Conclusion
In this study, we provide one of the first attempts to investigate the relationship between CSR and investment efficiency. Using a large sample of more than 3000 individual firms representing 21,030 firm-year observations over the 1998–2012 period, we find statistically significant evidence that CSR is positively related to investment efficiency. We believe that our evidence is mainly due to the low level of information asymmetry that high CSR firms enjoy, as well as their good management practices. Our findings are robust when using alternative measures of CSR, alternative measures of investment efficiency, alternative estimations and standard errors, and several approaches to address endogeneity and self-selection bias. Moreover, among the individual components of CSR, we show that dimensions which are linked to primary stakeholders (e.g. employee relations, product characteristics, environment, and diversity) are the dimensions that play the most important role in improving investment efficiency. Additional results suggest that CSR had an additional effect on investment efficiency during the subprime crisis. High CSR firms benefit from employee solidarity and customer loyalty in financial crises, which enhance the efficiency of their investment. In a final set of tests, our findings indicate that extremely low CSR and extremely high CSR firms do not enjoy a high level of investment efficiency. Our study’s results support the theory that CSR investments may be considered as an effective way to improve investment efficiency. Corporate managers are highly encouraged to improve their practices with their primary stakeholders. Such improvements will likely result in reflecting a better image of the company, gaining employee loyalty, and enhancing customer support. This may result in an increase in investment efficiency, especially in times of financial stability, which in turn leads to high financial performance.
