Corporate Social Responsibility and Shareholder ... · Prior research defines corporate social...

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2 Corporate Social Responsibility and Shareholder-Stakeholder Conflict: Evidence from a Quasi-Natural Experiment This Version: October 11, 2018 ABSTRACT We analyze the impact of the staggered adoption of state-level constituency statutes on corporate social responsibility (CSR), and the value implication of adjusting CSR engagement in response to the adoption of constituency statutes. The constituency statutes allow firms to consider interests of non-shareholder stakeholders and provide firms with discretion as to how stakeholder interests are considered. We find that firms respond to the adoption of constituency statutes by increasing CSR engagement. Besides, the positive impact of constituency statutes adoption on CSR engagement is more pronounced for firms with higher existing level of conflict of interest between shareholders and stakeholders. In addition, we find that increased CSR engagement after the adoption of constituency statutes leads to increases in firm value, especially for firms that have a poorer information environment. This indicates that CSR engagement can mitigate the conflict between shareholders and stakeholders by promoting the interests of both parties. Taken together, our paper highlights the efficacy of stakeholder orientation in CSR and provides supporting evidence for the shareholder wealth maximization perspective of CSR. Keywords: Corporate Social Responsibility; Constituency Statutes; Shareholder-Stakeholder Conflict; Firm Valuation JEL classification: M4, M14, G14, G38 141058

Transcript of Corporate Social Responsibility and Shareholder ... · Prior research defines corporate social...

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Corporate Social Responsibility and Shareholder-Stakeholder Conflict:

Evidence from a Quasi-Natural Experiment

This Version: October 11, 2018

ABSTRACT

We analyze the impact of the staggered adoption of state-level constituency statutes on

corporate social responsibility (CSR), and the value implication of adjusting CSR

engagement in response to the adoption of constituency statutes. The constituency statutes

allow firms to consider interests of non-shareholder stakeholders and provide firms with

discretion as to how stakeholder interests are considered. We find that firms respond to the

adoption of constituency statutes by increasing CSR engagement. Besides, the positive

impact of constituency statutes adoption on CSR engagement is more pronounced for firms

with higher existing level of conflict of interest between shareholders and stakeholders. In

addition, we find that increased CSR engagement after the adoption of constituency statutes

leads to increases in firm value, especially for firms that have a poorer information

environment. This indicates that CSR engagement can mitigate the conflict between

shareholders and stakeholders by promoting the interests of both parties. Taken together, our

paper highlights the efficacy of stakeholder orientation in CSR and provides supporting

evidence for the shareholder wealth maximization perspective of CSR.

Keywords: Corporate Social Responsibility; Constituency Statutes; Shareholder-Stakeholder

Conflict; Firm Valuation

JEL classification: M4, M14, G14, G38

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1. Introduction

Prior research defines corporate social responsibility (CSR) as “actions that appear to

further some social good, beyond the interests of the firm and that is required by law”

(McWilliams and Siegel 2000) and as “firms sacrificing profits in the social interest”

(Elhauge 2005). Traditional shareholder theory argues that a firm’s sole social responsibility

is to increase its profits (Friedman 1970). This indicates that CSR engagement may bring

benefits to stakeholders (i.e., non-shareholder stakeholders) at the expense of shareholders,

introducing conflict between shareholders and stakeholders. Despite the possible cost to

shareholders, the past few decades have seen the prevalence of CSR from the domain of

practitioners, investors to regulators and general public.5 However, given the inconclusive

evidence on the association between CSR engagement and firm performance, there is still

debate on why firms engage in CSR activities and the relation between CSR and

shareholder-stakeholder conflict.6

In this paper, we address the above debate by analysing CSR performance for firms

affected by a state-level regulation: a constituency statute, also called a stakeholder statute.

Constituency statutes allow corporate managers and directors to consider stakeholder

interests, and this brings exogenous shocks to stakeholder orientation. However, the adoption

of constituency statutes is not particularly intended for improving CSR, since no expressed

constraints are presented on directors’ discretion in deciding how stakeholder interests are

taken into consideration (Bainbridge 1992). How to respond to this legislation is left to the

5 Anecdotal evidence suggests that fund managers have taken CSR performance into consideration when

constructing their investment portfolios. Median corporate philanthropic giving rises from $9.3 million in 2013

to $10.5 million in 2014 for S&P Global 1200 companies. Source: 2015 Sustainability Practices Dashboard by

Global Reporting Initiative. 6 Mixed evidence on the association between CSR and firm performance is documented in prior studies,

such as McWilliams and Siegel (2001), Jiao (2010), Deng, Kang, and Low (2013), Krüger (2015), etc.

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firms’ discretion.7 Thus, it is an empirical question whether firms increase CSR engagement

after the adoption of constituency statutes.

We first examine the impact of staggered adoption of constituency statutes on firms’

decisions on CSR engagement. The staggered adoption of constituency statutes provides

time-series variations in the state-level policies and this creates exogenous changes in

stakeholder-orientation of local firms. Unlike prior works that rely on countries in which a

firm is listed to differentiate stakeholder-oriented firms versus shareholder-oriented firms

(e.g., Ely and Pownall 2002; Dhaliwal et al. 2012), we study the direct impact of stakeholder

orientation on CSR performance.8

Second, aiming at understanding the association between CSR engagement and

shareholder-stakeholder conflict, we examine the impact of exogenous changes in CSR due

to constituency statutes adoption on firm valuation. In this study, “shareholder-stakeholder

conflict” is defined as outweighing the interest of one side over that of the other.

Using firm-level CSR performance data, we employ a difference-in-difference approach

to analyze the effect of constituency statutes adoption. We find that firms incorporated in

states that adopted constituency statutes experience an increase in CSR engagement

compared with firms incorporated in states that did not adopt constituency statutes. The

evidence suggests that the adoption of constituency statutes has a positive causal impact on

engagement in corporate social responsibility activities.

7 Several studies provide evidence on firms’ various responses to constituency statutes, such as increases

in representation of non-shareholder stakeholders on the board (Luoma and Goodstein 1999), improvement in

innovation (Flammer and Kacperczyk 2016), reduction in cost of debt (Gao, Li, and Ma 2018), and decreases in

accounting conservatism (Radhakrishnan et al. 2018).

8 Ely and Pownall (2002) identify Japanese firms that choose to be listed in the (shareholder-focused) U.S.

capital market relative to similar Japanese firms that do not choose to cross-list in the United States. They find

that earnings and book value explain less of the variation in stock prices for non-US-listed, stakeholder-focused

firms than for US-listed, shareholder focused firms. Dhaliwal et al. (2012) divide countries into more and less

stakeholder-oriented groups using variables such as the legal status of labor protection, CSR disclosure

requirements, and public awareness of and attitudes toward CSR issues.

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Since the decision to respond to constituency statutes by improving engagement in CSR

activities is voluntary, it is important to understand the possible reason for firms to engage in

CSR after the adoption of constituency statutes. We next examine the cross-sectional

variations in the existing level of shareholder-stakeholder conflict over firms’ improvement in

CSR engagement in response to the adoption of constituency statutes. Constituency statutes

allow firms to pay greater attention to the interests of stakeholders and hence reduce their

over-emphasis on shareholder interests. We argue that the positive effect of constituency

statute adoption on CSR should be more pronounced for firms with greater tension between

shareholders and non-shareholder stakeholders prior to the adoption.

Prior studies suggest that firms pay excess cash to shareholders to maximize shareholder

wealth at the expense of stakeholders (Jensen and Meckling 1976; Chu 2017). We use

corporate payouts one year prior to the adoption year of constituency statutes as proxies for

the existing level of conflict between shareholders and non-shareholder stakeholders,

including dividend payout, share repurchase, and total payout (i.e., sum of dividends and

repurchase). We examine whether the adoption of constituency statutes has a greater impact

on CSR engagement for firms with higher corporate payouts. We find that the adoption of

constituency statutes has a greater impact on CSR engagement for firms that have (or have

greater) corporate payouts than for firms that do not have (or have less) corporate payouts.

This finding indicates that firms’ decision on CSR engagement in response to constituency

statutes depends on the existing level of conflict between shareholders and stakeholders.

To further explore the underlying motives and consequences of CSR engagement, we

then examine the value implication of the exogenous improvement in CSR engagement after

the adoption of constituency statutes. Prior studies propose two opposing perspectives on the

impacts of CSR. The first perspective demonstrates that CSR engagement is effective in

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maximizing shareholder wealth. A firm can be viewed a nexus of contracts between

shareholders and stakeholders where stakeholders provide resources in exchange for explicit

or implicit claims (Alchian and Demsetz 1972; Jensen and Meckling 1976; Cornell and

Shapiro 1987). CSR engagement aligns the interests of shareholders and stakeholders by

increasing stakeholders’ willingness to contribute to firms’ operations and enhances

shareholder wealth accordingly (Freeman 2010; Edmans 2011). Under this perspective,

engagement in CSR activities mitigates the shareholder-stakeholder conflict by increasing

both shareholder and stakeholder wealth. In contrast, the agency problem perspective

suggests that managers’ engagement in socially responsible activities is motivated by

managerial incentives to expand personal power among stakeholders at the expense of

shareholders (Friedman 1970; Jensen and Meckling 1976). Therefore, CSR engagement may

potentially intensify shareholder-stakeholder conflict since wealth is transferred from

shareholders to stakeholders and managers. Based on the above discussions, we would either

find a positive effect on firm value for firms that improve CSR engagement after the adoption

of constituency statutes from the shareholder wealth maximization perspective, or the

opposite from the agency problem perspective.

To investigate the underlying motives for CSR engagement, we examine the impact of

improvement in CSR engagement induced by constituency statutes on firm value.

Specifically, we restrict our analysis to sample firms that are incorporated in constituency

statutes adoption states. By identifying those firms that improve CSR engagement in the

post-adoption period, we examine whether these firms experience an increase in Tobin’s Q

after the adoption. Our results show that exogenous increases in CSR have a positive impact

on firms’ Tobin’s Q. This finding supports the shareholder wealth maximization perspective,

indicating that CSR engagement increases shareholder wealth while promoting stakeholder

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interests. This implies that CSR engagement is effective in mitigating the conflict between

shareholders and stakeholders. Besides, the results provide further support to our prior

finding that firms facing a high level of shareholder-stakeholder conflict are more likely to

respond to constituency statutes by improving CSR engagement.

Finally, we investigate whether firms’ information environment influences the

value-enhancing role of CSR engagement after the adoption of constituency statutes. Prior

research suggests that CSR practices can be used as a signaling device for firms to

communicate their quality to outsiders especially when information asymmetry is high (Lys

et al. 2015; Gao et al. 2016). Since constituency statutes provide firms with discretion in

deciding how to protect the interests of stakeholders, we argue that signaling is a possible

driving factor behind the increases in CSR engagement when a firm’s information

environment is poor. Consistent with this argument, we find that the positive impact of

improving CSR engagement on firm value after the adoption of constituency statutes is more

pronounced for firms with a poorer information environment, i.e., firms with lower analyst

coverage or with lower institutional ownership.

Our paper makes contributions in the following ways. First, our paper contributes to the

ongoing debate on whether CSR engagement increases shareholder wealth or benefits

stakeholders at the expense of shareholders. Prior studies document evidence in support of

the positive view of CSR. For example, CSR is found to be associated with lower cost of

capital (Dhaliwal et al. 2011; Cao et al. 2015), higher shareholder value for acquirers in

mergers (Deng et al 2013), better performance for firms in financial crisis (Lins et al. 2017)

and for firms with investors of long-term horizons (Nguyen et al. 2017). However, Clarkson

et al. (2004) find that there are incremental economic benefits associated with environmental

capital expenditure investment only by low-polluting firms that overcomply with existing

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environmental regulations, but not for high-polluting firms that just meet minimal

environmental requirements. Our study provides additional empirical evidence that CSR

engagement increases shareholder wealth by mitigating the conflict between shareholders and

stakeholders. Our findings imply that CSR engagement that protects stakeholders’ benefits is

not necessarily in conflict with shareholder wealth, and CSR may have the efficacy in

aligning the interests of two parties. Our paper answers Moser and Martin’s (2012) call by

exploring “the possibility that CSR activities are driven by both shareholders and

non-shareholder constituents”.

Second, this paper extends the stream of literature studying the determinants of corporate

social responsibility. Prior studies document several firm-level characteristics that may affect

investment in corporate social responsibility. For instance, firms with less financial

constraints (Hong et al. 2012), better prior accounting performance (Clarkson et al. 2011), a

higher percentage of outside directors on the board (Zahra et al. 1993), higher institutional

ownership (Chen et al. 2018), and firms located in higher CSR density areas (Husted et al.

2015) are shown to have higher levels of CSR engagement. In addition, the type of

institutional ownership (Johnson and Greening 1999), managerial control (Coffey and Wang

1998), insider ownership (Zahra et al. 1993), and political views of managers and directors

(Di Giuli and Kostovetsky 2014) are also documented as driving factors of CSR engagement.

Our paper adds to this stream of literature by showing that macro-level factors, i.e.,

regulations, can also influence firms’ decisions to engage in CSR activities. We provide

evidence on the effectiveness of stakeholder-oriented policies in improving engagement in

CSR activities. Unlike prior works that rely on countries in which a firm is listed to

differentiate stakeholder-oriented versus shareholder-oriented firms (e.g., Ely and Pownall

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2002; Dhaliwal et al. 2012), we use time-series variations in the state-level policies to

identify exogenous changes in stakeholder-orientation of local firms.

Third, we contribute to the literature on the signaling role of CSR. Prior theoretical

studies argue that firms strategically release CSR-related news (Li et al. 1997). Empirical

evidence is also found that firms use CSR as a signal for firm quality (Lys et al. 2015; Gao et

al. 2016) and investors respond to not only content but also presentation style of CSR

disclosures (Elliott et al. 2017). Our paper adds to this literature by showing that firms with a

poor information environment seize the opportunity resulting from the adoption of

constituency statutes to signal their quality to outsiders by improving engagement in CSR

activities.

The rest of the paper is organized as follows. Section 2 presents background information

and hypotheses development. Section 3 describes our empirical methodology. Empirical

results are provided in Section 4 and 5, and we conclude in Section 6.

2. Literature review and hypotheses development

Constituency statutes and CSR engagement

Constituency statutes, which are also called stakeholder statutes, are statutes aimed at

requiring or permitting directors to consider the welfare of stakeholders in their decisions

making. The U.S. states began to pass constituency statutes in the 1980s during the hostile

takeover wave (Karpoff and Wittry 2018), and the constituency statutes which can be applied

to takeovers as well as general business decisions (Bainbridge 1992; Elhauge 2005).

Particularly, these statutes allow directors to take into account “the social, legal and economic

effects upon employees, suppliers, customers, and others with similar relationships with the

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corporation, and the communities in which the corporation conducts its business”.9 Besides,

the permissive nature of constituency statutes provides firms with discretion in deciding how

to protect stakeholder interests (Bainbridge 1992).

The underlying reasons for the passage of constituency statutes can be traced back to the

debate on whose interest corporate management should be responsible for (Dodd 1932). The

traditional view of corporate governance in the 1970s is in line with the shareholder

orientation perspective. It advocates that corporate directors should conduct corporate

activities on behalf of shareholders and the ultimate goal of a corporation is to maximize

shareholder wealth (Friedman 1970). On the contrary, the stakeholder orientation perspective

has gained its popularity in the past two decades. It emphasizes the protection of

non-shareholder wealth in corporate duties. Proponents of stakeholder orientation argue that

all parties that can affect or be affected by corporate policies have an important role in the

success of a company (Freeman 2010). The optimal value of a company depends on wealth

maximization for all these parties. In that case, it is necessary for corporate managers to

balance the interests of stakeholders as well (Clarkson 1995; Donaldson and Preston 1995;

Jawahar and McLaughlin 2001).

CSR is defined in prior literature as “actions that appear to further some social good,

beyond the interests of the firm and that is required by law” (McWilliams and Siegel 2001)

and as “firms sacrificing profits in the social interest” (Elhauge 2005). This suggests that

engagement in CSR activities is a response to the demand of stakeholders in alignment with

the stakeholder orientation perspective of constituency statutes. However, CSR engagement

can be costly to shareholders. If the cost of CSR engagement exceeds the benefit, engaging in

9 Proxy Statement and Text of Amendment for Nortek, Inc. (May 26, 1982), reprinted in Shark Repellents

and Golden Parachutes: A Handbook for the Practitioner (Robert L. Winter, Robert D. Rosenbaum, Mark H.

Stumpf, and L. Stevenson Parker eds., 1983 and Supp. 1989).

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CSR activities may result in wealth transfer from shareholders to stakeholders. Since

constituency statutes allow firms to decide how to attend to stakeholders’ interests, firms

have discretion in deciding how to respond, i.e., whether to respond by engaging in CSR

activities or by adopting other mechanisms with relatively lower cost. Therefore, it is an

empirical question whether firms improve CSR engagement after the adoption of

constituency statutes. We propose our main hypothesis as follows.

HYPOTHESIS 1. The adoption of constituency statutes has a positive impact on CSR

engagement.

CSR engagement and shareholder-stakeholder conflict

Corporate payout: The moderator

If CSR is an effective device for protection of stakeholders’ interests in response to the

adoption of constituency statutes, the next question is that under what circumstances firms are

more likely to respond to constituency statutes by improving CSR engagement. Constituency

statutes allow firms to pay greater attention to the interests of stakeholders, leading to a

reduction in their emphasis on shareholder’s interests. Therefore, we expect greater

engagement in CSR activities when the shareholder-stakeholder conflict is more intense, i.e.

when shareholder interests are over-emphasized at the expense of stakeholders. According to

the agency theory, firms pay out excess cash to transfer wealth from stakeholders to

shareholders (Jensen and Meckling 1976). Chu (2017) documents supporting empirical

evidence that the conflict between shareholders and creditors induces firms to increase payout.

This suggests that corporate payout (e.g., total payout, cash dividends, share repurchase, etc.)

can be used as a proxy for the conflict between shareholders and stakeholders. Under such

circumstances, CSR engagement may have a role in mitigating the conflict induced by greater

corporate wealth transfer from stakeholders to shareholders via corporate payout. Therefore,

our second hypothesis is presented below.

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HYPOTHESIS 2. The positive impact of constituency statutes adoption on CSR

engagement is more pronounced when a firm has (high) corporate payout.

Firm value: The consequence

Firms may engage in CSR activities either to emphasize stakeholder interests at the

expense of shareholders or to maximize shareholder wealth. To further understand the

underlying motives of firms’ engagement in CSR activities, we then focus on the value

implication of improving CSR engagement in response to the adoption of constituency

statutes. On the one hand, according to the shareholder value maximization perspective,

interests of shareholders and stakeholders are in greater alignment when firms engage in CSR

activities. Therefore, CSR can enhance shareholder value by reducing the

shareholder-stakeholder conflict and increasing stakeholders’ willingness to contribute to

firms’ operations accordingly (Freeman 2010; Edmans 2011). On the other hand, the agency

problem perspective indicates that engagement in CSR activities is a waste of corporate

resources due to managers’ self-interests by transferring wealth from shareholders to

managers and stakeholders (Friedman 1970; Jensen and Meckling 1976). In this case,

engagement in CSR activities may potentially intensify the shareholder-stakeholder conflict

and creates little shareholder value. Based on the above discussions, we propose our

hypothesis on the implication of CSR on firm value as follows:

HYPOTHESIS 3a. An increase in CSR engagement has a positive impact on firm value

after the adoption of constituency statutes.

HYPOTHESIS 3b. An increase in CSR engagement has a negative impact on firm value

after the adoption of constituency statutes.

3. Sample and variable measurement

Sample and data

Our sample period is between 1991 and 2012. The sample period begins in year 1991

because of the availability of CSR data. We include five-year observations after the last

adoption of constituency statues by Nebraska in 2007. We obtain the CSR performance data

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from MSCI ESG STATS (formerly known as KLD). Financial information is obtained from

Compustat. We exclude firms that are incorporated outside the United States and firm-year

observations with missing financial information. Our final sample consists of 35,634

firm-year observations. All continuous variables are winsorized at 1 and 99 percent levels.

Table 1 provides information on the year of constituency statutes adoption for each state

in the U.S. and the number of firms incorporated in that state.10

We obtain the information on

constituency statutes adoption from Barzuza (2009). Information on state of business

incorporation is obtained from Compustat and historical 10-K filings. Although Compustat

only provides information on state of incorporation for the latest available year, anecdotal

evidence suggests that changes in state of incorporation are rare (Romano 1992). Thus, our

paper relies on the assumption that business incorporation information provided by

Compustat is consistent throughout our sample period.

– Table 1 here –

Measurement of Corporate social responsibility

Following prior research, we use CSR scores from MSCI ESG STATS (formerly known

as KLD) as our measure of CSR engagement (Deng et al. 2013; Krüger 2015). Beginning in

1991, KLD ratings covering around 600 U.S. firms were included either in the S&P 500

broad market index or the Domini 400 Social Index (DSI). In 2003, KLD expanded its rating

coverage to approximately 2,800 U.S. firms included in Russell indexes. By using 34 binary

scores across various subcategories, MSCI analysts assess firms on the basis of a variety of

dimensions of CSR engagement, including corporate governance, community activities,

10 For the adoption of constituency statutes, the state of incorporation is considered instead of the state of

headquarters. A firm’s state of incorporation is not always the same as its state of headquarters, and a change in

headquarters would affect the economic environment in which a firm operates and accordingly influence

corporate policies. Using states of incorporation can mitigate the concern that firms’ decisions on CSR

engagement are affected by changes in the headquartered state rather than the adoption of constituency statutes.

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diversity, employee relations, environmental record, human rights, and product quality and

safety. MSCI assigns a binary rating that equals one (zero) to indicate the presence (absence)

of concerns and strengths within each dimension. The score for each dimension equals the

number of strengths minus the number of concerns, and the total CSR score is calculated as

the sum of the scores for each dimension. However, prior research suggests that this approach

is problematic due to time variance (Mǎnescu 2009).

To mitigate the above concern, we construct an adjusted CSR strength (concern) score by

scaling the raw strength (concern) scores by the total number of strength (concern) indicators

in each dimension following prior research (e.g., Deng et al. 2013). The adjusted CSR score

is calculated as the difference between total adjusted strength score and the total adjusted

concern score. In addition, we exclude the corporate governance dimension when

constructing the adjusted CSR score in order to disentangle CSR from corporate governance.

The adjusted CSR score captures the net strength of CSR engagement. A higher value in the

adjusted CSR score indicates more engagement in CSR activities.

Summary statistics

Panel A of Table 2 presents the sample selection procedure and we provide summary

statistics for our key variables in panel B of Table 2. Detailed variable definitions are

provided in Appendix A. The adjusted net CSR scores in our sample have a mean value of

-0.102 and a median of -0.083, indicating that the adjusted number of concerns is slightly

higher than the adjusted number of strengths, which is consistent with Deng et al. (2013). On

average, firms in our sample have a logarithm of total assets (SIZE) of 7.391 (around 9,020

million U.S. dollars), a leverage ratio (LEV) of 0.189, and a market-to-book ratio (MTB) of

2.924, which are similar to those documented in prior literature. As for financial performance,

our sample firms have an average return on assets (ROA) of 0.020 and a cash to book value of

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total asset (CASH) of 0.160. Firms pay dividends of 1.2 percent relative to total assets

(DIV_AT), and spend capital expenditure of 4.6 percent relative to total assets (CAPEX).

Institutional ownership in our sample firms (IO2SHR_Y) is averagely 60.6%. The average

firm age (AGE) in our sample is 21.7, and the average number of analysts following a firm

(ANACOV) is about 11. We report the frequency of firm-year observations in each year in

Panel C of Table 1. Due to the availability of CSR data, the sample size is much smaller in

the periods prior to year 2003 than that of later periods.

– Table 2 here –

4. Empirical results

Impact of constituency statutes on CSR engagement

To examine the impact of the adoption of constituency statutes on firms’ CSR

engagement, we implement a difference-in-difference approach following Bertrand and

Mullainathan (2003). We compare the before-after effect of constituency statutes adoption for

firms incorporated in constituency statutes states and firms incorporated in non-constituency

statutes states. Specially, we employ the following regression specification for

difference-in-difference analyses.

ADJNETCSRit = β0 + β1CSist + β2SIZEit-1 + β3ROAit-1 + β4MTBit-1 + β5LEVit-1

+ β6AGEit-1 + β7CASHit-1 + β8NOLit-1 + β9IO2SHR_Yit-1

+ β10CAPEXit-1 + β11DIV_ATit-1 + Year, Ind F.E. + ε. (1)

The dependent variable, ADJNETCSRit, is the adjusted CSR score for firm i in year t for

the six dimensions including community activities, diversity, employee relations,

environmental record, human rights, and product quality and safety. CSist is an indicator

variable that equals one if firm i is incorporated in a state that adopts constituency statutes in

year t, and zero otherwise. The staggered adoption of constituency statutes suggests that our

control group includes both firms incorporated in adoption states that are not adopting

constituency statutes in the current year and firms incorporated in non-adoption states, and

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our treatment group includes firms incorporated in adoption states that are currently adopting

constituency statutes in a given year (Bertrand and Mullainathan 2003). If the level of CSR

engagement experiences an increase after the adoption of constituency statutes for firms

incorporated in states that are adopting constituency statutes relative to firms incorporated in

states that are not adopting, we would find a positive and significant coefficient for β1.

We control for several factors documented in prior literature that may have an impact on

CSR engagement (Surroca and Tribo 2008; Ioannou and Serafeim 2012; Di Giuli and

Kostovetsky 2014; Husted et al. 2015). We control for firm size (SIZE), leverage (LEV),

market-to-book ratio (MTB), profitability (ROA), cash holdings (CASH), loss carryforward

(NOL) and capital expenditure (CAPEX). We also control for firm age (AGE), institutional

ownership (IO2SHR_Y), and dividend payout (DIV_AT). We predict that larger firms, more

profitable firms, dividend paying firms, and firms with less debt are associated with a higher

level of CSR engagement (Di Giuli and Kostovetsky 2014). Market-to-book ratio (MTB),

which captures the growth opportunities, is expected to be positively related to CSR

engagement (Ioannou and Serafeim 2012; Di Giuli and Kostovetsky 2014). Firm age (AGE)

and institutional ownership (IO2SHR_Y) are positively associated with CSR engagement

(Surroca and Tribo 2008). Firms with loss carryforward often have a lower level of CSR

engagement, and firms with higher capital expenditure are associated with a higher level of

engagement in CSR activities. The control variables are lagged by one year.

To compare the pre-treatment effect between the treatment group and control group, we

estimate a dynamic regression model by replacing the indicator variable CS in Eq. (1) with

four indicator variables. The dynamic regression specification is presented below:

ADJNETCSRit = β0 + β1CS(-1)ist + β2CS(0)ist + β3CS(1)ist + β4CS(2)ist + β5SIZEit-1

+ β6ROAit-1 + β7MTBit-1 + β8LEVit-1 + β9LOGAGEit-1 + β10CASHit-1

+ β11NOLit-1 + β12IO2SHR_Yit-1 + β13CAPEXit-1 + β14DIV_ATit-1

+ Year, Ind F.E. + ε. (2)

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The four indicator variables are CS(-1), CS(0), CS(1), and CS(2), respectively. We use

these four variables to indicate the year relative to the adoption year. To be specific, suppose

that year τ is the adoption year for a given adoption state (s). CS(-1) equals one if firm i is

incorporated in state s in year τ-1, which is one year before the adoption year τ, and zero

otherwise. CS(0) equals one if firm i is incorporated in state s in year τ, which is the adoption

year, and zero otherwise. Similarly, CS(1) (CS(2)) equals one if firm i is incorporated in state

s in year τ+1 (τ+2 to τ+n), which is one (no less than two) year(s) after the adoption year τ,

and zero otherwise. If our treatment group and control group exhibit no difference in CSR

engagement before the adoption of constituency statutes, we would find an insignificant

coefficient of β1 on CS(-1) in Eq. (2).

Table 3 provides the regression results and the standard errors are clustered by state of

incorporation. We provide the estimation results of Eq. (1) in columns (1) – (3) and those of

Eq. (2) in columns (4) – (6). The variables of interest are constituency statutes indicators. In

columns (1) and (4), we include only the variables of interest, controlling for industry and

year fixed effects. In columns (2) and (5), we include firm size (SIZE), profitability (ROA),

market-to-book (MTB), leverage (LEV), and firm age (AGE) as control variables. In columns

(3) and (6), we add additional control variables including cash holdings (CASH), loss

carryforward (NOL), institutional ownership (IO2SHR_Y), dividend payout (DIV_AT), and

capital expenditure (CAPEX) in our analyses. The coefficients of CS in columns (1) – (3) are

positive and significant, indicating an increase in CSR engagement for the treatment group

after the adoption of constituency statutes. The coefficients of CS(-1) are positive but

insignificant across columns (4) – (6), and this suggests that there is no significant difference

in CSR engagement between treatment and control groups prior to the adoption of

constituency statutes. In addition, the positive and significant coefficients of CS(1) and CS(2)

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indicate that firms in the treatment group improve engagement in CSR activities after the

adoption of constituency statutes. As for control variables, we find a significant and positive

association between CSR engagement and firm size, return on assets, market-to-book ratio,

cash holdings, and capital expenditures, respectively. Besides, we find that firms with higher

institutional ownership and firms with higher dividend payment engage more in CSR

activities. Overall, the above findings answer our research question of whether firms respond

to the adoption of constituency statutes to consider stakeholder interests by improving

engagement in CSR activities.

– Table 3 here –

Impact of constituency statutes on CSR engagement – The effect of existing

shareholder-stakeholder conflict

Our second hypothesis argues that increases in CSR engagement in response to the

adoption of constituency statutes are more pronounced when a firm pays out or pays out high

to shareholders. This is because firms use payout policies including cash dividend payments

and share repurchase to maximize shareholder wealth at the expense of stakeholders (Jensen

and Meckling 1976; Chu 2017). In this case, firms that pay out or have high payout ratios

may face greater conflict between shareholders and stakeholders than non-payers or low

payers, and the demand for mitigating this conflict is higher. To examine the conditional

effect of corporate payout policies on the impact of constituency statutes on CSR engagement,

we use dividend payout, share repurchase, and total payout as our proxies for the intensity of

shareholder-stakeholder conflict and estimate the following regression models.

ADJNETCSRit = β0 + β1CSist×PAYERit-1 + β2PAYERit-1 + β3CSst + β4SIZEit-1 + β5ROAit-1

+ β6MTBit-1 + β7LEVit-1 + β8LOGAGEit-1 + β9CASHit-1 + β10NOLit-1

+ β11IO2SHR_Yit-1 + β12CAPEXit-1 + Year, Ind F.E. + ε. (3)

ADJNETCSRit = β0 + β1CSist×DUMMY_HIGHit-1 + β2DUMMY_HIGHit-1 + β3CSst

+ β4SIZEit-1 + β5ROAi,t-1 + β6MTBit-1 + β7LEVit-1 +β8LOGAGEit-1

+ β9CASHit-1 + β10NOLit-1 + β11IO2SHR_Yit-1 + β12CAPEXit-1

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+ Year, Ind F.E.+ ε. (4)

We use three measures of payout, i.e., total payout (TOTAL_PAYOUT), share repurchase

(REPURCHASE), and dividends (DIVIDENDS). REPURCHASE is the purchase of common

and preferred stocks minus any reduction in the value of net number of preferred stocks

outstanding, scaled by total assets. DIVIDENDS is cash dividends scaled by total assets.

TOTAL_PAYOUT is the sum of DIVIDENDS and REPURCHASE. PAYERit-1 is an indicator

variable that equals one if a firm has non-zero total payout, non-zero share repurchase, or

non-zero dividends in year t-1, when TOTAL_PAYOUT, REPURCHASE, or DIVIDENDS are

used as the proxy for payout, respectively. DUMMY_HIGHit-1 is an indicator variable that

indicates high payout based on total payout, repurchase, or dividends, respectively. To define

high payout, we compare the payout (TOTAL_PAYOUT, REPURCHASE, or DIVIDENDS) of

firm i in year t-1 with the median payout of its industry peers with the same one-digit SIC

code in the same year. If the payout of firm i is higher than the industry median in that year,

we assign DUMMY_HIGHit-1 a value of one, and zero otherwise. Control variables are lagged

by one year as in Eq.(1), and we include industry and year effects. The standard errors are

clustered by state of incorporation. The variable of interest in Eq.(3) is the interaction term,

CSist×PAYERit-1, and the variable of interest in Eq.(4) is CSist×DUMMY_HIGHit-1. We expect

β1 in both Eqs. (3) and (4) to be positive and significant.

We present the results of Hypothesis 2 in Table 4. Columns (1) to (2) show the results

using total payout (TOTAL_PAYOUT) as the proxy for corporate payout; columns (3) to (4)

show the results using repurchase (REPURCHASE) as the proxy for payout and columns (5)

to (6) report the results using dividends (DIVIDENDS) as the proxy for payout. The positive

and significant coefficients of CS×PAYER suggest that the impact of constituency statutes

adoption on improving firms’ CSR engagement is more pronounced for firms with payout

than non-payout counterparts. In columns (2) and (6), we find that the coefficients of the

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interaction terms based on total payout and dividends, CS×DUMMY_HIGH, are positive and

significant, suggesting that when firms have a higher level of payout, improvement in

engagement of CSR activities is greater after the adoption of constituency statutes. This

finding supports our hypothesis that the existing level of shareholder-stakeholder conflict

affects firms’ decision to engage in CSR activities in response to the adoption of constituency

statutes. This implies that CSR can be used as an effective device to mitigate the conflict

between shareholders and stakeholders.

Within the two components of total payout, dividends play a more important role in

driving the positive interaction effect than repurchase. This is because dividends are often

long-term commitments to shareholders rather than temporary decisions. Therefore,

compared with share repurchase, dividends may better capture the existing level of conflict of

interests between shareholders and stakeholders in the period prior to the adoption of

constituency statutes. In addition, dividends can help firms to form a stable dividend clientele

by attracting and retaining investors who care more about dividends than capital gains

(Shefrin and Statman 1984; Allen et al. 2000; Hameed and Xie 2018). These dividend-loving

investors may have owned dividend payers for a long time which accumulated the conflict

with other stakeholders, whereas repurchase is normally used to distribute temporary

abnormal profits. Therefore, dividend paid by a firm is a better proxy than repurchase for

measuring the extent of conflict of interests between shareholders and stakeholders.

– Table 4 here –

Constituency statutes, CSR engagement and firm valuation

Firms may engage in CSR activities either to enhance shareholder wealth or to increase

stakeholder wealth at the expense of shareholders. We then focus on the value implication of

improving CSR engagement after the adoption of constituency statutes to provide further

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evidence on the underlying motives behind firms’ engagement in CSR activities. . To be

specific, we investigate whether firm value is enhanced after firms increase CSR engagement

in response to the adoption of constituency statutes.

Using the state-level staggered adoption of constituency statutes as an exogenous shock to

improvement in CSR engagement to mitigate the reverse causality concern, in this section,

we restrict our sample to firms incorporated in states that have adopted the constituency

statutes. In other words, we exclude firms incorporated in states where constituency statutes

have never been adopted. We argue that this approach provides a relatively clean setting to

examine the value implication for firms that exogenously increase CSR engagement in

response to the state-level adoption of constituency statutes. Specifically, we estimate the

following regression model.

TQit = β0 + β1CSist×D_INCit + β2D_INCit + β3CSist + β4SIZEit-1 + β5ROAit-1 + β6MTBit-1

+ β7LEVit-1 + β8LOGAGEit-1 + β9CASHit-1 + β10NOLit-1 + β11IO2SHR_Yit-1

+ β12CAPEXit-1 + β13DIV_ATit-1 + Year, Ind F.E. + ε. (5)

The dependent variable in Eq.(5) is TQit, measured as firm i’s Tobin’s Q in year t. CSist is

an indicator variable that equals one if firm i is incorporated in a state in a certain year after

the adoption of constituency statutes, and zero otherwise. D_INCit is an indicator variable that

equals one if firm i increases CSR engagement after the adoption of constituency statutes,

and zero otherwise. We consider a firm CSR-increasing if it increases its CSR engagement in

period τ+1 to τ+3 relative to period τ-2 to τ, where τ is the year in which the state of

incorporation adopts constituency statutes. The variable of interest is the interaction term,

CSist×D_INCit. If increases in CSR engagement in response to the adoption of constituency

statutes have an effect of enhancing shareholder wealth, we expect β1 to be positive and

significant.

We present the results in Table 5. We find consistently positive and significant

coefficients for the interaction term, CS×D_INC, by adding more control variables each time

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to the regression model from column (1) to (3).11

The consistent results indicate that firm

value increases in response to the exogenous increase in CSR engagement after the adoption

of constituency statutes. This finding is in support of the shareholder wealth maximization

perspective that CSR engagement enhances value for shareholders, and implies that CSR

engagement can mitigate the conflict between shareholders and stakeholders by enhancing

the interests of both shareholders and stakeholders. In other words, the protection of

stakeholder interests by engaging in CSR activities is not necessarily at the expense of

shareholders.

– Table 5 here –

5. Additional analysis and robustness check

Constituency statutes, CSR engagement and firm valuation – The effect of information

environment

In this section, we conduct additional analyses to investigate whether firms’ information

environment has an effect on the value-enhancing role of CSR engagement after the adoption

of constituency statutes. Prior research suggests that CSR can be used as a signaling device

for firms to communicate their firm characteristics to outsiders under certain circumstances

(Lys et al. 2015; Gao et al. 2016). Faced with high information asymmetry, firms use CSR as

a credible and costly signal to indicate their quality to outsiders (Gao et al. 2016).

Constituency statutes provide firms with discretion in deciding how to consider the interests

of stakeholders when making business decisions. Thus, it is possible that firms with high

information asymmetry would take advantage of this opportunity to convey credible signals

to outsiders by increasing engagement in CSR activities. We argue that signaling motive is a

11 As there are insufficient observations if we cluster standard errors by state of incorporation, the standard

errors tabulated in Table 5 are not clustered. In an unreported robustness test, we cluster standard errors by firm

and find consistent results.

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possible mechanism behind the increase in CSR engagement after the adoption of

constituency statutes when a firm’s information environment is poor.

To examine the effect of information environment on the value implication of CSR in

response to the adoption of constituency statutes, we repeat the analysis in Eq.(5) for

subsamples of firms with high or low level of information asymmetry. We use analyst

coverage and institutional ownership as our proxies for information asymmetry. Analyst

coverage is a commonly used proxy for the amount of publicly available information about a

firm (Marquardt and Wiedman 1998). Institutional investors are considered as informed

investors, and prior literature has documented that institutional ownership is associated with

the information environment (Bushee and Neo 2000; Ajinkya et al. 2005). We expect a more

pronounced effect of improvement in CSR engagement on firm value for firms with lower

analyst coverage and firms with lower institutional ownership.

We partition the sample used in estimating Eq.(5) by industry-year median of each of the

two information environment proxies and present the results in Table 6. Panel A of Table 6

reports the results of subsample analyses based on low and high analyst coverage. Analyst

coverage is calculated as the natural logarithm of one plus the number of analysts following a

firm. We find that the coefficient of the interaction term CS×D_INC is positive and

significant for the subsample with low analyst coverage, but statistically insignificant and

positive for the subsample with high analyst coverage. In panel B, previous sample used in

Eq.(5) is partitioned by the industry-year median of institutional ownership. Again, we find a

positive and significant coefficient of CS×D_INC for firms with low institutional ownership,

but not for firms with higher institutional ownership.

Taken together, the results above are consistent with our prediction that when information

asymmetry is higher, the value-enhancing effect of CSR engagement is more pronounced.

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This indicates that for firms in a poor information environment, engagement in CSR can be

used as a signal to communicate with outsiders.

– Table 6 here –

Robustness Check – Corporate Payout

In Table 7, we use alternative definitions of indicators for high/low levels of corporate

payouts for robustness check of Hypothesis 2. Instead of scaling measures of payout by total

assets, we provide results using measures of payout scaled by earnings, operating cash flows,

or the number of outstanding shares. We get similar conclusions that the effect of

constituency statutes on corporate CSR is stronger for firms with higher total payout, and this

effect is mainly driven by dividends, rather than stock repurchase.

– Table 7 here –

6. Conclusion

We examine the impact of the state-level staggered adoption of constituency statutes on

corporate social responsibility (CSR) engagement and explore the motives behind firms’

engagement in CSR activities. Using the staggered adoption of constituency statutes in U.S.

states that aim at promoting stakeholder orientation, we find that CSR engagement increases

after the adoption of constituency statutes. Our evidence suggests a positive causal link

between stakeholder orientation and corporate social responsibility.

Besides, using payout as a proxy for corporate wealth transfer from stakeholders to

shareholders, we find that increases in CSR engagement after the adoption of constituency

statutes are more pronounced for firms that payout more. This evidence provides support for

our argument that the existing level of conflict between shareholders and stakeholders affects

firms’ engagement in CSR activities and CSR is used as a device to mitigate the

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shareholder-stakeholder conflict.

In addition, using a subsample of firms that exogenously increase CSR engagement in

response to the adoption of constituency statutes, we find that increases in CSR engagement

in response to the adoption of constituency statues can bring benefits to shareholders. In

support of the shareholder value maximization perspective, this finding implies that the

benefits of shareholders and stakeholders are not always in conflict with each other and CSR

activities align the interests of two parties.

Finally, we investigate a possible mechanism behind firms’ decision to engage in CSR

activities in response to the adoption of constituency statutes. We find that firms with a poor

information environment have signaling motives, and the positive effect of increases in CSR

engagement on firm value is more pronounced for this group of firms.

Overall, our paper contributes to the ongoing debate on how CSR engagement affects

shareholder wealth by showing that engaging in CSR activities mitigates the conflict between

shareholders and stakeholders. Besides, our paper provides evidence that macro-level factors,

such as regulation, are one possible determinant of CSR engagement. In addition, we provide

further support for research on the signaling role of CSR engagement.

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APPENDIX A

Variable definitions

Variable Definition

Dependent variables:

ADJNETCSR The adjusted CSR score, calculated as the net of adjusted strengths and

concerns across the six dimensions (community activities, diversity,

employee relations, environmental record, human rights, and product

quality and safety). Adjusted strength (concern) in each dimension is

the number of raw scores of strength (concern) deflated by the number

of indicators of strength (concern).

TQ Tobin’s Q, measured as market value of equity plus (short-term and

long-term) debt scaled by total assets

Independent variables:

CS An indicator variable that equals one if a firm is incorporated in a state

that has adopted a constituency statute, and zero otherwise

CS(-1) An indicator variable that equals one if a firm is incorporated in a state

that will adopt a constituency statute in one year, and zero otherwise

CS(0) An indicator variable that equals one if a firm is incorporated in a state

that adopts a constituency statute in the current year, and zero otherwise

CS(1) An indicator variable that equals one if a firm is incorporated in a state

that adopted a constituency statute one year ago, and zero otherwise

CS(2) An indicator variable that equals one if a firm is incorporated in a state

that adopted a constituency statute two or more years ago, and zero

otherwise

Control variables:

AT Total assets, measured as book value of total assets

SIZE Natural logarithm of one plus the book value of total assets lagged by one

year

AGE Firm age, measured as the number of years since the company was first

covered by Compustat

LOGAGE Natural logarithm of one plus the number of years since the company was

first covered by Compustat

ROA Return on asset, measured as income before extraordinary items divided

by total assets lagged by one year

MTB Market-to-book ratio, measured as the ratio of the market value of total

assets (obtained as the book value of total assets plus the market value of

common stocks minus the sum of the book value of common stocks and

balance sheet deferred taxes) to the book value of total assets lagged by

one year

LEV Leverage ratio, measured as book value of total assets scaled by the book

value of equity lagged by one year

CASH Cash holdings, measured as the ratio of cash and short-term investments to

the book value of total assets lagged by one year

NOL An indicator variable that equals one if the loss carryforward is positive at

the beginning of the year and zero otherwise

IO2SHR_Y Percentage of institutional ownership

CAPEX Capital expenditure scaled by total assets lagged by one year

DIV_AT Dividend payout, measured as the ratio of cash dividends to total assets

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lagged by one year

DIVIDENDS Sum of dividends for common stocks and for preferred stocks.

REPURCHASE Purchase of common and preferred stocks minus any reduction in the

value of net number of preferred stocks outstanding, scaled by total

assets

TOTAL_PAYOUT Sum of dividends and repurchases, scaled by total assets.

DUMMY_HIGH An indicator that equals one if TOTAL_PAYOUT / REPURCHASE /

DIV_AT is greater than the industry-year median value, and zero

otherwise

PAYER An indicator that equals one if a firm pays out to shareholders, and zero

otherwise

D_INC An indicator that equals one if a firm increases CSR engagement after the

adoption of constituency statutes, and zero otherwise

ANACOV Analyst coverage, measured as the number of analysts following a firm

LOGANAC Natural logarithm of one plus the number of analysts following a firm

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TABLE 1

Constituency statutes and state of incorporation

State of incorporation State abbreviation Adoption Year Number of affected firms

Nevada NV 1991 103

North Carolina NC 1993 41

North Dakota ND 1993 2

Connecticut CT 1997 17

Vermont VT 1998 4

Maryland MD 1999 276

Texas TX 2006 79

Nebraska NE 2007 5

Total

527

Notes: This table reports information on states of constituency statutes adoption, adoption

year, and the number of unique firms incorporated in the adoption states from 1991 to 2012.

Information on states of constituency statutes adoption is obtained from Barzuza (2009). State

of incorporation refers to the state in which a firm is incorporated. We obtain information on

the state of incorporation from Compustat and historical 10K filings. The total number of

firms that are incorporated in adoption states in our sample is 527.

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TABLE 2

Summary statistics

Panel A: Sample selection procedure

Num. of Obs.

Firm-year observations from Compustat from 1991 to 2012 140,907

Exclude:

Firm-year observations with missing CSR variables and control variables

(e.g., SIZE, ROA, MTB, LEVERAGE and AGE) -104,282

Non-US firm-year observations -991

35,634

Panel B: Summary statistics

Variable N Mean Q1 Median Q3 STD

ADJNETCSR 35,634 -0.102 -0.376 -0.083 0.125 0.493

TQ 35,623 1.845 1.080 1.392 2.091 1.265

LOGAT 35,634 7.391 6.122 7.312 8.522 1.759

AT (in millions) 35,634 9,020 499 1,641 5,410 27,175

ROA 35,634 0.020 0.007 0.035 0.075 0.132

MTB 35,634 2.924 1.376 2.089 3.425 3.725

LEV 35,634 0.189 0.020 0.144 0.298 0.190

AGE 35,634 21.728 8.000 16.000 31.000 18.501

LOGAGE 35,634 2.677 2.079 2.773 3.434 0.988

CASH 35,634 0.160 0.024 0.075 0.220 0.199

NOL 35,634 0.310 0 0 1.000 0.463

IO2SHR_Y 35,634 0.606 0.444 0.645 0.804 0.247

DIVIDENDS 35,634 0.012 0 0.003 0.017 0.022

CAPEX 35,634 0.046 0.01 0.03 0.062 0.054

ANACOV 35,634 10.662 4.000 8.000 16.000 8.763

LOGALYS 35,634 2.061 1.609 2.197 2.773 0.958

Panel C: Frequency of observations within each year

Fiscal year # of Obs. % of Obs.

1991 603 1.69

1992 610 1.71

1993 609 1.71

1994 597 1.68

1995 608 1.71

1996 618 1.73

1997 616 1.73

1998 605 1.7

1999 617 1.73

2000 609 1.71

2001 1,038 2.91

2002 1,059 2.97

2003 2,864 8.04

2004 2,806 7.87

2005 2,779 7.8

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2006 2,750 7.72

2007 2,628 7.37

2008 2,750 7.72

2009 2,790 7.83

2010 2,786 7.82

2011 2,688 7.54

2012 2,604 7.31

Total 35,634 100

Notes: This table reports our sample construction procedure, summary statistics of main

variables, and distribution of observations in each year. Panel A presents the steps we use to

get the final sample for our main regression. Panel B reports descriptive statistics for key

variables. Panel C presents the number of observations we have in each year. Variable

definitions are provided in Appendix A. The number of firm-year observations in the sample

is 35,634, and the sample period is from 1991 to 2012.

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TABLE 3

Impact of constituency statutes on CSR engagement

Dependent

Variable =

ADJNETCSR

(1) (2) (3) (4) (5) (6)

CS 0.035** 0.033** 0.033**

(2.46) (2.46) (2.50)

CS(-1)

0.008 0.026 0.023

(0.25) (0.70) (0.64)

CS(0)

0.029 0.046 0.045

(0.72) (1.06) (1.05)

CS(1)

0.061 0.073* 0.072*

(1.66) (1.95) (1.92)

CS(2)

0.035** 0.032** 0.032**

(2.40) (2.39) (2.43)

SIZE

0.052*** 0.053***

0.052*** 0.053***

(11.24) (11.00)

(11.24) (10.99)

ROA

0.161*** 0.139***

0.161*** 0.139***

(10.16) (8.77)

(10.14) (8.77)

MTB

0.004*** 0.003***

0.004*** 0.003***

(7.29) (4.95)

(7.26) (4.92)

LEV

-0.101*** -0.082***

-0.101*** -0.082***

(-3.64) (-3.16)

(-3.65) (-3.17)

LOGAGE

0.006 0.005

0.006 0.005

(1.61) (1.16)

(1.61) (1.16)

CASH

0.069***

0.069***

(4.18)

(4.19)

NOL

-0.003

-0.003

(-0.49)

(-0.49)

IO2SHR_Y

0.042***

0.042***

(2.76)

(2.76)

DIV_AT

0.906***

0.907***

(5.11)

(5.12)

CAPEX

0.430***

0.430***

(5.81)

(5.78)

Year FEs Yes Yes Yes Yes Yes Yes

Industry FEs Yes Yes Yes Yes Yes Yes

Observations 35,634 35,634 35,634 35,634 35,634 35,634

Adjusted R2

0.191 0.217 0.220 0.191 0.217 0.220

Notes: This table reports the impact of the adoption of constituency statutes on CSR

engagement (ADJNETCSR). The independent variable in columns (1) – (3), CS, is an

indicator variable that equals one if a firm is incorporated in a state that is adopting

constituency statutes in year t. In columns (4) – (6), we estimate a dynamic regression for the

impact of constituency statutes adoption on CSR engagement. Please refer to Appendix A for

detailed variable definitions. We control for industry and year fixed effects in all

specifications. t-statistics, based on robust standard errors clustered by state of incorporation,

are shown in brackets. *, **, and *** indicate statistical significance at the 10%, 5%, and 1%

levels, respectively.

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TABLE 4 The impact of constituency statutes on CSR engagement – the interaction effect of firm payout

Measures of

payout=

ADJNETCSR

TOTAL_PAYOUT REPURCHASE DIVIDENDS

(1) (2) (3) (4) (5) (6)

CS*PAYER 0.055***

0.028*

0.073***

(4.79)

(1.71)

(5.40)

PAYER 0.007

0.005

0.021***

(0.99)

(1.13)

(4.61)

CS*DUMMY_HI

GH 0.039***

0.021

0.048***

(3.06)

(1.41)

(3.56)

DUMMY_HIGH

0.019***

0.014***

0.023***

(2.90)

(3.30)

(3.82)

CS -0.006 0.008 0.019* 0.024** -0.017 0.003

(-0.55) (0.79) (1.80) (2.20) (-1.18) (0.22)

SIZE 0.053*** 0.052*** 0.052*** 0.052*** 0.051*** 0.051***

(26.71) (10.38) (10.95) (10.75) (11.12) (10.74)

ROA 0.155*** 0.150*** 0.156*** 0.152*** 0.158*** 0.156***

(7.59) (10.57) (11.07) (10.90) (11.06) (10.82)

MTB 0.003*** 0.003*** 0.003*** 0.003*** 0.003*** 0.003***

(4.68) (6.19) (6.20) (6.22) (5.90) (5.98)

LEV -0.079*** -0.077** -0.081*** -0.079*** -0.077*** -0.078***

(-4.97) (-2.60) (-2.85) (-2.72) (-2.91) (-2.87)

LOGAGE 0.005 0.004 0.006 0.006 0.004 0.003

(1.56) (0.96) (1.52) (1.51) (0.86) (0.85)

CASH 0.074*** 0.074*** 0.071*** 0.071*** 0.075*** 0.075***

(4.21) (4.52) (4.33) (4.39) (4.60) (4.57)

NOL -0.005 -0.005 -0.006 -0.006 -0.003 -0.004

(-0.93) (-0.81) (-1.00) (-0.99) (-0.51) (-0.60)

IO2SHR_Y 0.035*** 0.035** 0.035** 0.035** 0.041*** 0.041**

(3.25) (2.19) (2.16) (2.13) (2.71) (2.65)

CAPEX 0.435*** 0.438*** 0.428*** 0.428*** 0.450*** 0.446***

(6.94) (5.82) (5.63) (5.64) (6.62) (6.14)

Year FEs Yes Yes Yes Yes Yes Yes

Industry FEs Yes Yes Yes Yes Yes Yes

Observations 35,634 35,634 35,634 35,634 35,634 35,634

Adjusted R2

0.219 0.219 0.219 0.219 0.220 0.220

Notes: This table reports the conditional effect of payout on the impact of constituency

statutes on improving CSR engagement. PAYER is an indicator variable that equals one if a

firm has non-zero payout (TOTAL_PAYOUT, REPURCHASE and DIVIDENDS respectively

in columns (1), (3) and (5)) in year t-1, and zero otherwise. DUMMY_HIGH is an indicator

variable that equals one if a firm’s payout (TOTAL_PAYOUT, REPURCHASE and

DIVIDENDS respectively in columns (2), (4) and (6)) in year t-1 is above the median of its

industry peers with the same one-digit SIC code in the same year, and zero otherwise. We

control for industry and year fixed effects in all specifications. t-statistics based on robust

standard errors clustered by state of incorporation are shown in brackets. *, **, and ***

indicate statistical significance at the 10%, 5%, and 1% levels, respectively.

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TABLE 5 Constituency statutes, CSR engagement and firm valuation

Dependent Variable= TQ

(1) (2) (3)

CS*D_INC 0.192** 0.198*** 0.182**

(2.57) (2.78) (2.57)

D_INC -0.117 -0.108 -0.101

(-1.56) (-1.50) (-1.43)

CS -0.085 -0.075 -0.070

(-1.36) (-1.24) (-1.18)

SIZE

-0.018 -0.038

(-0.75) (-1.60)

ROA

0.368 0.228

(1.41) (0.88)

MTB

0.064*** 0.053***

(8.27) (6.75)

LEV

-0.285* -0.205

(-1.71) (-1.22)

LOGAGE

-0.056 -0.061

(-1.40) (-1.55)

CASH

0.689**

(2.29)

NOL

0.065

(1.24)

IO2SHR_Y

0.199**

(2.51)

DIV_AT

5.006***

(4.84)

CAPEX

-0.230

(-0.54)

Year FEs Yes Yes Yes

Industry fixed effect Yes Yes Yes

Observations 856 856 856

Adjusted R2 0.601 0.637 0.650

Notes: This table presents the impact of increases in CSR engagement in response to the

adoption of constituency statutes on firm value (TQ). We control for industry and year fixed

effects in all specifications. t-statistics are shown in brackets. *, **, and *** indicate

statistical significance at the 10%, 5%, and 1% levels, respectively.

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TABLE 6

Constituency statutes, CSR engagement and firm valuation – the effect of information

environment

Panel A: Subsample of firms with low vs. high analyst coverage

Sub-sample with analyst coverage= LOW HIGH

(1) (2)

CS*D_INC 0.205* 0.123

(1.76) (1.32)

D_INC -0.268** -0.004

(-2.30) (-0.04)

CS -0.205* 0.035

(-1.84) (0.46)

SIZE -0.056 -0.081**

(-1.32) (-2.26)

ROA -0.040 0.289

(-0.11) (0.74)

MTB 0.010 0.017***

(1.62) (2.85)

LEV 0.423 -0.544**

(1.61) (-2.24)

LOGAGE -0.099 0.020

(-1.45) (0.35)

CASH 1.241*** 1.790***

(2.87) (3.76)

NOL -0.014 0.207***

(-0.16) (3.10)

IO2SHR_Y 0.060 0.143

(0.40) (1.37)

DIV_AT 3.058* 2.697*

(1.76) (1.80)

CAPEX 0.032 0.336

(0.05) (0.72)

Year FEs Yes Yes

Industry FEs Yes Yes

Observations 376 471

Adjusted R2 0.583 0.718

Panel B: Subsample of firms with low vs. high institutional ownership

Sub-sample with institutional ownership= LOW HIGH

(1) (2)

CS*D_INC 0.202* 0.036

(1.78) (0.36)

D_INC -0.121 -0.044

(-1.08) (-0.42)

CS -0.263** 0.092

(-2.59) (1.14)

SIZE -0.077** -0.048

(-1.98) (-1.39)

ROA 0.242 -0.290

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(0.67) (-0.68)

MTB 0.064*** 0.022***

(5.07) (3.23)

LEV 0.025 -0.749***

(0.08) (-3.18)

LOGAGE 0.009 -0.022

(0.14) (-0.35)

CASH 1.367*** 0.912*

(2.95) (1.91)

NOL 0.028 0.132*

(0.26) (1.96)

IO2SHR_Y 0.219 0.233

(1.26) (0.95)

DIV_AT 5.230*** 2.051

(4.69) (1.23)

CAPEX -1.011 0.958*

(-1.65) (1.68)

Year FEs Yes Yes

Industry FEs Yes Yes

Observations 377 470

Adjusted R2 0.604 0.677

Notes: This table presents the conditional effect of information environment on the impact of

increases in CSR engagement on firm value in response to the adoption of constituency

statutes. The dependent variable is Tobin’s Q (TQ) in both panels. Using analyst coverage

(LOGANAC) and institutional ownership (IO2SHR_Y) lagged by one year relative to the

dependent variable, we partition our sample into low and high groups based on the median of

the information environment proxies by a firm’s industry peers (firms with the same one-digit

SIC code) in the prior year. We restrict our analysis to firms incorporated in adoption states.

Panel A reports results of subsamples partitioned by analyst coverage (LOGANAC). Panel B

presents results of subsamples partitioned on the basis of institutional ownership (IO2SHR_Y).

We control for industry and year fixed effects in all specifications. t-statistics are shown in

brackets. *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels,

respectively.

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TABLE 7 The impact of constituency statutes on CSR engagement – The effect of payout

Dependent Variable=

ADJNETCSR

TOTAL_PAYOUT REPURCHASE DIVIDENDS

(1) (2) (3) (4) (5) (6) (7) (8) (9)

CS×DUMMY_HIGH 0.039** 0.030** 0.040*** 0.017 0.012 0.020 0.039** 0.050*** 0.055***

(2.62) (2.27) (3.13) (1.05) (0.85) (1.36) (2.46) (3.19) (3.60)

DUMMY_HIGH 0.016*** 0.021*** 0.017** 0.018*** 0.020*** 0.014*** 0.024*** 0.017** 0.016***

(3.21) (3.19) (2.23) (3.99) (4.79) (3.23) (4.41) (2.57) (2.68)

CS 0.009 0.014 0.007 0.026** 0.028** 0.025** 0.010 0.004 -0.000

(0.83) (1.35) (0.61) (2.49) (2.63) (2.24) (0.76) (0.35) (-0.01)

LOGAT 0.052*** 0.052*** 0.052*** 0.052*** 0.052*** 0.052*** 0.051*** 0.052*** 0.051***

(10.51) (10.31) (10.27) (10.72) (10.63) (10.76) (10.81) (10.48) (10.86)

ROA 0.145*** 0.145*** 0.150*** 0.147*** 0.147*** 0.152*** 0.149*** 0.153*** 0.158***

(10.28) (10.16) (10.49) (10.59) (10.65) (10.92) (10.13) (10.50) (11.03)

MTB 0.003*** 0.003*** 0.003*** 0.003*** 0.003*** 0.003*** 0.003*** 0.003*** 0.003***

(6.20) (6.14) (6.17) (6.14) (6.16) (6.21) (6.13) (6.05) (6.04)

LEV -0.076*** -0.078** -0.077** -0.079*** -0.079*** -0.079*** -0.075*** -0.079*** -0.078***

(-2.69) (-2.63) (-2.63) (-2.73) (-2.69) (-2.73) (-2.82) (-2.78) (-2.86)

LOGAGE 0.004 0.004 0.004 0.005 0.005 0.006 0.004 0.004 0.004

(1.10) (1.05) (1.03) (1.46) (1.48) (1.52) (0.96) (1.05) (0.94)

CASH 0.074*** 0.076*** 0.074*** 0.072*** 0.072*** 0.071*** 0.074*** 0.077*** 0.073***

(4.44) (4.64) (4.57) (4.42) (4.48) (4.39) (4.48) (4.58) (4.59)

NOL -0.005 -0.005 -0.005 -0.006 -0.006 -0.006 -0.004 -0.003 -0.004

(-0.88) (-0.81) (-0.82) (-1.02) (-0.98) (-1.00) (-0.74) (-0.55) (-0.65)

IO2SHR_Y 0.036** 0.035** 0.035** 0.035** 0.034** 0.035** 0.042*** 0.040** 0.040**

(2.22) (2.17) (2.20) (2.13) (2.12) (2.13) (2.68) (2.50) (2.59)

CAPEX 0.433*** 0.436*** 0.437*** 0.427*** 0.427*** 0.428*** 0.441*** 0.439*** 0.447***

(5.81) (5.73) (5.75) (5.62) (5.61) (5.63) (6.03) (5.91) (6.24)

Year FEs Yes Yes Yes Yes Yes Yes Yes Yes Yes

Industry FEs Yes Yes Yes Yes Yes Yes Yes Yes Yes

Observations 35,634 35,634 35,634 35,634 35,634 35,634 35,634 35,634 35,634

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Adjusted R2

0.219 0.219 0.219 0.219 0.219 0.219 0.22 0.22 0.22

Notes: This table reports the effect of payout on the change in CSR engagement after the adoption of constituency statutes. DUMMY_HIGH is an indicator

variable that equals one if a firm’s total payout (TOTAL_PAYOUT, REPURCHASE and DIVIDENDS) in year t-1 is above the median of its industry peers

with the same one-digit SIC code in the same year, and zero otherwise. We control for industry fixed effects (three-digit SIC codes) and year fixed effects in

all specifications. t-statistics, based on robust standard errors clustered by state of incorporation, are shown in brackets. *, **, and *** indicate statistical

significance at the 10%, 5%, and 1% levels, respectively.

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