Over-Investment and Corporate Social Responsibility
Background - This study investigates whether corporate social responsibility (CSR) influences firm investment policy and earnings management.CSR allows organizations to do their bit for the society, environment, and customers or for those matter stake holders. A firm with better CSR performance goes a long way in creating a positive word of mouth for the organization, society, environment, and country on the whole.
Purpose –According to the stakeholder theory, CSR draws its philosophy from ethics, declares that companies are morally responsible to benefits of a larger group of stake holders. As a consequence, this study conjectures that manager’s belief would influence his/her decision-making. As a consequence, I apply the CSR performance for firms to measure the manager’s morals.This study explores whether a firm with better social responsibility performance is more likely to prevent from inefficiency investment policy and earnings manipulation?
Design/methodology/approach – This study apply regression model to investigate the relationship between over-investment/real earnings management and CSR performance. The dependent variable is over-investment or real earnings management, while the independent variable is CSR performance. I collect CSR data for public listed firms in United States from Kinder, Lydenberg, and Domini Research & Analytics, Inc. (KLD; now MSCI). The sample period is from 1991 to 2014. This study retrieves yearly financial data of public listed firms in United States from Compustat database, and stock returns from CRSP.
Findings – The empirical results show that the CSR score is significantly negative to the investment inefficiency and real earnings management. The results indicate that the firm with high CSR performance will decrease over-investment and is less likely to engage in real earnings manipulation. The results are robustness to various setting, including different definition of over-investment, earnings management, and CSR score. The findings in this study are also robustness after addressing the endogeneity problem.
Keywords - Corporate Social Responsibility; Over-Investment; Investment Inefficiency; Real Earnings Management