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Review of Quantitative Finance and Accounting

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27.08.2016 | Original Research

Corporate social responsibility and degrees of operating and financial leverage

verfasst von: Maretno Agus Harjoto

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 2/2017

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Abstract

We examine the relationship between corporate social responsibility (CSR) and firms’ degrees of operating (DOL) and financial leverage (DFL). Combining the enlightened value maximizing and capital structure theories, we hypothesize that CSR as firms’ strategic choice to internalize the cost from implicit contracts between the firms and their non-investing stakeholders affects firms’ operating and financial leverage. We find empirical evidence that CSR and CSR strengths are positively (negatively) related to firms’ DOL (DFL). CSR concerns are positively related firms’ DOL and DFL. We also document that CSR is positively related to firms’ operating cost and we find evidence that CSR acts as a substitute for corporate debt tax shield when firms’ financial leverage is low.

Vorheriger Artikel Directors’ education and corporate liquidity: evidence from boards in Taiwan

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For instance, having more environmentally friendly packaging can increase firms’ variable cost per unit. In contrast, voluntary adoption of product safety (recall), building factories with low emissions, and advertising cost to inform stakeholders regarding firms’ CSR activities can increase firms’ fixed (overhead) operating cost.

Recent studies find that firms with CSR activities is able to charge a higher price per unit for their products due to consumers’ preference toward socially responsible products (Ailawadi et al. 2014; Auger et al. 2003; Elfenbein et al. 2012). Therefore, CSR may allow firms to earn higher contribution margins because the revenues (product prices) increases more than its direct cost (cost of the good sold).

See footnote 4 (page 49) from Mandelker and Rhee (1984).

It is also possible that CSR activities reduce the firm’s variable cost, and therefore, X_CSR = (P + P_CSR)Q − (V − V_CSR)Q − (F + F_CSR) and this helps the firm to the increase in total dollar contribution margin ((p − v)Q) above the increase in firm’s fixed cost (f).

KLD data started with a sample of 500 largest U.S. firms and firms listed in the Domini 400 social index. In 2001, KLD included the 1000 largest U.S. firms and in 2003, it included the 3000 largest U.S. firms.

While our sample spans from 1991 to 2011, our measures of firms’ DOL and DFL in the future periods spans from 1991 to 2015. For instance, we examine the impact of CSR scores in 2011 on the firms’ DOL and DFL during 2011–2015.

Effective tax rate is calculated from the total income taxes divided by the pre-tax income. Debt is the book value of total debt and Equity is the market value of equity.

While CSR spending (CSR strengths may act as a substitute for firm’s corporate debt as a tax shield, the economic impact (magnitude) of CSR on firms’ DFL is relatively small. Thus, we recognize that firm cannot avoid taxes entirely from conducting CSR. Therefore, CSR does not reduce the marginal benefit from taking additional debt financing to reduce corporate tax. We view CSR as firm’s commitment to meet the implicit contracts with its non-investing stakeholders while the value maximizing managers take advantage of CSR spending to reduce the taxable income at the same time.

We use the natural breaks (change) in the CSRSTR and CSRCON scores to classify low, medium, and high CSRSTR and CSRCON. We are unable to divide the subsamples of non-zero CSRSTR and non-zero CSRCON because CSRSTR and CSRCON scores are integer numbers (non-continuous values).

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Titel: Corporate social responsibility and degrees of operating and financial leverage
verfasst von: Maretno Agus Harjoto
Publikationsdatum: 27.08.2016
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 2/2017
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-016-0598-5

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