Corporate Social Responsibility and Shareholder ... · Prior research defines corporate social...
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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18
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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19
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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20
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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21
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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22
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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23
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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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33
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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35
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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36
(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.
141058