Are Corporate Environmental Responsibility Activities an Efficient Investment or an Agency Cost? Evidence from Korea

Sang Koo Kang,Hee Sub Byun

doi:10.3390/su12093738

Abstract

External conditions such as capital market maturity, investor protection levels, and government control over individual firms vary among countries. We posit that such environmental differences could cause differences in corporate environmental responsibility (CER) activities between countries. However, previous studies have mainly focused on developed countries, while studies conducted in emerging countries are limited. We examine the relationship between CER activities and investment inefficiency in firms listed on the Korea Exchange. Specifically, we analyze the incentive of managers’ ex-ante behavior on CERs and further analyze the relationship between these incentives and external evaluations. Using firm-year panel data, we conducted the pooled ordinary least squares (OLS) regression analysis and found the following results. First, the relationship between CERs and investment inefficiency is significantly positive, especially those based on managers’ incentives for overinvestments. Second, the positive relationship between CERs and investment inefficiency is prominent in the subsamples with large free cash flows or low asset efficiency. Third, active CERs reduced corporate value in the overinvestment subsample. Unlike existing literature that focuses on developed countries, our results imply that CERs may have negative effects due to agency problems in emerging countries with immature capital markets. From this arises the academic implication that the evaluation of CERs should be changed according to different capital market environments.

Highlights

Previous studies argue that corporate environmental responsibility (CER) activities are efficient investment alternatives that can contribute to the maximization of corporate value by expanding corporate sustainability [1,2,3]
Active CER activities lead to investment inefficiency, especially based on managers’ incentives for overinvestments
We tested the hypothesis based on extensive data on CER by Korea Corporate Governance Service (KCGS); considering which CER activities may either increase investment inefficiency due to agency problems or improve investment efficiency and provide a viable investment alternative in Korea, as a typical emerging country

Summary

Introduction

Previous studies argue that corporate environmental responsibility (CER) activities are efficient investment alternatives that can contribute to the maximization of corporate value by expanding corporate sustainability [1,2,3]. Other studies counter this perspective and espouse that, owing to agency problems, CER activities may be abused by managers in pursuit of private benefits. Agency problems are more serious in emerging countries than in developed countries due to high information asymmetry and low transparency External conditions such as capital market maturity, investor protection levels, and government control over individual firms vary among countries. Previous studies have mainly focused on developed countries, while studies conducted in emerging countries are limited

Methods

Results

Conclusion