The Determinants of Firms’ Engagement in Corporate Social Responsibility: Evidence from Natural Experiments

What drives firms’ engagement in sustainable, socially, and environmentally responsible actions?As the interest in corporate social responsibility (CSR) and its role in portfolio construction grows, it is critically important for investors to understand the determinants of CSR in order to under-stand the value of CSR, especially if CSR becomes a new investment factor. In my Ph.D. thesis, I study the determinants of CSR through the use of natural experiments, namely the passage of the American Jobs Creation Act of 2004 (AJCA), the removal of short selling restrictions as part of a Securities and Exchange Commission (SEC) pilot study and the occurrence of extreme weather events. The use of natural experiments allows me to establish a direction of causality, which is pivotal for advancing both the scholarships on sustainability and corporate social responsibility as well as the understanding of investors seeking to include CSR as a component of their portfo-lios.
The first chapter, "Improved Access to Finance and Firms’ Engagement in Corporate Social Re-sponsibility: Evidence from a Natural Experiment", set out to investigate one of the long-standing questions in the field of CSR, the direction of causality between firm financial performance and firms’ engagement in CSR. To establish causality, we use the exogenous variation in the firm-level cost of financing induced by a one-off reduction of tax-related costs under the AJCA. Information on firm repatriation activities was collected from thousands of firm filings with the SEC. Results from a sample of U.S. firms for years 2001 through 2007 provide causal evidence that improved access to finance leads to higher CSR engagement. We further investigate whether firms’ prior levels of financial constraints and media coverage moderate the relationship between improved access to finance and subsequent engagement in CSR.
The second chapter, "Enemy at the Gates: The threat of Short Selling and Firms’ Engagement in Corporate Social Responsibility", explores the link between an increase in the threat of short selling through the removal of short selling restrictions and firms’ engagement in CSR. Taking a risk-management perspective of CSR, we argue that firms will improve their CSR when con-fronting an increase in the threat of short selling. We further theorize that the level of stock held by short-term oriented institutional investors and the firms’ level of financing constraints moder-ate the relationship. To test our hypotheses, we use the exogenous variation in the cost of short selling induced by the SEC’s Pilot Program under Regulation SHO of 2004, through which the SEC lifted short selling restrictions for a randomly selected subset of Russell 3000 firms. Results from difference-in-differences analyses lend support to our hypotheses.
The third chapter, titled "The Inconvenient Mind: Extreme Weather Events and Firms’ En-gagement in Corporate Social Responsibility," tests whether shortening of manager’s temporal and spatial distance to climate change, induced by the occurrence of extreme weather events, causes changes in their firms’ engagement in CSR. I account for the moderating effect of man-agers’ political beliefs and further explore whether managers express more concerns about cli-mate change after experiencing an extreme weather event. Results from difference-in-differences analysis show that firms increase their engagement in CSR. However, the increase is driven by the social rather than the environmental component of CSR. I find no evidence for the moderat-ing effect of CEO’s political affiliation. Further, I find evidence that extreme weather events are severe and salient enough for managers to discuss them in their reports to investors; however, they do not link the events and the related risks to climate change. Overall, the results suggest that managers respond to the immediate threat of extreme weather when it materializes but not to the more distant and abstract threat posed by climate change.