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The Impact of Corporate Social Responsibility on Risk Taking and Firm Value

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Abstract

We hypothesize that CSR serves as a control mechanism to reduce deviations from optimal risk taking, and therefore, CSR curbs excessive risk taking and reduces excessive risk avoidance. Based on the stakeholder theory, firms with CSR focus must balance the interests of multiple stakeholders, and therefore, managers must allocate resources to satisfy both investing and non-investing stakeholders’ interests. Using five measures of corporate risk taking and a sample of 1718 US firms during 1998 to 2011, we find that stronger CSR performance is associated with smaller deviations from optimal risk taking levels. We examine the mechanism through which CSR has an impact on firm value and find a positive indirect impact of CSR on firm value through the impact of CSR on risk taking. CSR performance is positively associated with firm value because CSR reduces excessive risk taking and risk avoidance.

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Notes

  1. Carroll’s commonly used definition of CSR (Carroll 1979) suggests that corporations have four responsibilities: (1) the economic responsibility to be profitable; (2) the legal responsibility to abide by the laws of society; (3) the ethical responsibility to do what is right, just, and fair; and (4) the philanthropic responsibility to be a good corporate citizen by contributing resources for various kinds of social, educational, recreational, or cultural purposes.

  2. See the following link (http://business.time.com/2012/05/28/why-companies-can-no-longer-afford-to-ignore-their-social-responsibilities/) for more discussion about the arguments for and against CSR.

  3. Firms have both explicit and implicit contracts with their stakeholder. Explicit contracts refer to formal contractual agreements between firms and their stakeholders, such as investment contracts with shareholders, loan contracts with creditors, and wage contracts with employees. Implicit contracts refer to promises to stakeholders that are either too vague or too costly to specify in writing. Firms may have implicit contracts to provide customers with quality products and services, to maintain safe workplace for employees, and to protect the environment for local communities and government.

  4. For further description of MSCI ESG rating methodology, see https://www.msci.com/eqb/methodology/meth_docs/Executive_Summary_MSCI_ESG_Ratings_Methodology.pdf MSCI no longer publishes a detail description of MSCI ESG Stats database publicly. The description of MSCI ESG Stats can be found in the WRDS database. We fill the missing values of KLD scores with zero. This approach is consistent with that of Chava (2014), Erhemjamts et al. (2013), and Kim et al. (2012).

  5. See Goss and Roberts (2011) and Harjoto and Jo (2011) for a detailed list and description of CSR strengths and concerns criteria for KLD Stats database.

  6. We recognize that acquisition expense can be a noisy risk taking measure since acquisition expense can come from both related (synergy) acquisitions and unrelated acquisitions.

  7. Since all of sample firms in this study are US firms, we use S&P500 Index returns (SPINDEXRET) and US GDP growth (GDPGROWTH).

  8. We recognize that both board and CEO characteristics variables that we use as control variables may be endogenously determined based on firm characteristics. We re-estimate our analyses by excluding corporate governance variables from all regressions and find that the results without controlling for corporate governance variables are consistent with our main results in Table 6. The CEO compensation data are collected from the Execucomp database.

  9. The RiskMetrics Directors database starts since 1996 and we did not use the RiskMetrics Directors data from 1996 to 1997 due to missing director data on tenure and other directorship positions which restricts the sample size.

  10. The estimated slope coefficients of CSR on the deviations from the optimal risk taking in Table 6 are significantly smaller than the correlation coefficients between CSR and the deviations from the optimal risk taking in panel A of Table 4 because slope coefficients in a multivariate regression represent the causal impact while correlation coefficients only represent the co-movement between two variables without controlling for other factors that influence the dependent variable.

  11. We also examine the strengths and concerns for CSR components (i.e., community strengths, community concerns). Our untabulated results indicate that the results of CSR components are driven by both strengths and concerns and they are consistent with our findings in panels A and B of Table 7.

  12. For instance, the indirect impact of CSR via ECAPEX is 0.00018 which is 1.76 % of the direct impact (0.01021).

  13. We utilize Harjoto and Jo (2011) and Harjoto et al. (2015) to estimate the first-stage regression to account for endogeneity of CSR decision.

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Acknowledgments

We would like to thank the Editor-in-Chief, R. Edward Freeman, and eight (8) anonymous reviewers for their constructive suggestions and comments. Harjoto acknowledges the Denney Academic Chair (2015–2017) award for financial support and release time for this research project. Laksmana acknowledges the financial support from Kent State University College of Business Administration Dean’s 2015 Summer Research Funding.

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Authors and Affiliations

  1. Graziadio School of Business and Management, Pepperdine University, Malibu, USA

    Maretno Harjoto

  2. College of Business Administration, Kent State University, Kent, USA

    Indrarini Laksmana

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  1. Maretno Harjoto
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  2. Indrarini Laksmana
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Correspondence to Maretno Harjoto.

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See Appendix Table 11

Table 11 Variable definitions
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Harjoto, M., Laksmana, I. The Impact of Corporate Social Responsibility on Risk Taking and Firm Value. J Bus Ethics 151, 353–373 (2018). https://doi.org/10.1007/s10551-016-3202-y

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