Corporate Social Responsibility Disclosure and the Value of Cash Holdings

Abstract

This study investigates whether corporate social responsibility (CSR) reports mitigate the value destruction associated with increases in cash holdings. We find that the issuance of a standalone CSR report increases the marginal value of cash holdings and this effect is more pronounced for firms in a less transparent information environment and for firms with weaker external monitoring. Our results suggest that information in CSR reports can facilitate monitoring and thus induce more efficient use of cash holdings.

Acknowledgements

We thank Gilles Hilary (the editor), an anonymous referee, Kevin C. W. Chen, Tai-Yuan Chen, Neil Fargher, Jeong-Bon Kim, Xiaohong Liu, Gary Monroe, Chul W. Park, Xin Wang, Mark Wilson, and Liandong Zhang; the workshop participants at City University of Hong Kong, University of Hong Kong, Australian National University, Xi’an Jiaotong University, the AAA 2014 Annual Meeting, the EAA 2015 Annual Congress, the AFAANZ 2014 Conference, and the 2014 Asia-Pacific Conference on International Accounting Issues.

ORCiD

Greg Shailer http://orcid.org/0000-0002-4896-4197

Notes

1 In general, there are two types of institutional investors: short-term-oriented institutional investors (‘transient or transitory’) that create incentives for myopic investment behaviors and sophisticated long-term-oriented institutional investors (‘dedicated or non-transitory’) that provide a high degree of monitoring of managerial behaviors and reduce managerial myopic behaviors (Bushee, 1998; Bushee & Noe, 2000). In this paper, consistent with prior studies (e.g. Chen et al., 2007; Dikolli, Kulp, & Sedatole, 2009), we only expect monitoring from non-transitory institutional shareholders.

2 Because ABRET and ΔC are both scaled by the lagged market value of equity, the coefficient for ΔC can be interpreted as the dollar change in equity value resulting from a $1 change in the firm’s cash holdings, holding other factors constant.

3 Our research design is facilitated by cross-sectional and time-series variations in the issuance of standalone CSR reports. The cross-sectional variation arises because some firms issued such reports while others did not. The temporal variation occurs because a firm may decide to release its CSR reports at varying time intervals (e.g. annually, biannually, or ad hoc).

4 Qualitative issues cover CSR performance with respect to corporate governance, community relations, humanity, diversity, employee relations, environment, and product characteristics. Controversial business issues include alcohol, gambling, military contracting, nuclear power, and tobacco. For each issue, MSCI assigns a zero or one rating to a set of concerns and strengths.

5 We control for the level of earnings by including lagged earnings (LAGE), following Louis et al. (2012), because both changes in earnings and level of earnings have incremental explanatory power for returns (Easton & Harris, 1991). Our results are robust to the omission of this control variable from the model.

6 Starting from 1991, MSCI rated approximately 650 companies every year, consisting mainly of all firms in the S&P 500 and Domini 400 Social SM index. During 2001–2002, MSCI expanded its coverage to include the largest 1000 US companies by market capitalization. Since 2003, it has covered the largest 3000 US companies based on market capitalization.

7 The industry and year distributions of our initial sample are similar to those of Dhaliwal et al. (2011) before adjusting for data requirements in the estimation procedures.

8 We check the variance inflation factor (VIF) for each of our tests. We find that none of the VIFs is over 4.6 despite the high number of interaction terms that we use. We also respectively cluster standard errors at the industry level and at the year level. We find that our main results are qualitatively similar to the main results reported in Table 3.

9 We first calculate the benchmark marginal value of cash holdings (i.e. the effect of a $1 increase in cash for the average non-reporter firm) as $0.82. This is obtained by summing the coefficients for ΔC and the coefficients for the interactions of ΔC with the relevant control variables (ΔC × L, ΔC × LAGC, ΔC × CON, ΔC × CSR_SCORE) multiplied by the mean for the control variable (1.160 − 0.498 × 0.201 − 0.300 × 0.132 − 0.415 × 0.514 + 0.019 × 0.402 = 0.815). We then calculate the marginal value of $1 change in cash holdings for the average treatment firm that issued a report as $1.69 (0.815 + 0.204 + 0.672). Our benchmark value of $0.82 for our sample period 1992–2011 is comparable to Louis et al.’s (2012) benchmark of $0.84 for the sample period 1974–2006.

10 We obtain the PIN score from Stephen Brown’s website (http://www.rhsmith.umd.edu/faculty/sbrown/) and analyst forecast data from I/B/E/S. Analyst forecast dispersion is measured as the standard deviation of earnings per share forecasts deflated by the lagged share price.

11 We collect institutional shareholding data from Thomson Reuters Institutional holdings (13F) and analyst following data from I/B/E/S.

12 Consistent with Dittmar and Mahrt-Smith (2007), we use three-year lagged sales growth as an instrument for the market-to-book ratio in the regression that estimates the normal cash.

13 We focus on positive excess cash firms as our hypotheses only concern the effect of CSR disclosure on the value of cash holdings not needed for operations.

14 All control variables are scaled by the book value of assets of the firm.

15 Our results are qualitatively similar without the inclusions of these additional controls.

16 The variable F-SCORE is calculated according to Equation (1) in Table 6, Panel A, of Dechow et al. (2011).

17 While CSR performance is a determinant of CSR disclosure decision, there is no established theory that explains why CSR performance could affect the value of cash holdings and the empirical evidence is inconclusive (see Margolis et al., 2009). With regard to the blue state indicator, prior studies suggest that the political-leaning of a firm’s headquarters location matters to the firm’s CSR activities (Deng et al., 2013; Di Giuli & Kostovetsky, 2014; Rubin, 2008). For example, Democratic voters tend to place more emphasis on CSR-related issues such as environmental protection, anti-discrimination laws, and employee protection. However, there is no obvious reason to believe that the choice of headquarters location could have a direct significant effect on the value of cash holdings.