The impact of corporate social responsibility on firm value: an application of structural equation modelling

Abstract

The current study aims to propose an alternative methodology to account for measurement errors in proxies for corporate social responsibility (CSR). In doing so, this study considers CSR as a latent variable measured by environmental and social category scores of Thomson Reuters ESG. To overcome limitations of a single-equation regression analysis, structural equation modelling (SEM) is employed to investigate the relationship between CSR and firm value. Based on data of US companies from 2002 to 2016, this study demonstrates that traditional regression analysis produces inconsistent relationships between CSR and firm value. By contrast, SEM provides strong evidence in support of the positive CSR effect on firm value. Interestingly, a main channel for CSR in driving firm value is social engagement rather than environmental involvement. These results have important implications for corporate managers in enhancing firm value through CSR strategies and socially responsible investors in making equity investment choices.