Deciphering the motives behind corporate social responsibility (CSR) using managerial ownership: evidence from heteroskedastic identification

ABSTRACT

Motivated by agency theory, we investigate the effect of managerial ownership on CSR engagement. Exploiting a novel identification strategy and using a large U.S. sample of over 14,000 observations across 18 years, we find that higher managerial ownership diminishes CSR engagement significantly. As managers own a larger share of equity, they bear greater costs of CSR, leading to a reduction in CSR engagement. Further analysis, however, shows that not all CSR activities are motivated by agency problems. In particular, the CSR activities related to human rights and products appear to promote shareholders’ wealth. The results of this study are important as they show that there can be different motives behind different CSR activities. We contribute to the literature by shedding light on the motives behind CSR investments using a novel identification strategy.

KEYWORDS:

• Corporate social responsibility
• CSR
• agency theory
• agency problems
• managerial ownership

JEL CLASSIFICATION:

• M14
• G32
• G34

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ In the literature on CSR, several theories have been explored such as the stakeholder theory, the social contract theory, the legitimacy theory. In this study, we concentrate on agency theory as it has been demonstrated to be relevant to CSR in many prior studies such as Barnea and Rubin (2010), Jo and Harjoto (2011), Surroca and Tribo (2008), Cespa and Cestone (2007), Jiraporn and Chintrakarn (2013b) and Chintrakarn et al. (2016).

² This study is motivated by agency theory. Managers run the company on behalf of shareholders and therefore act as their agents. Managers are expected to act in the best interest of the shareholders. An agency conflict arises when they take actions that enhance their private benefits rather than those of shareholders. By providing managers with ownership stakes in the company, agency problems can be alleviated.

³ We use the ratio of EBIT to total assets to represent profitability because earnings capture the attention of most investors. Earnings before interest and taxes (EBIT) represents a company’s earning power before the effects of interest and taxes.