Investigating the Effect of Corporate Social Responsibility on the Investment Efficiency and Innovation

Document Type : Original Article

Authors

Abstract

Introduction: One of the manifestations of maximizing the value of a company is
performing those activities related to social responsibility that may result in some benefits
such as desirable investment and the improvement of products. Therefore, the aim of this
research is to investigate the effect of corporate social responsibility on the investment
efficiency and innovation of the companies listed on the Tehran Stock Exchange.
Method: Type of the present research is applied, with ex post facto approach and its design
is quasi-experimental. In this research, 60 companies listed on the Tehran Stock Exchange
have been investigated during 2009-2014. In order to measure social responsibility, Kinder,
Lydenberg, & Domini Co. Inc. ranking method and to measure investment efficiency,
Beadle et al. and Chen et al. models have been used. Also, the hypotheses of the research
were tested by the Panel Data model.
Results: The results of the research showed that corporate social responsibility has a
significant positive effect on the investment efficiency, and it has a significant and negative
effect on overinvestment and undercapitalization. Moreover, corporate social responsibility
has a significant and positive effect on innovation.
Conclusion: The disclosure of corporate social responsibility reduces agency conflicts and
any exploitation of managers of free cash flows and extracted loans in the form of debt.
Therefore, the investment inefficiency decreases. Also, evidence points to the fact that the
disclosure of social responsibility associates with producing new products as well as
appropriate use of the results out of investment in research and development. So, it is
necessary for managers to commit to their performing social responsibility duties in order
to invest optimally, to produce high quality and high technology products, to retain
stakeholders' interests, and to reduce agency costs.

Keywords


1      Gao, F.; Lisic, L. L.; and I. X. Zhang (2014). “Commitment to Social Good and Insider Trading”, Journal of Accounting and Economics,Vol. 57, Nos. 2 and 3, pp. 149-175.
2      Pagano, M. and P. F. Volpin (2005). “The Political Economy of Corporate Governance”, American Economic Review,Vol. 95, No. 4, pp. 1005-1030.
3      Kruger, P. (2015). “Corporate Goodness and Shareholder Wealth”, Journal of Financial Economics,Vol. 115, No. 2, pp. 304-329.
4      Jensen, M. C. (2001). “Value Maximization, Stakeholder Theory, and the Corporate Objective Function”, Journal of Applied Corporate Finance, Vol. 14, No. 3, pp. 8-21.
5      Porter, M. E. and M. R. Kramer (2011). “Creating a Shared Value”, Harvard Business Review,Vol. 89, Nos. 1 and 2, pp. 62-77.
6      Edmans, A. (2011). “Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices”, Journal of Financial Economics,Vol. 101, No. 3, pp. 621-640.
7       Deng, X.; Kang, J-K.; and B. S. Low (2013). “Corporate Social Responsibility and Stakeholder Value Maximization: Evidence from Mergers”, Journal of Financial Economics, Vol. 110, No. 1, pp. 87-109.
8      Jensen, M. C. and W. H. Meckling (1976). “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure”, Journal of Financial Economics,Vol. 3, No. 4, pp. 305-360.
9      Kim, Y.; Park, M. S.; and B. Wier (2012). “Is Earnings Quality Associated with Corporate Social Responsibility?”, The Accounting Review, Vol. 87, No. 3, pp. 761-796.
10   Biddle, G. C.; Hilary, G.; and R. S. Verdi (2009). “How Does Financial Reporting Quality Relate to Investment Efficiency?”, Journal of Accounting and Economics,Vol. 48, No. 2, pp. 112-131.
11  Martinez-Conesa, I.; Soto-Acosta, P.; and M. P. Manzano (2017). “Corporate Social Responsibility and its Effect on Innovation and Firm Performance: An Empirical Research in SMEs”, Journal of Cleaner Production,Vol. 142, No. 20. pp. 2374-2383.
12   Katila, R. and S. Shane (2005). “When Does Lack of Resources Make New Firms Innovative?” Academy of Management Journal, Vol. 48, No. 5, pp. 814-829.
13  Porter, M. E. (1998). “Clusters and the New Economics of Competition”, Harvard Business Review, Vol. 76, No. 6, pp. 77-90.
14  Hsu, P-H.; Tian, X.; and Y. Xu (2014). “Financial Development and Innovation: Cross-Country Evidence”, Journal of Financial Economics, Vol. 112, No. 1, pp. 116-135.
15  Cho, S.; Lee, Y. C.; and R. J. Pfeiffer (2013). “Corporate Social Responsibility Performance and Information Asymmetry”, Journal of Accounting and Public Policy, Vol. 32, No. 1, pp. 71-83.
16  Kruger, P. (2015). “Corporate Goodness and Shareholder Wealth”, Journal of Financial Economics,Vol. 115, No. 2, pp. 304-329.
17   Friedman, M. (1970). “The Social Responsibility of Business is to Increase its Profits”, The New York Times Magazine, Vol. 13, pp. 32, 33, 122, 124 and 126.
18   Preston, L. E. and D. P. O’Bannon (1997). “The Corporate Social-Financial Performance Relationship”, Business and Society, Vol. 36, No. 4, pp. 419-429.
19   Bénabou, R. and J. Tirole (2010). “Individual and Corporate Social Responsibility”, Economica, Vol. 77, No. 305, pp. 1-19.
20  Waddock, S. A. and S. B. Graves (1997). “The Corporate Social Performance Financial Performance Link”, Strategic Management Journal, Vol. 18, No. 4, pp. 303-319.
21   Copeland, T. E.; Weston, J. F.; and K. Shastri (2005). Financial Theory and Corporate Policy, 4th Edition, Boston: Pearson Addison-Wesley.
22  Modigliani, F. and M. Miller (1958). “The Cost of Capital, Corporation Finance, and the Theory of Investment”, American Economic Review, Vol. 48, No. 3, pp. 261-297.
23  Chen, F.; Hope, O.; Li, Q.; and X. Wang (2011). “Financial Reporting Quality and Investment Efficiency of Private Firms in Emerging Markets”, The Accounting Review, Vol. 86, No. 4, pp. 1255-1288.
24  Izadinia, N. and M. Hashemi Dehchi (2017). “Investigating the Relation between Corporate Social Responsibility and Cost Stickiness”, Management Accounting, Vol. 10, No. 32, pp. 1-12. [In Persian]
25  Dhaliwal, D.; Li, O.; Tsang, A.; and A. G. Yang (2011). “Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting”, The Accounting Review, Vol. 86, No. 1, pp. 59-100.
26  Dhaliwal, D. S.; Radhakrishnan, S.; Tsang, A.; and Y. G. Yang (2012). “Nonfinancial Disclosure and Analyst Forecast Accuracy: International Evidence on Corporate Social Responsibility Disclosure”, The Accounting Review, Vol. 87, No. 3, pp. 723-759.
27  Hoi, C. K.; Wu, Q.; and H. Zhang (2013). “Is Corporate Social Responsibility (CSR) Associated with Tax Avoidance? Evidence from Irresponsible CSR Activities”, The Accounting Review, Vol. 88, No. 6, pp. 2025-2059.
28  Khajavi, Sh. and M. Etemadi Jowryabi (2015). “Corporate Social Responsibility and Its Reporting”, Journal of Health Accounting, Vol. 4, No. 2, pp. 104-123. [In Persian]
29  Munari, F.; Oriani, R.; and M. Sobrero (2010). “The Effects of Owner Identity and External Governance Systems on R&D Investments: A Study of Western European Firms”, Research Policy, Vol. 39, No. 8, pp. 1093-1104.
30  Chauvin, K. W. and M. Hirschey (1993). “Advertising, R&D Expenditures and the Market Value of the Firm”, Financial Management, Vol. 22, No. 4, pp. 128-140.
31  Amore M. D.; Schneider, C.; and A. Zaldokas (2013). “Credit Supply and Corporate Innovation”, Journal of Financial Economics, Vol. 109, No. 3, pp. 835-855.
32  Chang, X.; Fu, K.; Low, A.; and W. Zhang (2015). “Non-Executive Employee Stock Options and Corporate Innovation”, Journal of Financial Economics,Vol. 115, No. 1, pp. 168-188.
33  He, J. and X. Tian (2013). “The Dark Side of Analyst Coverage: The Case of Innovation”, Journal of Financial Economics, Vol. 109, No. 3, pp. 856-878.
34  Grant, A. M. and J. W. Berry (2011). “The Necessity of Others is the Mother of Invention: Intrinsic and Prosocial Motivations, Perspective Taking, and Creativity”, Academy of Management Journal, Vol. 54, No. 1, pp. 73-96.
35  Chen, H. and X. Wang (2011). “Corporate Social Responsibility and Corporate Financial Performance in China: An Empirical Research from Chinese Firms, Corporate Governance”, The International Journal of Business in Society, Vol. 11, No. 4, pp. 361-370.
36  Revert, C. (2012). “The Impact of Better Corporate Social Responsibility Disclosure on the Cost of Equity Capital”, Corporate Social Responsibility and Environmental Management, Vol. 19, No. 5, pp. 253-272.
37  Erhemjamts, O.; Li, Q.; and A. Venkateswaran (2013). “Corporate Social Responsibility and Its Impact on Firms’ Investment Policy, Organizational Structure, and Performance”, Journal of Business Ethics, Vol. 118, No. 2, pp. 395-412.
38  Lu, Y.; Abeysekera, L.; and C. Cortese (2015). “Corporate Social Responsibility Reporting Quality, Board Characteristics and Corporate Social Reputation: Evidence from China”, Pacific Accounting Review, Vol. 27, No. 1, pp. 95-118.
39  Benlemlih, M. and M. Bitar (2016). “Corporate Social Responsibility and Investment Efficiency”, Journal of Business Ethics, Vol. 133, pp. 1-25
40  Gil, E. G.; Manzano, M. P.; and J. H. Fernández (2016). “Investigating the Relationship between Corporate Social Responsibility and Earnings Management: Evidence from Spain”, Business Research Quarterly, Vol. 19, No. 4, pp. 289-299.
41  Cheung, A. (2016). “Corporate Social Responsibility and Corporate Cash Holdings”, Journal of Corporate Finance, Vol. 37, pp. 412-430.
42  Samet, M. and A. Jarboui (2017). “How Does Corporate Social Responsibility Contribute to Investment Efficiency?”, Journal of Multinational Financial Management, Vol. 40, pp. 33-46.
43  Khoshtinat, M. and H. Raie (2004). “The Effect of Presenting Social Accounting Information on Investorsʼ Decision-Making”, The Iranian Accounting and Auditing Review, Vol. 11, No. 3, pp. 73-92. [In Persian]
44  Foroughi, D.; Mirshams Shahshahani, M.; and S. Pourhossein (2008). “The Managers' Attitudes toward Disclosure of Social Accounting Information: The Companies Listed on the Tehran Stock Exchange”, The Iranian Accounting and Auditing Review, Vol. 15, No. 3, pp. 55-65. [In Persian]
45  Khajavi, Sh.; Bayazidi, A.; and S. Jabbarzadeh Kangarluei (2011). “Investigating the Relationship between Earnings Management and Social Responsibility of the Companies Listed on the Tehran Stock Exchange”, Journal of Accounting Advances, Vol. 3, No. 1, pp. 29-54. [In Persian]
46  Hajiha, Z. and B. Sarfaraz (2014). “Investigating the Relationship between Corporate Social Responsibility and Cost of Equity Capital of the Companies Listed on the Tehran Stock Exchange”, Journal of Empirical Research in Accounting, Vol. 4, No. 2, pp. 105-123. [In Persian]
47  Cornell, B. and A. C. Shapiro (1987). “Corporate Stakeholders and Corporate Finance”, Financial Management, Vol. 16, No. 1, pp. 5-14.
48  Waddock, S. A. and S. B. Graves (1997). “The Corporate Social Performance-Financial Performance Link”, Strategic Management Journal, Vol. 18, No. 4, pp. 303-319.
49   Álvarez, l. G.; Lorenzo, J. M. P.; and I. M. G. Sánchez (2011). “Corporate Social Responsibility and Innovation: A Resource‐Based Theory”, Management Decision, Vol. 49, No. 10, pp. 1709-1727.
50  Kashanipour, M.; Azar Khosh, H.; and M. Rahmani (2015). “The Effect of Managers' Ability on the Relationship between the Quality of Financial Reporting and the Efficiency of Investment in the Pharmaceutical Companies Listed on the Tehran Stock Exchange”, Journal of Health Accounting, Vol. 4, No. 3, pp. 66-85. [In Persian]
51  Baradaran Hasanzadeh, R. and V. Taghizadeh Khanqah (2016). “The Effect of Agency Costs on the Investment Behavior”, The Financial Accounting and Auditing Researches, Vol. 8, No. 32, pp. 139-170. [In Persian]
52   El Ghoul, S.; Guedhami, O.; Kwok, C.; and D. Mishra (2011). “Does Corporate Social Responsibility Affect the Cost of Capital?”, Journal of Banking and Finance, Vol. 35, No. 9, pp. 2388-2406.
53  Goss, A. and G. S. Roberts (2011). “The Impact of Corporate Social Responsibility on the Cost of Bank Loans”, Journal of Banking and Finance,Vol. 35, No. 7, pp. 1794-1810.
54  Heidarpour, F. and N. Shahbazi (2015). “Investigating the Relationship between the Environmental Disclosure and the Corporate Governance Mechanisms with the Relevance to Value and Performance”, Journal of Health Accounting, Vol. 4, No. 2, pp. 39-59. [In Persian]
55  Fakhari, H.; Rezaei Pitenoei, Y.; and M. Noroozi (2016). “The Effect of Corporate Social Responsibility Disclosure on the Investment Efficiency”, Journal of Financial Management Strategy, Vol. 4, No. 4, pp. 85-106. [In Persian]
56  Lehn, K. and A. Poulsen (1989). “Free Cash Flow and Stockholder Gains in Going Private Transactions”, The Journal of Finance, Vol. 44, No. 3, pp. 771-787.