Abstract
In this paper, we investigate whether a firm’s Corporate Social Responsibility initiatives could affect its financial performance. We specifically investigate the firm’s capital allocation efficiency as a moderating channel affecting their performance. We employ a comprehensive sample of Australian and New Zealand stock exchange-listed firms consisting of 3324 firm-year observations for the period 2004–2017. We do not find that the firm’s capital allocation efficiency is negatively affected by the overall CSR scores or its two main components, namely the environmental or social dimensions. However, our empirical analysis exposes a challenging result for the firms in that we find strong evidence that extremely costly environmental CSR initiatives or policies (e.g., emission reduction, employee health and safety improvements, clean energy products) could reduce the firm’s investment efficiency. Hence, firms need to follow a balancing act when contemplating CSR plans and investing in them. While investors appreciate moderate levels of investment in CSRs, they penalize those firms that invest excessively in such initiatives.
Highlights
Companies have increasingly been focusing on Corporate Social Responsibility (CSR) initiatives and adopting CSR policies as their corporate strategy
Following the idea of Bhandari and Javakhadze (2017), we investigate the effects of CSR activities by Australian and New Zealand firms on their investment allocation efficiency
The results only show that the costly CSR initiatives or policies significantly reduce a company’s investment sensitivity to Q, negatively affecting a company’s capital allocation efficiency in Australia and New Zealand
Summary
Companies have increasingly been focusing on Corporate Social Responsibility (CSR) initiatives and adopting CSR policies as their corporate strategy. Our empirical framework is closely related to a recent U.S.-based research by Bhandari and Javakhadze (2017) They indicated that CSR activities are negatively associated with a firm’s financial performance by affecting firm-level capital allocation efficiency. We concentrate on those CSR initiatives that are arguably among the costliest ones This class of CSR program is the one most likely to reduce firm investment efficiency because they could lead to a substantial reallocation of the firm’s resources to environmentally friendly projects. We add to the literature by investigating our fundamental research question in two countries with different institutional, governance, and financial structures than those of the U.S We do observe that firms’ CSR policies and their implementation in Australia and New Zealand, as opposed to the U.S, generally do not lead to poor financial outcomes.
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