Abstract
The purpose of this paper is to examine the association between corporate environmental responsibility (CER) activities and investment efficiency as measured by overinvestment, and whether the industry-level competition affects this association. We investigate a sample of 2285 non-financial firms with fiscal year-end in December listed in the Korea Stock Exchange Market for the period of 2013–2018, measuring the investment efficiency by overinvestment model. Using environmental scores from the Korea Corporate Governance Service to measure CER activities, we show that, on average, firms can decrease overinvestment behavior through CER activities in South Korea. Moreover, in firms in a highly competitive market, the negative association between CER activities and overinvestment is pronounced, indicating that strong product market competition are effective in monitoring managerial opportunistic behavior. These results are robust, even after controlling for different setting and alternative CER. These findings also suggest that the relationship between CER and overinvestment appears to be benefit firms that are sound and sustainable and honestly present their financial information.
Highlights
Corporate social responsibility (CSR) indicates the commitment by firms to behave responsibly [1] and is one of the most significant and common trends in recent years
We examine the relationship between corporate environmental responsibility (CER) activities and investment efficiency by reducing overinvestment between the years 2013 and 2018
CER activities refer to the efforts a company invests in activities that mitigate a negative impact on the environment
Summary
Corporate social responsibility (CSR) indicates the commitment by firms to behave responsibly [1] and is one of the most significant and common trends in recent years. Recent studies have found a positive correlation between the social performance of a firm and its value, suggesting the shift to CSR is more strategic than altruistic. Researchers have settled on two main theories regarding the relationship between CSR and firm value. As defined by Waddock and Graves [2], proposes that financial performance is positively correlated to the amount of available slack resources, which provide social investment opportunities for firms, such as community and employee relations and environmental sustainability. The other theory, known as good management or conflict theory, proposes a positive correlation between good management practices and social performance, since a focus on CSR theoretically strengthens relationships with important stakeholders, thereby improving overall performance
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