and innovation (Cook et al, 2019). Overall, while prior literature is informative in documenting an association between CSR and firm performance, little is known about the role CSR measures play in compensation contracts (O'Connell & Sullivan, 2011).…”