Conclusion
In this paper, we assess how CSR activity affects firm value. We treat the recent financial crisis as an exogenous shock to firms to disentangle the confounding association between CSR practices and firm value. Performing a difference-in-difference analysis, we find that influential institutional ownership significantly affects the relation between CSR practices and firm value. We show that on average CSR firms exhibit higher firm value (Tobin’s Q) than non-CSR firms prior to the financial crisis. However, following the onset of the crisis, CSR firms are hit harder in terms of firm value than other firms. Our findings suggest that the importance of the CSR overinvestment effect, relative to that of the CSR conflict-resolution effect, is time-variant. The overall CSR effect depends on which effect dominates under a specific economic condition. In addition, we apply a triple difference (DDD) approach. We find that before the crisis CSR positively affects the value of low institutional ownership firms. However, we show that during the same pre-crisis period, the CSR effect is significantly lower for firms with high influential IO than for firms with low IO. Our evidence implies that the CSR benefits low-IO firms more before the crisis. However, when the crisis occurs, we document that high influential institutional holdings have positive influence on CSR-firm value relation. Specifically, we find that the change in Tobin’s Q of CSR firms from the pre-crisis to crisis period, net of that of non-CSR firms, is significantly positive in the group with high influential IO. The results support the view that influential institutional ownership can play an important monitoring role in enhancing firm value, especially during the crisis when agency problems get worse. To study how financial constraints influence the interaction among CSR, institutional ownership, and firm value, we focus on firms with debt maturing at the start of the financial crisis. Interestingly, we document an insignificant impact of influential institutional ownership on CSR-firm value relation when the crisis happens. Our results suggest that the negative impact of refinancing risks and the monitoring role of short-term debtholders subdue the positive impact of high institutional ownership on CSR-firm value relation during the crisis. In sum, we find that the effect of CSR on firm value varies with the level of influential institutional ownership and depends on the economic condition. Our study contributes to ongoing research that gauges benefits and costs of CSR activity and provide investment implication for socially responsible investments.
