Abstract
The literature evidently demonstrates the CEO-centric effect upon firms’ Corporate Social Responsibility (CSR) engagements. Given the CEO’s strong discretionary power over CSR decisions and self-serving motive divergent from shareholder value maximization, it would be interesting to investigate the strategic decisions made by the CEO on CSR policy facing varied dimensions of market conditions. From an agency theory perspective, the paper develops a theoretical framework to model and clarify the relationships between firm’s CSR provisions and the three dimensions of external market conditions: market complexity, munificence, and dynamism. Furthermore, I empirically measure the market dimensions and test the propositions implied by the theoretical work. Consistent with the model implications, I found CEOs tend to invest more in CSR in a competitive market, less in CSR when the market is munificent and more in CSR when the market is dynamic and unpredictable. The results are consistent with the extant literature and shed light on the value relevancy of CSR activities.
Highlights
It is widely documented that corporate social responsibility (CSR) activities are deeply value relevant
Assumption 2: The risk aversion of CEO is negatively related to the generosity of external business resources and abundancy of growth opportunity measured by environmental munificence, or Proposition 2: Ceteris paribus, the effect of environmental munificence is negative on the level of Corporate Social Responsibility (CSR) provisions chosen by the CEO, or dCSP dμ due to the stabilization effect of CSR (Barney, 1991; Wernerfelt, 1984; Godfrey, Merrill, and Hansen, 2009), the volatility of CEO’s income brought by the market uncertainty will decrease in CSR provisions and the sensitivity of V to CSR provisions is higher in more dynamic industries in the sense that when the environmental uncertainty is naturally high, firms with good social reputation would avoid more negative shocks than the same firm but in a stable business environment
The coefficient of market dynamism measure (STD) is positive and significant at 1%, suggesting that firms facing turbulent market conditions are more likely to engage in socially responsible activities, which is in line with the evidence demonstrated in Barney (1991), Wernerfelt (1984), and Godfrey, Merrill, and Hansen (2009)
Summary
It is widely documented that corporate social responsibility (CSR) activities are deeply value relevant (see, for example, Szymanski and Henard, 2001, Godfrey, Merrill, and Hansen, 2009, and Luo and Bhattacharya, 2009). Building upon the value relevancy of CSR and the CEO-centric effect on social activities, the paper steps further to analyze the strategic decision making of CEO in face of different market conditions both theoretically and empirically. The paper contributes to both the literature on CSR value relevancy (see, for example, Szymanski and Henard, 2001, Godfrey, Merrill, and Hansen, 2009, and Luo and Bhattacharya, 2009) and the literature on CEO centric effect (see, for example, Fernández-Kranz and Santaló, 2010, Kang, 2017, Brick and Qiao, 2017, and Bernard, Godard, and Zouaoui, 2018).
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