Empire Building and Corporate Social Responsibility

Abstract

In this paper, we investigate whether and to what extent corporate social responsibility (CSR) influences empire building. To derive our testable hypotheses, we use the prevalent agency cost hypothesis and develop a behavioral traits framework, which is grounded in the upper echelons theory. Using a large sample of firms in the US, we find that socially responsible firms exhibit a lower propensity to engage in empire building activity. In addition, firms with high CSR activities are also less likely to engage in mergers and acquisitions and if they do, they pay lower bid premium to target firms and make value maximizing acquisition decisions. A direct examination of the behavioral traits theory shows evidence consistent with the view that CEO overconfidence and narcissism reduce CSR activity but increase empire building. Overall, our results are consistent with the behavioral traits theory but are inconsistent with agency theory in the context of empire building.