Monitoring of Managers and CSR: CSR As a Governance Problem

Abraham Hvidberg Paaske

Student thesis: Master thesis


This thesis analyzes Corporate Social Responsibility (CSR) as a governance problem by examining the level of CSR activity of firms that experience a reduction in the level of managerial monitoring, measured as the number of security analysts who follow the firm. If CSR rating of firms can be used as a proxy for the CSR expenditures of firms, then following the overinvestment hypothesis on CSR, one would observe a higher level of CSR expenditures in the firms who’s managers are unexpectedly less monitored, implying that managers obtain utility from investing in CSR, at shareholders’ expense. The thesis starts with an overview of different perspectives of CSR, and how this thesis fits with the existing literature. To measure the effects of a reduction in managerial monitoring, a natural experiment is undertaken. Brokerage house mergers are used as an exogenous event causing a reduction in analyst coverage. Following the merger of brokerage houses, it is expected that a number of analysts employed at said brokerage houses will be found redundant in the new merged entity, causing some firms to be followed by fewer analysts than before the merger. Using a difference- in differences methodology, I compare the difference in the observed CSR rating of companies affected by the brokerage house mergers, compared to those companies that are not affected by the brokerage house mergers. To measure the level of CSR activities of companies, I use data from Kinder, Lydenberg, and Domini (KLD). The results of the natural experiment, if valid, indicate that firms experiencing a reduction in analyst’ monitoring receive a significantly higher “community involvment” score in the year after the exogenous reduction in analyst coverage compared to the group of control firms who do not experience a reduction in analyst coverage. This effect is however only observed in the group of firms with a below-median level of analyst coverage in the year before the merger. Some caveats, mentioned in the text, must also be considered.

EducationsMSc in International Business, (Graduate Programme) Final Thesis
Publication date2013
Number of pages63