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Journal of Business Ethics
Published in: Journal of Business Ethics 1/2017

05-11-2015

A Further Examination of the Impact of Corporate Social Responsibility and Governance on Investment Decisions

Authors: Jeffrey Cohen, Lori Holder-Webb, Samer Khalil

Published in: Journal of Business Ethics | Issue 1/2017

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Abstract

The value relevance of corporate social responsibility (CSR) performance disclosures for financial markets participants remains uncertain despite advances in the literature and the recent proliferation of CSR disclosures around the world. Using an experimental approach involving MBA students at universities in the United States and Lebanon, we study the value relevance of CSR disclosures by testing whether they affect participants’ personal portfolio management investment decisions. We also examine whether the degree to which the CSR disclosures affect these decisions is influenced by corporate governance quality. To examine these issues, we examine the effect of environmental performance on investment decisions in Experiment 1, and the effect of labor performance on investment decisions in Experiment 2. Results from both experiments show that investment decisions are affected by CSR performance. Analysis shows that governance strength exerts a marginal effect on the investment decision only when CSR performance is strong. Lebanese participants appear to be more sensitive to weak performance (both CSR and governance) than U.S. participants. Overall, our findings extend the CSR disclosures literature by documenting the value relevance of CSR performance for financial markets participants’ decision making. These findings also extend the governance literature by documenting that consistent with attribution theory, the effects of governance quality are contingent upon the information and decision context, and that efforts to decontextualize governance may be counterproductive.
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Appendix
Available only for authorised users
Footnotes
1
Coram et al. (2009) document that non-financial information on the balanced scorecard affects investor estimates of the trends of future share price. PricewaterhouseCoopers (2002) report that a majority of top executives around the world consider non-financial information to be more valuable than financial information in assessing a firm’s long-term prospects. Narayanan et al. (2000) argue that the disclosures of non-financial information provide investors with better information about the substantive performance of managers and their companies.
 
2
Bird et al. (2007) also find that the market appears not to value most CSR activity during their later period of 1997–2003; this may, however, be reflective of the significant economic uncertainty and society-level upheavals that took place globally during this period (i.e., the inception of significant wars, the rise of global terrorist activity, and multiple economic downturns). To the extent that CSR activity consumes resources, one would expect to see less of it, and to have such activity that is provided by less rewarded, during periods of scarcity in resources or increased uncertainty about the future.
 
3
For instance, Holder-Webb et al. (2009) found evidence supporting the existence of a positive reporting bias consistent with impression management. Cohen et al. (2012) found a tendency for managers of U.S. companies to disclose more positive than negative non-financial information.
 
4
For instance, the number of companies from this region that are members of the UN Global Compact—a strategic policy initiative for businesses committed to align their operations and strategies with 10 principles in the areas of human rights, labor, the environment, and anticorruption- has increased from three in 2003 to 262 by the end of 2012 (Booz and Company 2013).
 
5
Hofstede (1980, 2001) and Salter et al. (2015) suggest that national culture may affect an individual’s decision making. Although Lebanon and the U.S. differ on important cultural variables such as Individualism and Power Distance (Hofstede 2015) we did not find any significance to including country of origin as a covariate. Thus, for all statistical analysis, we used the combined aggregate sample. Note, that we did not collect individual data from participants on their cultural score.
 
6
These descriptions are adapted from Holder-Webb et al. (2009) examination of disclosure of CSR activities.
 
7
These descriptions are adapted from factors that may affect the corporate governance mosaic (Cohen et al. 2004).
 
8
We also asked participants on whether they would divest in this company. Specifically, participants were asked “How much more or less likely would you be to divest from [the Company] for the next year, given the [environmental or labor] disclosure information?” Results for the divestment judgment and the investment judgment were qualitatively similar. Thus, all results reported in the paper are for the investment judgment only.
 
9
Analysis did not reveal any obvious trends with respect to experiment number, or experimental condition, with respect to the participants that failed the manipulation checks.
 
10
Consistent with Elliott et al. (2007) we conclude that these types of students have both a relevant informational and knowledge background, and relevant investing experience.
 
11
Cross-experiment, within-condition differences in means are not significant.
 
12
As indicated in the development of H2, the assessment of the reliability of the firm’s communications may be a function of the perceptions of the strength of the firm’s governance. This is the case with our experimental participants: the subjective assessment of the reliability of the disclosures is highly correlated with the subjective assessment of the strength of the governance (Pearson correlation = .650, p = .000). Thus, we conclude that the governance measure is also impounding beliefs about reliability, and in order to avoid econometric problems arising from collinearity in these variables, we include only the governance variable.
 
13
Ordered logits do not yield measures of explained variance that are comparable to the R 2 provided by least-squares techniques. Thus, we present the Likelihood Ratio Chi-Square, which tests the null model that no variable in the model is significant.
 
14
The results are comparable after controlling for the prior investment experience of participants. The parameter estimate for prior investment experience is insignificant for both investment/divestment decisions (p > 0.10). Results are also not affected qualitatively or quantitatively by including a vector of demographic controls (each is statistically insignificant). Demographic variables consisted of gender, age, education level, field of undergraduate and/or graduate study.
 
15
This is why we our hypothesis testing is based on the statistical significance of coefficients, rather than the interpretation of their economic significance.
 
16
This contrasting result between the manipulation and the perceptions of participants could be a function of governance being perceived as comprising multiple dimensions not described in the instrument, but which are components of what Cohen et al. (2004) denote as the “corporate governance mosaic”.
 
17
Including an interaction term comprised the participant ratings of governance and CSR does not alter the results of the model qualitatively. The term is not significant in and of itself, and so has been omitted from the further analysis for reasons of parsimony.
 
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Metadata
Title
A Further Examination of the Impact of Corporate Social Responsibility and Governance on Investment Decisions
Authors
Jeffrey Cohen
Lori Holder-Webb
Samer Khalil
Publication date
05-11-2015
Publisher
Springer Netherlands
Published in
Journal of Business Ethics / Issue 1/2017
Print ISSN: 0167-4544
Electronic ISSN: 1573-0697
DOI
https://doi.org/10.1007/s10551-015-2933-5

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