Introduction
Although there has been a noteworthy discussion
among scholars and practitioners over the last two
decades on what constitutes the best corporate
governance practices, corporate governance across
Hoje Jo
Maretno A. Harjoto
352
and find that the number of social objectives positively affects firms board size. Fisman et al. (2005)
examine the link between firms CSR engagement
and accounting profit. They find that the effect of
CSR on profitability is stronger for firms in more
competitive industries. Barnea and Rubin (2010)
examine the relation between firms CSR ratings and
their ownership and capital structures and find that
insiders tend to over-invest in CSR. Goss and
Roberts (2007) analyze the association between CSR
and the cost of bank loans. They find that firms with
the worst social responsibility scores pay higher loan
costs while firms with good scores do not receive
lower loan costs. Hong and Kacperczyk (2009) find
sin stocks from publicly traded firms that produce
alcohol, tobacco, and gambling have higher risk and
returns indicating that social norms affect stock prices
and returns. Although these studies enhance our
understanding of the important benefits and costs of
CSR engagement, in our view, the previous research
on this issue is still premature to provide any definite
conclusions regarding the impact of CSR engagement on firm value.3
To correctly examine the relationship between
CSR and firm value, we need to consider potential
simultaneity bias and endogenous treatment effects.
Since better quality firms tend to choose CSR
engagement, the contribution of CSR engagement
to firm value will be overstated (Greene, 1993) if we
do not correct for the simultaneity and endogeneity
problems. In this paper, we conduct our endogeneity and simultaneity analyses in two stages. We
examine the factors determining CSR engagement
extensively in the first stage, and then compare the
firm values of CSR engaging versus CSR nonengaging firms in the second stage. Based upon a
large sample of 12,527 firm-year (2952 firms)
observations, including both CSR and no-CSR
firms during the 19932004 period, we initially
perform a first-stage probit regression analysis of
CSR engagement. Consistent with the conflictresolution hypothesis, the results show that the
likelihood of opting for CSR involvement is significantly and positively related to governance
characteristics such as board leadership, board independence, institutional ownership, analyst following,
and anti-takeover provisions after controlling for
such firm characteristics as firm size, leverage, profitability, R&D, a firms diversification, and risk.
353
Hypotheses
Why do firms engage in CSR?
Despite large literature on CSR (Bowen, 1953;
Donham, 1927; and for an overview, see Whetten,
et al., 2002), there is no unified theory behind CSR
engagement, and there are at least two alternative
explanations regarding its existence. First, based on
Jensen and Mecklings (1976) agency theory, Barnea
and Rubin (2010) consider CSR engagement as a
principal-agent relation between managers and
shareholders, and argue that affiliated insiders have
an interest in overinvesting in CSR in order to
obtain private benefits of building reputation as good
social citizens, possibly at a cost to shareholders.
As reputation improves, top management will
enjoy better outside career opportunities and greater
negotiation power, which will eventually lead them
to have overconfidence. Malmendier and Tate
(2005) suggest that there is some evidence of overinvestment by overconfident CEOs. Goel and
Thakors (2008) theoretical model also shows that
overconfident managers sometimes make valuedestroying investments. In a related vein, Bertrand
and Mullainathan (2003) argue that when managers are not closely monitored and insulated from
354
Hypothesis 1:
355
Hypothesis 2:
356
Measurement
To measure external monitoring by institutional
holders, we use the equity ownership of outside
institutional holders as the sum of the greater-thanfive percent owners that are unaffiliated with the
firm (PCTINSTI). We use the number of analysts
who follow the firm to measure external analyst
monitoring by security analysts from the I/B/E/S
database. We measure analyst coverage with the
natural logarithm of one plus the number of analysts following the firm (LOGANAL) because the
number of analysts is highly skewed to the right
(Bushman, et al., 2005; Lim, 2001).
We utilize several structural measures of internal
corporate governance from the RiskMetrics database
(e.g., board characteristics such as independent
outside board proportion, board ownership, and
board leadership, etc.). With these corporate board
357
Methodology
We conduct an endogeneity correction for the
treatment effects because firm value could come
from two broad sources of unique features: the
choice of CSR engagement and corporate governance. The CSR involvements contribution to firm
value could be overstated if we do not control for
the endogeneity problem (Greene, 1993). Specifically, it may be that firms engaging into CSR
activities are simply of higher quality and deliver
better performance, regardless of whether they
choose to become involved in CSR. In this case, the
coefficient on the CSR dummy variable might
reveal a value-add from CSR engagement, when
indeed there is no true effect.
Tobin (1958) first identified this endogeneity
problem. If this endogeneity problem is not taken into
consideration in the estimation procedure, an ordinary least-square estimation (OLS) will produce biased
parameter estimates. Heckman (1976, 1979) proposed
a two-stage estimation procedure using the inverse
Mills ratio to take account of the endogeneity bias. In
the first step, a regression for observing a positive
outcome of the dependent variable is modeled with a
probit (or logit) model. The estimated parameters are
used to calculate the inverse Mills ratio, which is then
included as an additional explanatory variable in the
OLS estimation (Greene, 1993). Using Heckmans
two-stage estimation, we correct the specification for
endogeneity and examine whether CSR activities
enhance firm value.
GIM (2010) employ a different approach, i.e., the
instrumental variable to address the endogeneity problem. Heckman and Robb (1985) and
Moffitt (1999) suggest the instrumental variable (IV)
358
Empirical results
Univariate tests and bivariate correlations
359
TABLE I
Descriptive statistics and univariate tests
Firms not engaging in CSR
N
Mean
Difference tests
Median
(or Count)
Mean
Median
(or Count)
T-stat
z-stat
768
2804
3158
3159
3076
2057
3158
2512
3152
1416
3111
707
3370
2676
3099
2984
5639
5601
5575
5561
5577
5575
5557
5568
5567
5576
5599
5639
5575
5550
5557
5557
0.0890
2.2895
4.0758
-0.1020
0.6464
8.4108
0.2453
0.0346
0.0711
0.0106
29.8155
0.6215
0.1086
0.0512
1.7391
-0.1422
502
2301
2923
2878
3603
4024
2902
2417
2894
1699
3531
3505
2690
3380
2930
3045
1.964**
-6.795**
-7.697***
-4.870***
-20.750***
-55.566***
-1.527
0.776
1.489
-6.122**
-34.271***
-79.005***
4.777***
-4.179***
-3.490***
-10.144***
1.964**
-5.687***
4.913***
-3.567***
-1.550
-44.994***
-4.484***
5.397***
4.014***
-11.285***
-26.075***
-65.232***
3.527***
-22.048***
-5.517***
-9.719***
3087
3109
5815
2144
4545
2852
2874
3105
3455
2834
5639
5639
5639
5639
5639
5639
5639
5639
5639
5639
9.7318
2.3111
0.8471
0.4325
0.0541
10.3984
0.6736
14.1394
64.8823
2.5096
3034
2635
4777
2439
2149
3291
2984
3589
3239
3851
-20.269***
-7.615***
-13.699***
-19.019***
11.281***
-24.961***
-22.793***
-4.791***
-21.986***
-42.821***
-16.006***
-8.011***
-13.605***
-18.751***
23.447***
-24.703***
-18.217***
-26.928***
-14.675***
-36.232***
This table displays descriptive statistics for the 7750 firm-year (1777 firms) observations of no-CSR firms and 5639 firmyear (1175 firms) observations of CSR firms from 1993 to 2004. The number of firm-year observations (N), Mean,
Median, Count (i.e., total number of observations for dummy variable) are reported by types of firms. Difference in mean
(t-statistics) and median (non-parametric Wilcoxon) tests are reported. The definitions of variables are provided in
Appendix B. ***, **, *Statistically significant at the 1%, 5%, and 10% levels, respectively.
13
14
15
16
17
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
SGROWTH
DIVR
SEGDIV
GINDEX
ENTINDEX
CSRDUMMY
FAMFIRM
STATELAW
ROA
CHGROA
TOBINQ
ADJTOBINQ
FIRMAGE
SP500
RNDR
CAPX
ADVR
SGROWTH
DIVR
SEGDIV
GINDEX
ENTINDEX
DUALITY
CEONOM
BSIZE
PCTINDEP
PCTDIRSHR
LOGBLKS
LOGANAL
PCTINSTI
13
1
0.04a
0.03a
-0.003
-0.04a
-0.001
-0.02b
-0.03a
-0.09a
-0.01
0.02a
-0.01
-0.01
-0.01
-0.07a
-0.10a
-0.04a
-0.04a
0.06a
-0.27a
0.14a
-0.05a
-0.08a
-0.10a
1
-0.01
-0.02a
-0.07a
-0.06a
1
-0.02b
0.06a
0.07a
0.04a
0.03a
0.09a
0.28a
0.56a
-0.01
-0.01
0.06a
-0.04a
0.04a
0.18a
0.17a
0.07a
0.12a
0.16a
0.21a
0.19a
-0.10a
0.04a
0.35a
0.19a
1
0.003
0.03a
0.01
14
1
0.05a
0.01
-0.08a
-0.02c
0.23a
0.04a
-0.12a
-0.10a
-0.06a
-0.05a
0.01
0.03a
0.28a
0.06a
0.06a
0.08a
0.16a
0.06a
-0.03a
-0.09a
-0.06a
-0.10a
1
0.07a
0.09a
15
1
0.48a
0.10a
0.19a
0.09a
0.07a
-0.24a
-0.07a
-0.03a
0.03b
0.03a
-0.03a
0.04a
0.01
-0.001
0.03a
0.07a
0.01
-0.02b
0.02b
0.03a
0.13a
1
0.72a
16
1
0.05a
0.11b
0.03a
0.03a
-0.08a
-0.04a
-0.02b
0.12a
0.02b
-0.002
0.03a
0.01
-0.02c
0.02b
0.04a
0.02b
-0.01
0.004
0.003
0.06a
17
1
0.61a
-0.11a
0.11a
0.29a
0.04a
0.12a
0.18a
0.02b
-0.07a
-0.13a
-0.14a
-0.04a
-0.05a
-0.18a
-0.07a
0.03a
-0.002
0.16a
0.08a
18
1
0.01
0.13a
0.02a
0.08a
0.05a
0.15a
0.04a
-0.04a
-0.04a
-0.07a
-0.03a
-0.03a
0.03a
-0.04a
0.01
-0.06a
0.23a
0.06a
TABLE II
19
1
0.36a
-0.16a
-0.01
0.03a
-0.09a
0.09a
0.03a
0.28a
0.07a
0.13a
0.20a
0.31a
0.26a
-0.13a
-0.09a
0.13a
-0.06a
20
1
0.002
-0.02a
0.07a
-0.03a
0.05a
0.04a
0.17a
0.03a
0.15a
0.16a
0.33a
0.18a
-0.11a
0.04a
0.56a
0.12a
21
1
0.03a
0.03a
0.07a
-0.03a
0.02b
-0.12a
-0.08a
-0.06a
-0.05a
-0.24a
0.03a
-0.03a
0.05a
0.05a
0.03a
10
22
23
1
-0.04a
0.08a
-0.01
-0.09a
-0.05a
-0.02b
-0.001
-0.04a
-0.08a
-0.04a
-0.005
-0.003
0.12a
-0.01
11
24
1
0.01
0.04a
-0.04a
-0.05a
-0.07a
0.02c
0.01
-0.004
-0.05a
0.07a
-0.02c
0.03a
-0.03a
12
25
1
-0.01
-0.02a
-0.07a
-0.06a
-0.01
-0.05a
-0.03a
-0.07a
0.02b
0.01
0.08a
0.03a
13
360
Hoje Jo and Maretno A. Harjoto
This table reports Spearman correlation coefficients among variables for the 7750 firm-year observations of no-CSR firms and 5639 firm-year observations of
CSR firms from 1993 to 2004. See Appendix B for variable definitions. a, b, c indicate the 1%, 5%, and 10% level of significance, respectively.
1
1
0.17a
1
-0.01
0.51a
1
-0.03a
-0.14a
-0.15a
1
-0.24a
0.03a
0.12a
0.18a
1
0.11a
-0.06a
-0.16a
0.31a
-0.14a
1
0.15a
0.21a
-0.03a
0.01
0.09a
0.06a
1
0.20a
0.12a
0.14a
-0.004
-0.001
0.12a
0.048a
0.12a
0.17a
0.22a
0.27a
-0.17a
-0.003
0.09a
0.06a
0.01
0.02c
0.05a
0.03a
-0.01
-0.02b
0.01
-0.02c
18
19
20
21
22
23
24
25
DUALITY
CEONOM
BSIZE
PCTINDEP
PCTDIRSHR
LOGBLKS
LOGANAL
PCTINSTI
-0.01
-0.05a
-0.03a
-0.07a
0.02b
0.01
0.08a
0.03a
0.06a
0.14a
0.06a
0.16a
0.01
0.03a
-0.03a
0.15a
0.08a
0.13a
0.10a
0.26a
-0.16a
0.05a
0.01
0.11a
18
17
16
15
14
13
continued
TABLE II
19
20
21
22
23
24
25
361
362
TABLE III
Propensity to engage in CSR activities
INTERCEPT
Model (1)
Model (2)
Model (3)
Model (4)
Model (5)
-3.710
(44.07)***
-4.912
(14.21)***
-3.258
(10.05)***
-5.607
(16.25)***
-5.491
(16.11)***
0.071
(12.29)***
0.049
(7.71)***
Governance variables
GINDEX
ENTINDEX
DUALITY
CEONOM
PCTDIRSHR
PCTINDEP
LOGBLKS
PCTINSTI
LOGANAL
Control variables
LOGTA
DEBTR
RNDR
FAMFIRM
STATELAW
ROA
CHGROA
SEGDIV
FF 48 industry
Pseudo R2
Observations
Number of firms
0.429
(43.09)***
-0.296
(3.86)***
2.184
(11.48)***
-0.054
(1.25)
0.025
(3.27)***
0.022
(9.69)***
-0.004
(2.06)**
0.369
(14.58)***
No
0.1937
11,901
2493
0.583
(47.39)***
-0.724
(7.88)***
1.485
(6.33)***
-0.062
(1.37)
0.022
(2.74)***
0.013
(5.45)***
0.004
(0.18)
0.450
(16.59)***
Yes
0.2571
11,901
2493
0.121
(3.69)***
0.254
(9.35)***
-0.002
(0.03)
0.708
(8.90)***
-0.002
(0.65)
0.010
(11.42)***
0.692
(32.14)***
0.019
(0.53)
0.102
(3.50)***
-0.037
(0.54)
0.470
(5.47)***
0.002
(0.70)
0.008
(8.79)***
0.150
(5.31)***
0.031
(2.87)***
0.030
(0.87)
0.113
(3.85)***
-0.065
(0.91)
0.529
(6.16)***
0.002
(0.58)
0.008
(8.83)***
0.149
(5.26)***
Yes
0.1777
11,901
2493
0.495
(32.25)***
-0.793
(8.57)***
1.264
(5.31)***
0.135
(2.81)***
0.011
(1.26)
0.009
(3.78)***
0.001
(0.67)
0.387
(13.43)***
Yes
0.2778
11,901
2493
0.506
(32.89)***
-0.776
(8.41)***
1.211
(5.13)***
0.134
(2.79)***
0.029
(3.47)***
0.009
(3.80)***
0.001
(0.63)
0.383
(13.31)***
Yes
0.2746
11,901
2493
This table reports the coefficient of estimates from the probit model explaining the determinants of CSR engagement.
The dependent variable is the CSR, which is a dichotomous variable that equals to one if a firm has involved into CSR
activities. Otherwise equals to zero. Model (1) and (2) report only control variables. Model (3), (4), and (5) include
internal and external corporate governance variables. FamaFrench (FF) 48 industry is included all Models except Model
(1). T-statistics are adjusted for robust and clustered (by firm) standard errors and reported in parentheses. Appendix B
provides variable definitions. ***, **, *Statistically significant at the 1%, 5%, and 10% levels, respectively.
363
364
TABLE IV
Propensity to engage in CSR activities based on the CSR-combined scores
Dependent
variable
Model (1)
CSRCOMPOSITE
Model (2)
CSRCOMPOSITE
Model (3)
CSRSTR
Model (4)
CSRSTR
Model (5)
CSRCON
Model (6)
CSRCON
INTERCEPT
-1.144
(13.56)***
0.013
(8.86)***
-1.120
(13.30)***
-0.526
(14.02)***
0.003
(5.99)***
-0.517
(13.91)***
4.377
(15.05)***
-0.041
(8.16)***
4.305
(14.84)***
GINDEX
ENTINDEX
DUALITY
CEONOM
PCTDIRSHR
PCTINDEP
LOGBLKS
PCTINSTI
LOGANAL
LOGTA
DEBTR
RNDR
FAMFIRM
STATELAW
ROA
SEGDIV
Log likelihood
Pseudo R2
Observations
0.002
(0.29)
0.018
(2.75)***
0.012
(0.77)
0.118
(6.00)***
-0.001
(1.91)*
0.004
(17.46)***
0.049
(7.69)***
0.097
(31.31)***
-0.230
(11.16)***
0.207
(4.06)***
0.044
(4.09)***
0.004
(2.30)**
0.003
(5.86)***
0.144
(22.16)***
-4740.19
0.347
11,901
0.012
(4.72)***
0.005
(0.66)
0.020
(3.04)***
0.007
(0.46)
0.129
(6.51)***
-0.001
(1.94)*
0.004
(17.42)***
0.049
(7.71)***
0.100
(32.25)***
-0.228
(11.05)***
0.194
(3.79)***
0.044
(4.12)***
0.009
(4.72)***
0.003
(6.03)***
0.142
(21.90)***
-4770.822
0.3428
11,901
-0.001
(0.23)
0.005
(1.96)**
0.006
(1.16)
0.056
(7.39)***
0.00023
(1.04)
0.000017
(0.23)
0.021
(8.27)***
0.045
(37.54)***
-0.060
(7.46)***
0.119
(6.16)***
0.003
(0.85)
0.001
(0.87)
0.001
(8.14)***
0.011
(4.51)***
-911.58
0.5539
11,901
0.002
(2.10)*
0.00027
(0.09)
0.005
(2.18)**
0.005
(0.92)
0.059
(7.85)***
0.00023
(1.02)
0.000026
(0.33)
0.021
(8.28)***
0.045
(37.98)***
-0.059
(7.31)***
0.115
(5.98)***
0.003
(0.84)
0.002
(2.41)**
0.001
(8.26)***
0.01
1(4.43)***
-895.31
0.5440
11,901
0.008
(0.28)
-0.053
(2.36)**
-0.077
(1.29)
-0.359
(5.24)***
0.004
(1.84)
-0.013
(17.84)***
-0.169
(7.66)***
-0.230
(21.66)***
0.700
(9.79)***
-0.559
(3.16)***
-0.138
(3.71)***
-0.012
(1.79)*
-0.010
(6.68)***
-0.492
(21.60)***
-11,136.14
0.1464
11,901
-0.043
(5.00)***
-0.002
(0.06)
-0.058
(2.60)***
-0.059
(1.01)
-0.389
(5.65)***
0.004
(1.88)
-0.013
(17.77)***
-0.169
(7.68)***
-0.240
(22.52)***
0.697
(9.71)***
-0.518
(2.92)***
-0.140
(3.76)***
-0.026
(4.00)***
-0.011
(6.86)***
-0.488
(21.36)***
-11,160.01
0.1446
11,901
This table reports the coefficient of estimates from the Tobit model explaining the determinants of CSR engagement
based on the CSR-combined scores from the Kinder, Lydenberg, and Dominis (KLD) Socrates database. The dependent
variable is the CSR-combined scores (CSRCOMPOSITE) for models (1) and (2), combined strength scores (CSRSTR)
for models (3) and (4), and combined concern scores (CSRCON) for models (5) and (6). FamaFrench 48 industry is
included all Models. T-statistics are adjusted for robust and clustered (by firm) standard errors and reported in parentheses.
Appendix B provides variable definitions. ***, **, *Statistically significant at the 1%, 5%, and 10% levels, respectively.
365
TABLE V
Simultaneous regressions between the CSR choice and analyst following
Simultaneous method
Dependent variable
Intercept
Model (1)
CSR
-4.879
(43.29)***
CSR
LOGANAL
Governance variables
GINDEX
DUALITY
CEONOM
PCTDIRSH
PCTINDEP
LOGBLKS
PCTINSTI
Control variables
LOGTA
DEBTR
RNDR
CAPXR
ADVR
FAMFIRM
STATELAW
ROA
SEGDIV
SP500
FIRMAGE
Model (2)
LOGANAL
1.805
(7.96)***
0.422
(6.23)***
2.502
(29.13)***
CSR
-4.442
(11.35)***
LOGANAL
0.741
(11.23)***
0.097
(6.03)***
2.415
(23.90)***
0.058
(9.17)***
-0.012
(0.35)
0.171
(5.85)***
0.270
(4.06)***
0.779
(9.16)***
0.016
(5.35)***
-0.005
(4.97)***
-0.010
(3.68)***
-0.295
(11.36)***
0.535
(6.03)***
-1.995
(8.78)***
-1.849
(11.99)***
1.979
(3.74)***
0.436
(8.98)***
0.063
(7.20)***
-0.007
(3.42)***
0.852
(24.99)***
0.148
(12.15)***
-0.235
(6.29)***
0.680
(10.01)***
0.800
(14.86)***
-0.467
(1.56)
-0.164
(8.57)***
-0.047
(4.23)***
-0.132
(5.89)***
-0.196
(5.53)***
-0.006
(6.03)***
0.001
(1.70)*
-0.377
(11.78)***
-0.101
(1.15)
-0.008
(14.09)**
0.053
(8.13)***
-0.015
(0.43)
0.189
(6.25)***
0.212
(2.90)***
0.689
(7.61)***
0.015
(4.70)***
-0.004
(3.29)***
-0.0004
(0.22)
-0.218
(6.50)***
-0.019
(0.19)
-1.822
(6.93)***
-0.914
(5.21)***
-0.403
(0.68)
0.364
(7.23)***
0.042
(4.69)***
-0.013
(5.69)***
0.867
(24.04)***
0.202
(43.30)***
-0.362
(13.61)***
0.848
(14.51)***
0.951
21.57
0.685
(3.75)***
-0.112
(7.03)***
-0.022
(2.25)**
-0.124
(5.52)***
-0.093
(3.27)***
-0.009
(8.99)***
0.005
(14.84)***
-0.231
(19.31)***
0.312
(12.67)***
-0.005
(18.13)***
366
TABLE V
continued
Simultaneous method
FF 48 Industry
Pseudo R2
Adjusted R2
Observations
Model (1)
No
0.2862
11,808
Model (2)
No
0.5305
11,808
Yes
0.3130
11,808
Yes
0.5304
11,808
This table shows the results from two-stage estimation method described in Maddala (1983) for simultaneous equations
models in which one of the endogenous variables is continuous (LOGANAL) and the other endogenous variable is
dichotomous (CSR). T-statistics are adjusted for robust and clustered (by firm) standard errors and reported in parentheses.
See Appendix B for variable definitions. ***, **, *Statistically significant at the 1%, 5%, and 10% levels, respectively.
367
TABLE VI
Industry-adjusted Tobins q regressions based on the Heckman two-stage treatment effect model
Heckman two-stage model
Dependent variable
INTERCEPT
CSR
Model (1)
Model (2)
Model (3)
ADJTOBINQ
3.115
(15.63)***
0.091
(7.46)***
ADJTOBINQ
2.963
(13.89)***
0.087
(7.57)***
ADJTOBINQ
2.682
(13.37)***
0.085
(7.41)***
Governance variables
GINDEX
-0.033
(12.09)***
-0.054
(4.54)***
-0.020
(1.95)*
-0.359
(10.70)***
0.114
(2.62)***
-0.014
(13.13)***
0.001
(3.24)***
0.318
(24.86)***
-0.075
(15.33)***
-0.057
(4.80)***
-0.018
(1.68)*
-0.331
(9.79)***
0.108
(2.63)***
-0.014
(13.09)***
0.002
(4.79)***
0.319
(25.31)***
-0.389
(28.13)***
0.306
(6.80)***
0.145
(1.46)
0.211
(4.17)***
0.847
(3.20)***
0.265
(9.00)***
-0.499
(11.70)***
Yes
5876.81
11,741
-0.382
(28.87)***
0.294
(6.76)***
0.214
(2.16)**
0.235
(4.61)***
0.855
(3.23)***
0.261
(8.94)***
-0.457
(11.36)***
Yes
6005.28
11,741
ENTINDEX
DUALITY
CEONOM
PCTINDEP
PCTDIRSHR
LOGBLKS
PCTINSTI
LOGANAL
Control variables
LOGTA
DEBTR
RNDR
CAPXR
ADVR
SGROWTH
LAMBDA (inverse Mills ratio)
FF 48 industry
Wald Chi-square
Observations
-0.367
(21.61)***
0.216
(4.50)***
0.290
(2.62)***
0.479
(8.87)***
1.373
(4.72)***
0.321
(8.86)***
-0.657
(14.75)***
Yes
4594.23
11,741
368
Model (1)
Model (2)
Model (3)
Number of firms
2463
2463
2463
This table reports the coefficients of estimates from Heckman two-stage treatment effect models. In the first stage, we run
the probit model with same specification in Table III. We include Lambda (inverse Mills ratio) in the second stage with
control variables. The dependent variable in the second stage is industry-adjusted Tobins q (ADJTOBINQ). Model (1)
reports the results of control variables. Models (2) and (3) include internal and external corporate governance variables.
FamaFrench 48 industry is included all Models. T-statistics are reported in parentheses. See Appendix B for variable
definitions. ***, **, *Statistically significant at the 1%, 5%, and 10% levels, respectively.
369
TABLE VII
Industry-adjusted Tobins q regressions based on the instrument variables approach
Dependent variable
INTERCEPT
CSR
Model (1)
Model (2)
Model (3)
Model (4)
ADJTOBINQ
0.119
(3.26)***
0.007
(10.10)***
ADJTOBINQ
0.151
(4.22)***
ADJTOBINQ
0.089
(1.94)
0.0023
(7.28)***
ADJTOBINQ
0.316
(6.15)***
CSRCOMPOSITE
0.493
(3.32)***
Governance variables
GINDEX
DUALITY
CEONOM
PCTDIRSHR
PCTINDEP
PCTINSTI
LOGANAL
Control variables
LOGTA
DEBTR
RDNR
CAPXR
ADVR
SGROWTH
Adjusted R2
Observations
-0.084
(15.88)***
-0.052
(1.46)
0.079
(0.94)
0.444
(9.96)***
0.631
(2.37)**
0.373
(9.35)***
0.0440
11,741
-0.078
(14.19)***
0.028
(0.78)
0.238
(2.91)***
0.436
(9.77)***
0.525
(1.85)
0.341
(9.09)***
0.0802
11,741
0.564
(3.75)***
-0.010
(3.98)***
-0.056
(4.14)***
-0.017
(1.45)
0.075
(2.45)**
-0.099
(2.98)***
-0.000
(0.24)
0.332
(28.29)***
-0.013
(5.09)***
-0.056
(4.16)***
-0.020
(1.74)
0.076
(2.34)**
-0.130
(3.86)***
0.001
(1.83)
0.318
(27.18)***
-0.138
(23.40)***
0.134
(4.07)***
0.515
(6.40)***
0.111
(2.57)**
0.352
(1.42)
0.278
(8.61)***
0.1502
11,741
-0.152
(24.08)***
0.200
(5.80)***
0.500
(6.09)***
0.092
(2.11)**
0.010
(0.04)
0.282
(8.76)***
0.1597
11,741
This table reports the coefficients on the estimates from two-stage instrumental variable method. Our choice of instrumental variable is FIRMAGE that is highly correlated with CSR, but is uncorrelated with industry-adjusted Tobins q.
The dependent variable in the second stage is industry-adjusted Tobins q (ADJTOBINQ). Model (1) and (2) include
CSR dummy and CSRCOMPOSITE (CSR combined score) with control variables, respectively. Models (3) and (4)
include internal and external governance variables. The CSR scores are from the Kinder, Lydenberg, and Dominis (KLD)
Socrates database. T-statistics are reported in parentheses. See Appendix B for variable definitions. ***, **, *Statistically
significant at the 1%, 5%, and 10% levels, respectively.
370
0.2
0.1
ADJTOBINQ
0
-0.1
-0.2
-0.3
Loganal5
Loganal4
Loganal3 LOGANAL
Loganal2
Quintiles
Loganal1
-0.4
-0.5
Q1
Q2
Q3
CSR Quin
tiles
Q4
Q5
371
TABLE VIII
Industry-adjusted Tobins q regressions of each CSR subcategory
Dependent variable
INTERCEPT
CSR criteria
COMMUNITY
ENVIRONMENT
DIVERSITY
EMPLOYEE RELATIONS
PRODUCT
(1)
(2)
(3)
ADJTOBINQ
0.356
(2.36)**
ADJTOBINQ
0.646
(4.61)***
ADJTOBINQ
0.609
(4.46)***
0.181
(2.00)**
0.035
(0.39)
0.304
(4.24)***
0.584
(8.43)***
0.364
(4.33)***
0.137
(1.60)
0.070
(0.83)
0.271
(4.01)***
0.523
(7.92)***
0.162
(2.06)**
0.102
(1.22)
0.095
(1.13)
0.278
(4.15)***
0.522
(7.96)***
0.159
(2.03)**
Governance variable
GINDEX
-0.019
(6.50)***
ENTINDEX
DUALITY
CEONOM
PCTINDEP
PCTDIRSH
LOGBLKS
PCTINSTI
LOGANAL
Control variables
FF 48 Industry
Adjusted R2
Observations
Number of firms
Yes
Yes
0.2583
6479
1677
-0.027
(1.57)
0.019
(1.53)
-0.206
(4.72)***
0.065
(1.30)
-0.012
(9.32)***
0.003
(6.99)***
0.395
(26.00)***
Yes
Yes
0.3602
6479
1677
-0.074
(12.14)***
-0.025
(1.50)
0.022
(1.72)
-0.158
(3.64)***
0.051
(1.13)
-0.012
(9.42)***
0.004
(7.97)***
0.393
(26.10)***
Yes
Yes
0.3695
6479
1677
This table reports the coefficients of estimates from two-stage instrumental variable method. Our choice of instrumental
variable is FIRMAGE that is highly correlated with CSR, but is uncorrelated with industry-adjusted Tobins q. The
dependent variable in the second stage is industry-adjusted Tobins q (ADJTOBINQ). In these regressions, we only
include the sample that has positive scores of each category of the CSR engagement. Model (1) includes each CSR
combined score of five categories. Models (2) and (3) include internal and external governance variables. FamaFrench 48
industry is included all Models. T-statistics are reported in parentheses. See Appendix A for variable definitions and
Appendix C for the calculation of CSR criteria including COMMUNITY, ENVIRONMENT, DIVERSITY, EMPLOYEE RELATIONS, and PRODUCT. The CSR scores are from the Kinder, Lydenberg, and Dominis (KLD)
Socrates database. ***, **, *Statistically significant at the 1%, 5%, and 10% levels, respectively.
372
TABLE IX
Simultaneous regressions of industry-adjusted Tobins q and the CSR composite score
Simultaneous method
Dependent variable
INTERCEPT
CSRCOMPOSITE
Model (1)
ADJTOBINQ
-0.387
(4.28)***
2.356
(15.52)***
ADJTOBINQ
Governance variables
GINDEX
DUALITY
CEONOMI
PCTDIRSHR
PCTINDEP
LOGBLKS
PCTINSTI
LOGANAL
Control variables
LOGTA
DEBTR
RNDR
CAPXR
ADVR
SGROWTH
FF 48 INDUSTRY
Adjusted R2
Observations
CSRCOMPOSITE
0.411
(83.48)***
Model (2)
ADJTOBINQ
-1.927
(8.87)***
5.920
(12.23)***
0.013
(11.42)***
CSRCOMPOSITE
0.386
(26.95)***
0.026
(4.27)***
-0.017
(5.32)***
-0.045
(2.43)**
0.006
(0.44)
0.032
(0.98)
-0.130
(2.89)***
-0.011
(8.01)***
0.0002
(0.46)
0.317
(20.96)***
0.001
(3.10)***
0.002
(1.25)
0.0003
(0.34)
0.009
(3.44)***
0.010
(2.54)**
-0.00008
(0.69)
-0.0003
(7.75)***
0.004
(3.69)***
-0.019
(5.53)***
-0.051
(2.53)**
0.004
(0.27)
-0.0002
(0.01)
-0.161
(3.32)***
-0.010
(6.68)***
0.001
(2.44)**
0.276
(16.75)***
0.001
(3.73)***
0.003
(1.94)*
0.0001
(0.09)
0.007
(2.57)**
0.011
(2.75)***
0.0002
(1.43)
-0.0003
(7.43)***
0.004
(3.42)***
-0.169
(26.37)***
0.204
(4.62)***
0.764
(8.02)***
-0.070
(0.97)
0.762
(2.89)***
0.248
(10.33)***
No
0.1690
6479
0.003
(6.67)***
-0.016
(4.45)***
0.063
(7.68)***
-0.167
(24.58)***
0.243
(5.08)***
0.879
(8.52)***
0.172
(2.49)**
0.548
(2.02)**
0.200
(8.60)***
Yes
0.2290
6479
0.004
(3.65)***
-0.003
(0.58)
0.092
(6.08)***
No
0.0845
6479
Yes
0.1716
6479
This table shows the results from the two-stage estimation method in which one of the dependent variables is industryadjusted Tobins q and the other dependent variable is the CSR composite scores. In these regressions, we only include
the sample that has positive CSR scores. The CSR scores are from the Kinder, Lydenberg, and Dominis (KLD) Socrates
database. T-statistics are adjusted for robust and clustered (by firm) standard errors and reported in parentheses. See
Appendix B for variable definitions. ***, **, *Statistically significant at the 1%, 5%, and 10% levels, respectively.
High
CSR &
Low
analyst
Low
CSR &
High
analyst
High
CSR &
High
analyst
Low
High
Low
High
Low
CSR & CSR & CSR & CSR & CSR &
Low
Low
High
low
Low
analyst analyst analyst analyst analyst
Low
CSR &
High
analyst
Low
CSR &
Low
analyst
0.1208
[96.03]***
0.139
[40.96]***
0.1142
[28.40]***
0.0481
[7.40]***
0.0392
[3.76]*
0.0854
-0.0354 0.1053
-0.0337 0.0245 -0.0897 0.0082 -0.0399 -0.067 -0.1062
(3.87)*** (1.68)* (6.30)*** (2.11)** (1.46) (5.62)*** (0.37) (1.86)* (4.11)*** (6.54)***
High
CSR &
High
analyst
This table reports the coefficients on the estimates from the 2SLS simultaneous regression for CSR sample. We include the interaction dummy variables, CSR
(No-CSR) * High (Low) Analysts in Panel A and High (Low) CSR * High (Low) Analysts in Panel B. We report only the interaction variables for brevity. The
dependent variables are log (number of analysts +1) (LOGANAL) and industry-adjusted Tobins q (ADJTOBINQ). FamaFrench 48 industry is included all
Models. T-statistics is reported in parentheses. Chow Test chi-square is reported in bracket. ***, **, *Statistically significant at the 1%, 5%, and 10% levels,
respectively.
High
CSR &
High
analyst
0.1122
[59.61]***
0.0013
[0.01]
0.1636
[73.06]***
0.0878
[20.88]***
-0.0956 -0.0969
(6.22)*** (7.05)***
CSR &
Low
analyst
Panel A: Full sample of firms with CSR engagement and no-CSR engagement
ADJTOBINQ
0.1291
0.0626
-0.0154 -0.0676
(9.27)*** (4.02)*** (0.83)
(3.76)***
Chow test
Slope Difference (Chi-square) 0.0665
0.0522
[13.57]***
[9.81]***
CSR &
High
analyst
Simultaneous equation model of analyst following and industry-adjusted Tobins q with the interaction dummy variables in CSR Sample
TABLE X
374
Discussion
The goal of this paper was to investigate the empirical
association between corporate governance (CG) and
firm value through corporate social responsibility
375
376
Notes
1
Acknowledgments
We thank an anonymous referee, Sanjiv Das, Carrie
Pan, and Mark Seasholes for valuable comments. Donna
Maurer provided editorial assistance. Jo acknowledges
the Leavey Research Grant for financial support.
377
APPENDIX A
List of the strength and concern items in the KLD social ratings database
Category
Strength items
Concern items
Community
Generous giving
Investment controversies
Innovative giving
Negative economic impact
Support for housing
Indigenous peoples relations (0001)
Support for education (added 94)
Other concern
Indigenous peoples relations (added 00, moved 02)
Non-U.S. charitable giving
Other strength
Environment
Beneficial products & services
Hazardous waste
Pollution prevention
Regulatory problems
Recycling
Ozone depleting chemicals
Alternative fuels
Substantial emissions
Communications (added 96)
Agricultural chemicals
Property, plant, and equipment (ended 95)
Climate change (added 99)
Other strength
Other concern
Diversity
CEO
Controversies
Promotion
Non-representation
Board of directors
Other concern
Family benefits
Women/minority contracting
Employment of the disabled
Progressive gay & lesbian policies
Other strength
Employee relations
Strong union relations
Poor union relations
No layoff policy (ended 94)
Health safety concern
Cash profit sharing
Workforce reductions
Employee involvement
Pension/benefits (added 92)
Strong retirement benefits
Other concern
Health and safety strength (added 03)
Other strength
Product quality and safety Quality
Product safety
R&D/Innovation
Marketing/contracting controversy
Benefits to economically disadvantaged
Antitrust
Other strength
Other concern
KLD exclusionary items
Alcohol
Gambling
Tobacco
Firearms
Military
Nuclear
Notes: All items are listed in their corresponding category. Unless otherwise indicated, the item has been included in the
data from 19942004. Items that were add to the data or discontinued (i.e., ended) in intermediate years are indicated, as
are the cases in which an item was moved from one category to another. Further details on the definition of each indicator
are available from KLD Research & Analytics, Inc at http://www.kld.com/research/ratings_indicators.html.
378
Variable
[Name]
CSR (1, 0)
[CSR]
[CSRCOMPOSITE]
[FAMFIRM]
State law
[STATELAW]
ROA
Change ROA
[ROA]
[CHGROA]
Diversification
[SEGDIV]
GINDEX
[GINDEX]
Entrenchment index
[ENTINDEX]
Duality (1, 0)
[DUALITY]
[CEONOM]
% of director share
[PCTDIRSHR]
Board size
[BSIZE]
% of independent directors
[PCTINDEP]
Log of Blockholdings
[LOGBLKS]
% of institutional ownership
[PCTINSTI]
[LOGANAL]
[LOGTA]
Debt/total asset
[DEBTR]
Variable definitions
Dummy variable equals to 1 if a firm has
engaged in corporate social responsibility
(CSR)
Arithmetic average of the combined scores of
KLD strengths and concerns of community,
environment, diversity, employee, and
product dimensions. (source: KLD Socrates
database)
Dummy variable equals to 1 if a firm is family
owned firm and otherwise equals to zero
A firm incorporated in states with anti-takeover laws (source: GIM index, RiskMetrics
data)
Return on asset (source: COMPUSTAT)
Change in ROA from t - 1 to t.
(source: COMPUSTAT)
Dummy variable equals to 1 if a firm has
more than one business segment
(COMPUSTAT)
Gompers, Ishii and Metrick index
(source: RiskMetrics data)
Bebchuk et al. (2009) Entrenchment Index
(source: RiskMetrics data)
Dummy variable equals to 1 if a CEO is also
chair of the board. (source: RiskMetrics data)
Dummy variable equals to 1 if a CEO is a
chair or a member of nomination committee
Percentage of director shares (source: RiskMetrics data)
Total number of board members (source:
RiskMetrics data)
Number of independent outside directors/
Number of total directors (source: RiskMetrics data)
Log of sum of total blockholdings (5% or
more)
Percentage of institutional share ownerships
(CDA/Spectrum 13(f) filing)
Log of (number of analysts + 1) (source: I/B/
E/S database)
Log of total asset (data 6) (source:
COMPUSTAT)
Long-term debt divided by total asset
(source: COMPUSTAT)
379
APPENDIX B
continued
Variable
[Name]
[RNDR]
[CAPXR]
[ADVR]
Tobins q
[TOBINQ]
Industry-adjusted Tobins q
[ADJTOBINQ]
Firm age
[FIRMAGE]
[SP500]
Sales growth
[SGROWTH]
Dividend/book equity
[DIVR]
Variable definitions
Research and development expense divided
by total sales (source: COMPUSTAT)
Capital expenditure expense divided by total
sales (source: COMPUSTAT)
Advertising expense divided by total sales
(source: COMPUSTAT)
Tobin q = Total debt (data 9 + data
34) + preferred stock (data56) + market value of equity (data24*data25)/Total asset
(data 6) [Chung and Pruitt (1994)]
The natural log of firms q divided by the
median q in the firms industry [Campbell
(1996)]
Firm age is calculated from the beginning of
the year from the CRSP database
Dummy variable equals to 1 if a firm is in
S&P 500 index.
Sales growth rate from t - 1 to t. (source:
COMPUSTAT)
Dividend divided by book value of equity
(data21/data60) (source: COMPUSTAT)
APPENDIX C
Calculation of the combined strength and composite scores and the combined strength scores
Combined strength and concern scores
COMMUNITY(i,t) = (sum of all community strength score for firm i at year t minus the sum of all community concern
score for firm i at year t plus total maximum possible number of community concern score at year t) divided by (total
maximum possible number of community strength score during year plus total maximum possible number of community
concern score at year t)
ENVIRONMENT(i,t) = (sum of all environment strength score for firm i at year t minus the sum of all environment
concern score for firm i at year t plus total maximum possible number of environment concern score at year t) divided by
(total maximum possible number of environment strength score during year plus total maximum possible number of
environment concern score at year t)
DIVERSITY(i,t) = (sum of all diversity strength score for firm i at year t minus the sum of all diversity concern score for
firm i at year t plus total maximum possible number of diversity concern score at year t) divided by (total maximum
possible number of diversity strength score during year plus total maximum possible number of diversity concern score at
year t)
EMPLOYEE RELATIONS(i,t) = (sum of all employee strength score for firm i at year t minus the sum of all employee
concern score for firm i at year t plus total maximum possible number of employee concern score at year t) divided by
(total maximum possible number of employee strength score during year plus total maximum possible number of
employee concern score at year t)
380
APPENDIX C
continued
EMPLOYEE RELATIONS(i,t) = (sum of all employee strength score for firm i at year t minus the sum of all employee
concern score for firm i at year t plus total maximum possible number of employee concern score at year t) divided by
(total maximum possible number of employee strength score during year plus total maximum possible number of
employee concern score at year t)
PRODUCT(i,t) = (sum of all product strength score for firm i at year t minus the sum of all product concern score for
firm i at year t plus total maximum possible number of product concern score at year t) divided by (total maximum
possible number of product strength score during year plus total maximum possible number of product concern score at
year t)
Strength scores
COMSTR(i,t) = (sum of all community strength score for firm i at year t) divided by (total maximum possible number of
community strength score during year t)
ENVSTR(i,t) = (sum of all environment strength score for firm i at year t) divided by (total maximum possible number of
environment strength score during year t)
DIVSTR(i,t) = (sum of all diversity strength score for firm i at year t) divided by (total maximum possible number of
diversity strength score during year t)
EMPSTR(i,t) = (sum of all employee strength score for firm i at year t) divided by (total maximum possible number of
employee strength score during year t)
PROSTR(i,t) = (sum of all product strength score for firm i at year t) divided by (total maximum possible number of
product strength score during year t)
Corporate social combined score
CSRCOMPOSITE = (COMMUNITY + ENVIRONMENT + DIVERSITY + EMPLOYEE + PRODUCT)/5
Social strength score
CSRSTRENGTH = (COMSTR + ENVSTR + DIVSTR + EMPSTR + PROSTR)/5
Source: The Kinder, Lydenberg, and Dominis (KLD) Stats database
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Maretno A. Harjoto
Graziadio School of Business and Management,
Pepperdine University,
24255 Pacific Coast Highway, Malibu,
CA 90263, U.S.A.
E-mail: Maretno.Harjoto@Pepperdine.edu
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.