CSR, market value and profitability: International evidence

Abstract

Three problems pose severe challenges to identify the impact of corporate social responsibility (CSR) on firm value and performance. These are construct validity, limited data, and endogeneity. To deal with them we use a broad composite measure of CSR and panel data with firm fixed and random effects, plus extensive covariates. We analyze a unique sample drawn from 35 countries over 2003-2012 and find an economically significant relationship between the overall CSR measure and firm value, but little impact of CSR on profitability. The results are driven by the social subscore of our CSR measure. We show that both omitted firm characteristics and omitted aspects of CSR can lead to omitted variable bias and that studies focusing on a single aspect of CSR, such as employee relations or toxic emissions face severe omitted variables bias. These problems are exacerbated in models which use limited controls and ignore firm level heterogeneity.