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where CSR
it
is a dummy variable equal to one if
rm i has CSR engagement in year t, and 0 other-
wise. Z
it
is a vector of rm, governance, or moni-
toring characteristics at the time of rm is choice
of CSR engagement. B is a vector of coefcients.
To understand rm and governance characteris-
tics that lead some rms to choose CSR engage-
ment, we choose several variables to model the
probability of that choice. Based on the previous
literature and our chosen governance metrics, we
include the variables as components of Z and explain
in detail in the following sections.
Governance and monitoring variables
We hypothesize that internal and external moni-
toring and governance mechanisms should be related
to the choice of CSR engagement. Thus, we include
various internal and external governance variables,
including the number of anti-takeover provisions
using the GIM (2003) g index (GINDEX), or
358 Hoje Jo and Maretno A. Harjoto
Bebchuk et al.s (2000) entrenchment index
(ENTINDEX), a dummy variable of 1 if the CEO is
a chairperson of the board (DUALITY), a dummy
variable of 1 if the CEO is a member of the nomi-
nation committee (CEONUM), the percentage of
director shares (PCTDIRSHR), the natural log of
the sum of blockholdings (LOGBLKS), the per-
centage of outside independent directors (PCTIN-
DEP), the percentage of institutional ownership
(PCTINSTI), and the natural logarithm of one
plus the number of analysts following the rm
(LOGANAL).
Firm characteristics
Firm characteristics are used as control variables
including rm size measured by the natural log of
total assets (LOGTA), R&D expenditures divided by
sales revenue (RNDR), total debt divided by total
TABLE I
Descriptive statistics and univariate tests
Firms not engaging in CSR Firms engaging in CSR Difference tests
N Mean Median N Mean Median T-stat z-stat
(or Count) (or Count)
Panel A: rm characteristics
FAMFIRM 7750 0.0991 768 5639 0.0890 502 1.964** 1.964**
STATELAW 7742 2.0939 2804 5601 2.2895 2301 -6.795** -5.687***
ROA 6587 1.2559 3158 5575 4.0758 2923 -7.697*** 4.913***
CHGROA 6516 -0.9232 3159 5561 -0.1020 2878 -4.870*** -3.567***
SEGDIV 6659 0.4621 3076 5577 0.6464 3603 -20.750*** -1.550
LOGTA 6588 6.8911 2057 5575 8.4108 4024 -55.566*** -44.994***
DEBTR 6563 0.2399 3158 5557 0.2453 2902 -1.527 -4.484***
RNDR 6516 0.0358 2512 5568 0.0346 2417 0.776 5.397***
CAPXR 6525 0.0739 3152 5567 0.0711 2894 1.489 4.014***
ADVR 6589 0.0076 1416 5576 0.0106 1699 -6.122** -11.285***
FIRMAGE 7743 19.0012 3111 5599 29.8155 3531 -34.271*** -26.075***
SP500 7750 0.0912 707 5639 0.6215 3505 -79.005*** -65.232***
SGROWTH 6546 0.1411 3370 5575 0.1086 2690 4.777*** 3.527***
DIVR 6562 0.0242 2676 5550 0.0512 3380 -4.179*** -22.048***
TOBINQ 6501 1.6229 3099 5557 1.7391 2930 -3.490*** -5.517***
ADJTOBINQ 6501 -0.2556 2984 5557 -0.1422 3045 -10.144*** -9.719***
Panel B: governance characteristics
GINDEX 7750 8.7931 3087 5639 9.7318 3034 -20.269*** -16.006***
ENTINDEX 7750 2.1285 3109 5639 2.3111 2635 -7.615*** -8.011***
DUALITY (1, 0) 7750 0.7503 5815 5639 0.8471 4777 -13.699*** -13.605***
CEONOM (1, 0) 7750 0.2766 2144 5639 0.4325 2439 -19.019*** -18.751***
PCTDIRSHR 7750 0.0950 4545 5639 0.0541 2149 11.281*** 23.447***
BSIZE 7750 9.0988 2852 5639 10.3984 3291 -24.961*** -24.703***
PCTINDEP 7750 0.6011 2874 5639 0.6736 2984 -22.793*** -18.217***
LOGBLKS 7750 13.6855 3105 5639 14.1394 3589 -4.791*** -26.928***
PCTINSTI 7750 57.5194 3455 5639 64.8823 3239 -21.986*** -14.675***
LOGANAL 7750 2.0178 2834 5639 2.5096 3851 -42.821*** -36.232***
This table displays descriptive statistics for the 7750 rm-year (1777 rms) observations of no-CSR rms and 5639 rm-
year (1175 rms) observations of CSR rms from 1993 to 2004. The number of rm-year observations (N), Mean,
Median, Count (i.e., total number of observations for dummy variable) are reported by types of rms. Difference in mean
(t-statistics) and median (non-parametric Wilcoxon) tests are reported. The denitions of variables are provided in
Appendix B. ***, **, *Statistically signicant at the 1%, 5%, and 10% levels, respectively.
359 Corporate Governance and Firm Value
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360 Hoje Jo and Maretno A. Harjoto
assets (DEBTR), and the FamaFrench 48-industry
classication. GIM (2010) suggest using the State
Law as anti-takeover index. Similar to GIM, we
also use the State Law anti-takeover index
(STATELAW), family rms (FAMFIRM), ROA,
the natural log of the change in ROA (CHGROA)
to measure protability, and the diversication
dummy (SEGDIV). We choose family rms instead
of GIMs name variable because the private benets
of control should be more relevant to family
rms, following Anderson and Reeb (2003) and
Villalonga and Amit (2006).
In Table III, we estimate the choice of CSR
engagement using a probit function. We estimate ve
models with different sets of explanatory variables
to compare and contrast the various impacts of con-
trol variables and corporate governance variables.
Throughout Model (1) toModel (5), we replace or add
some of the explanatory variables to investigate the role
of governance and monitoring in the analysis.
7
Consistent with prior literature, we can see that
many of our chosen variables are highly signicant in
explaining the likelihood of choosing CSR engage-
ment for all Models (1) to (5). Model (1) shows that
larger rms, highly leveraged rms, protable rms,
rms with higher R&D, and diversied rms are
more likely to choose CSR engagement while the
coefcient on FAMFIRM is insignicant. Model (2)
shows the same results with the industry adjustment.
Basically, the results are similar, except the signi-
cance of CHGROA disappears. In model (3), we
report the results for the governance variables only.
Model (3) suggests that the coefcients on GINDEX,
DUALITY, CEONOM, PCTINDEP, PCTINSTI,
and LOGANAL are signicantly positive at the 1%
signicance level, implying that rms with a higher
board leadership (DUALITY and CEONOM), a
higher proportion of outside independent directors
(PCTINDEP), a higher proportion of institutional
investors (PCTINSTI), more analysts following the
rm (LOGANAL), or more anti-takeover provisions
(GINDEX) are more likely to choose CSR engage-
ment.
8
We nd that the estimated slope coefcients
on PCTINDEP and LOGANAL have the highest
economic signicance on the rms choice of CSR
engagement. These ndings suggest that internal and
external governance measured by board leader-
ship, independent boards, institutional investors, and
security analysts are positively related to the choice of
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361 Corporate Governance and Firm Value
TABLE III
Propensity to engage in CSR activities
Model (1) Model (2) Model (3) Model (4) Model (5)
INTERCEPT -3.710
(44.07)***
-4.912
(14.21)***
-3.258
(10.05)***
-5.607
(16.25)***
-5.491
(16.11)***
Governance variables
GINDEX 0.071
(12.29)***
0.049
(7.71)***
ENTINDEX 0.031
(2.87)***
DUALITY 0.121
(3.69)***
0.019
(0.53)
0.030
(0.87)
CEONOM 0.254
(9.35)***
0.102
(3.50)***
0.113
(3.85)***
PCTDIRSHR -0.002
(0.03)
-0.037
(0.54)
-0.065
(0.91)
PCTINDEP 0.708
(8.90)***
0.470
(5.47)***
0.529
(6.16)***
LOGBLKS -0.002
(0.65)
0.002
(0.70)
0.002
(0.58)
PCTINSTI 0.010
(11.42)***
0.008
(8.79)***
0.008
(8.83)***
LOGANAL 0.692
(32.14)***
0.150
(5.31)***
0.149
(5.26)***
Control variables
LOGTA 0.429
(43.09)***
0.583
(47.39)***
0.495
(32.25)***
0.506
(32.89)***
DEBTR -0.296
(3.86)***
-0.724
(7.88)***
-0.793
(8.57)***
-0.776
(8.41)***
RNDR 2.184
(11.48)***
1.485
(6.33)***
1.264
(5.31)***
1.211
(5.13)***
FAMFIRM -0.054
(1.25)
-0.062
(1.37)
0.135
(2.81)***
0.134
(2.79)***
STATELAW 0.025
(3.27)***
0.022
(2.74)***
0.011
(1.26)
0.029
(3.47)***
ROA 0.022
(9.69)***
0.013
(5.45)***
0.009
(3.78)***
0.009
(3.80)***
CHGROA -0.004
(2.06)**
0.004
(0.18)
0.001
(0.67)
0.001
(0.63)
SEGDIV 0.369
(14.58)***
0.450
(16.59)***
0.387
(13.43)***
0.383
(13.31)***
FF 48 industry No Yes Yes Yes Yes
Pseudo R
2
0.1937 0.2571 0.1777 0.2778 0.2746
Observations 11,901 11,901 11,901 11,901 11,901
Number of rms 2493 2493 2493 2493 2493
This table reports the coefcient of estimates from the probit model explaining the determinants of CSR engagement.
The dependent variable is the CSR, which is a dichotomous variable that equals to one if a rm has involved into CSR
activities. Otherwise equals to zero. Model (1) and (2) report only control variables. Model (3), (4), and (5) include
internal and external corporate governance variables. FamaFrench (FF) 48 industry is included all Models except Model
(1). T-statistics are adjusted for robust and clustered (by rm) standard errors and reported in parentheses. Appendix B
provides variable denitions. ***, **, *Statistically signicant at the 1%, 5%, and 10% levels, respectively.
362 Hoje Jo and Maretno A. Harjoto
CSR engagement, supporting the conict-resolution
hypothesis, as stated in hypothesis 1.
Other variables are insignicant at the conventional
level. In models (4) and (5), we report the results when
we include both control variables and governance
variables. The results for the governance variables are
qualitatively similar to those of model (3), except the
insignicance of the DUALITY variable. It is
important to note that the internal and external gov-
ernance variables are highly signicant, suggesting
that they are major determinants of CSRengagement.
Table IV reports the coefcient of estimates from
the Tobit model explaining the determinants of
CSR engagement based on the CSR-combined
scores instead of the CSR choice (dummy) variable.
We use the Tobit model because the dependent
variables are left censored at zero rather than
dichotomous variables. The Tobit model is an
econometric model proposed by Tobin (1958)
to describe the relation between a non-negative
dependent variable and an independent variable (or
vector). We compute the arithmetic average of the
combined scores of KLD inclusive strengths and
concerns of community, environment, diversity,
employee relations, and product criteria to get
combined CSR scores. KLD scores report both
strengths and concerns for the above-mentioned
dimensions. The dependent variable is the CSR-
combined scores, including both strengths and
concerns (CSRCOMPOSITE) for models (1) and
(2), combined strength scores (CSRSTR) for models
(3) and (4), and combined concern scores (CSR-
CON) for models (5) and (6), respectively [see the
calculation procedures of the combined strengths
and concerns, combined strength, and combined
concern scores (unreported, but similar to the cal-
culation of strength scores in Appendix C)]. The
results closely mirror those of Table III, in that
the governance and monitoring variables positively
affect the rms decisions about CSR engagement,
supporting the conict-resolution hypothesis. As
expected, the signs of the coefcients on all the
variables based on CSRCON are exactly opposite of
those of the coefcients based on CSRSTR.
Table V shows the results of the 2SLS with the two
dependent variables of CSR and LOGANAL. We
employ the 2SLS estimation method described in
Maddala (1983) for simultaneous equations models in
which one of the endogenous variables is continuous
(LOGANAL) and the other endogenous variable is
dichotomous (CSR). Our results suggest that after
correcting for a potential simultaneity bias, the possi-
bility that rms with a greater analyst following tend to
engage in CSR engagement (with t-values of 23.90
29.13) is much higher than the possibility that rms
choosing CSR tend to have a higher analyst following
(with t-values of 6.036.23). It seems that rms with
greater analyst coverage (i.e., rms with a transparent
information environment) opt for CSR engagement
after incorporating the reverse causality. In addition,
although the top management of CSR rms can
control the number of outside independent directors,
they cannot control the number of analysts following
the rm. Accordingly, security analysts, as third-party
information intermediaries, can provide an external
monitoring mechanism in the top managements
decision-making about CSR engagement.
So far, we use board independence as one of the
measures for the quality of the rms internal gov-
ernance. But for two reasons there may not be a
one-to-one relation between governance quality and
board independence. First, Coles et al. (2008) indi-
cate that board independence reects such things as
rm diversication, rm size, rm age, and insider
ownership. These researchers claim that board
independence reects, and is driven by, other
characteristics of the rm and its line of business.
There is no single board structure that ts all
rms. Rather, board independence is endogenously
determined by rm and managerial characteristics.
This indicates that board independence may or may
not be an indicator of governance quality. Suppose,
for example, that ceteris paribus, board independence
does improve governance. Then, rms with few
independent directors might have more blockhold-
ers, or fewer takeover defenses, or more bond cov-
enants, to offset the effects of having few
independent directors. The result could be that such
rms have better governance, not worse. Thus, we
include such variables, including rm diversication,
rm size, rm age, insider ownership, blockholder
ownership, and GIM index, etc. in the independent
director equation to address the endogeneity issue.
Our unreported results based on two-stage least-
square (2SLS) regressions, in which both CSR
engagement and the percentage of outside indepen-
dent directors are dependent variables, again support
the monitoring role of outside independent directors.
363 Corporate Governance and Firm Value
TABLE IV
Propensity to engage in CSR activities based on the CSR-combined scores
Dependent
variable
Model (1) Model (2) Model (3) Model (4) Model (5) Model (6)
CSRCOMPOSITE CSRCOMPOSITE CSRSTR CSRSTR CSRCON CSRCON
INTERCEPT -1.144
(13.56)***
-1.120
(13.30)***
-0.526
(14.02)***
-0.517
(13.91)***
4.377
(15.05)***
4.305
(14.84)***
GINDEX 0.013
(8.86)***
0.003
(5.99)***
-0.041
(8.16)***
ENTINDEX 0.012
(4.72)***
0.002
(2.10)*
-0.043
(5.00)***
DUALITY 0.002
(0.29)
0.005
(0.66)
-0.001
(0.23)
0.00027
(0.09)
0.008
(0.28)
-0.002
(0.06)
CEONOM 0.018
(2.75)***
0.020
(3.04)***
0.005
(1.96)**
0.005
(2.18)**
-0.053
(2.36)**
-0.058
(2.60)***
PCTDIRSHR 0.012
(0.77)
0.007
(0.46)
0.006
(1.16)
0.005
(0.92)
-0.077
(1.29)
-0.059
(1.01)
PCTINDEP 0.118
(6.00)***
0.129
(6.51)***
0.056
(7.39)***
0.059
(7.85)***
-0.359
(5.24)***
-0.389
(5.65)***
LOGBLKS -0.001
(1.91)*
-0.001
(1.94)*
0.00023
(1.04)
0.00023
(1.02)
0.004
(1.84)
0.004
(1.88)
PCTINSTI 0.004
(17.46)***
0.004
(17.42)***
0.000017
(0.23)
0.000026
(0.33)
-0.013
(17.84)***
-0.013
(17.77)***
LOGANAL 0.049
(7.69)***
0.049
(7.71)***
0.021
(8.27)***
0.021
(8.28)***
-0.169
(7.66)***
-0.169
(7.68)***
LOGTA 0.097
(31.31)***
0.100
(32.25)***
0.045
(37.54)***
0.045
(37.98)***
-0.230
(21.66)***
-0.240
(22.52)***
DEBTR -0.230
(11.16)***
-0.228
(11.05)***
-0.060
(7.46)***
-0.059
(7.31)***
0.700
(9.79)***
0.697
(9.71)***
RNDR 0.207
(4.06)***
0.194
(3.79)***
0.119
(6.16)***
0.115
(5.98)***
-0.559
(3.16)***
-0.518
(2.92)***
FAMFIRM 0.044
(4.09)***
0.044
(4.12)***
0.003
(0.85)
0.003
(0.84)
-0.138
(3.71)***
-0.140
(3.76)***
STATELAW 0.004
(2.30)**
0.009
(4.72)***
0.001
(0.87)
0.002
(2.41)**
-0.012
(1.79)*
-0.026
(4.00)***
ROA 0.003
(5.86)***
0.003
(6.03)***
0.001
(8.14)***
0.001
(8.26)***
-0.010
(6.68)***
-0.011
(6.86)***
SEGDIV 0.144
(22.16)***
0.142
(21.90)***
0.011
(4.51)***
0.01
1(4.43)***
-0.492
(21.60)***
-0.488
(21.36)***
Log likelihood -4740.19 -4770.822 -911.58 -895.31 -11,136.14 -11,160.01
Pseudo R
2
0.347 0.3428 0.5539 0.5440 0.1464 0.1446
Observations 11,901 11,901 11,901 11,901 11,901 11,901
This table reports the coefcient of estimates from the Tobit model explaining the determinants of CSR engagement
based on the CSR-combined scores from the Kinder, Lydenberg, and Dominis (KLD) Socrates database. The dependent
variable is the CSR-combined scores (CSRCOMPOSITE) for models (1) and (2), combined strength scores (CSRSTR)
for models (3) and (4), and combined concern scores (CSRCON) for models (5) and (6). FamaFrench 48 industry is
included all Models. T-statistics are adjusted for robust and clustered (by rm) standard errors and reported in parentheses.
Appendix B provides variable denitions. ***, **, *Statistically signicant at the 1%, 5%, and 10% levels, respectively.
364 Hoje Jo and Maretno A. Harjoto
TABLE V
Simultaneous regressions between the CSR choice and analyst following
Simultaneous method Model (1) Model (2)
Dependent variable CSR LOGANAL CSR LOGANAL
Intercept -4.879
(43.29)***
1.805
(7.96)***
-4.442
(11.35)***
0.741
(11.23)***
CSR 0.422
(6.23)***
0.097
(6.03)***
LOGANAL 2.502
(29.13)***
2.415
(23.90)***
Governance variables
GINDEX 0.058
(9.17)***
-0.010
(3.68)***
0.053
(8.13)***
-0.0004
(0.22)
DUALITY -0.012
(0.35)
-0.015
(0.43)
CEONOM 0.171
(5.85)***
-0.047
(4.23)***
0.189
(6.25)***
-0.022
(2.25)**
PCTDIRSH 0.270
(4.06)***
-0.132
(5.89)***
0.212
(2.90)***
-0.124
(5.52)***
PCTINDEP 0.779
(9.16)***
-0.196
(5.53)***
0.689
(7.61)***
-0.093
(3.27)***
LOGBLKS 0.016
(5.35)***
-0.006
(6.03)***
0.015
(4.70)***
-0.009
(8.99)***
PCTINSTI -0.005
(4.97)***
0.001
(1.70)*
-0.004
(3.29)***
0.005
(14.84)***
Control variables
LOGTA -0.295
(11.36)***
0.148
(12.15)***
-0.218
(6.50)***
0.202
(43.30)***
DEBTR 0.535
(6.03)***
-0.235
(6.29)***
-0.019
(0.19)
-0.362
(13.61)***
RNDR -1.995
(8.78)***
0.680
(10.01)***
-1.822
(6.93)***
0.848
(14.51)***
CAPXR -1.849
(11.99)***
0.800
(14.86)***
-0.914
(5.21)***
0.951
21.57
ADVR 1.979
(3.74)***
-0.467
(1.56)
-0.403
(0.68)
0.685
(3.75)***
FAMFIRM 0.436
(8.98)***
-0.164
(8.57)***
0.364
(7.23)***
-0.112
(7.03)***
STATELAW 0.063
(7.20)***
0.042
(4.69)***
ROA -0.007
(3.42)***
-0.013
(5.69)***
SEGDIV 0.852
(24.99)***
-0.377
(11.78)***
0.867
(24.04)***
-0.231
(19.31)***
SP500 -0.101
(1.15)
0.312
(12.67)***
FIRMAGE -0.008
(14.09)**
-0.005
(18.13)***
365 Corporate Governance and Firm Value
We nd that the coefcients on PCTINDEP and
CSR are positive and statistically signicant (p va-
lue <0.01). We also nd that the coefcients on
PCTDIRSHR, LOGBLKS, and LOGANAL are
signicantly positive. These results suggest that having
a certain governance structure is important in deter-
mining CSR involvement. However, we also nd
that the causality runs from some governance and
control variables to board independence. Since nei-
ther CSR engagement nor board independence
changes frequently, simple 2SLS results may not
capture causality precisely.
9
Nevertheless, this reverse
causality suggests that after correcting for a potential
simultaneity bias, the possibility that rms choosing
CSR engagement tend to have outside independent
directors (with t-values of 9.1710.35) is slightly
smaller than the possibility that rms with a higher
proportion of independent directors engage in CSR
engagement (with t-values of 17.5819.12). It seems
that the potential simultaneity bias does not signi-
cantly change our inferences concerning the associa-
tion between the governance and monitoring
variables and CSR engagement.
The value of rms with CSR engagement
Next, this study examines the impact of CSR
involvement on rm value, measured by industry-
adjusted Tobins q (ADJTOBINQ) because Camp-
bell (1996) suggests that ADJTOBINQ neutralizes
the industry effect on Tobins q. Using Heckmans
(1979) two-stage model, we report several models in
Table VI. In model (1), following GIM (2010), Shin
and Stulz (2000), and Morck and Yang (2001), we
include capital expenditures divided by total sales
(CAPXR), the ratio of advertising to sales (ADVR),
growth options measured by R&D expenditure
divided by sales (RNDR), and sales growth
(SGROWTH). The evidence suggests that CSR
engagement positively affects rm value measured
by industry-adjusted Tobins q after correcting for
the endogenous treatment effect, supporting the
conict-resolution hypothesis as opposed to the
overinvestment hypothesis.
Next, we add governance and monitoring vari-
ables to examine whether any governance or moni-
toring variables inuence rm value after the
endogeneity correction, and report the results of the
positive association between CSR and ADJTO-
BINQ in model (2). In particular, a one unit increase
of CSR engagement is followed by an increase of
0.085 times of ADJTOBINQ. In addition, the
coefcient on LOGANAL is signicantly positive
with a t-value of 24.86, suggesting that security
analysts provide an additional monitoring role, which
is supportive for hypothesis 2(b). This evidence is
consistent with Chung and Jo (1996), who nd that
analyst coverage makes a rms information envi-
ronment transparent and positively affects rm value.
The coefcient on PCTINSTI is also positive, but its
magnitude is only marginal. In contrast, however, the
coefcients on DUALITY and GINDEX are sig-
nicantly negative, indicating that the dual role of the
CEO and the chairperson and many take-over de-
fenses through anti-takeover provisions (GINDEX)
adversely affect rm value. In particular, an inverse
association between GINDEX and industry-adjusted
Tobins q implies that too much take-over defense
TABLE V
continued
Simultaneous method Model (1) Model (2)
FF 48 Industry No No Yes Yes
Pseudo R
2
0.2862 0.3130
Adjusted R
2
0.5305 0.5304
Observations 11,808 11,808 11,808 11,808
This table shows the results from two-stage estimation method described in Maddala (1983) for simultaneous equations
models in which one of the endogenous variables is continuous (LOGANAL) and the other endogenous variable is
dichotomous (CSR). T-statistics are adjusted for robust and clustered (by rm) standard errors and reported in parentheses.
See Appendix B for variable denitions. ***, **, *Statistically signicant at the 1%, 5%, and 10% levels, respectively.
366 Hoje Jo and Maretno A. Harjoto
TABLE VI
Industry-adjusted Tobins q regressions based on the Heckman two-stage treatment effect model
Heckman two-stage model Model (1) Model (2) Model (3)
Dependent variable ADJTOBINQ ADJTOBINQ ADJTOBINQ
INTERCEPT 3.115
(15.63)***
2.963
(13.89)***
2.682
(13.37)***
CSR 0.091
(7.46)***
0.087
(7.57)***
0.085
(7.41)***
Governance variables
GINDEX -0.033
(12.09)***
ENTINDEX -0.075
(15.33)***
DUALITY -0.054
(4.54)***
-0.057
(4.80)***
CEONOM -0.020
(1.95)*
-0.018
(1.68)*
PCTINDEP -0.359
(10.70)***
-0.331
(9.79)***
PCTDIRSHR 0.114
(2.62)***
0.108
(2.63)***
LOGBLKS -0.014
(13.13)***
-0.014
(13.09)***
PCTINSTI 0.001
(3.24)***
0.002
(4.79)***
LOGANAL 0.318
(24.86)***
0.319
(25.31)***
Control variables
LOGTA -0.367
(21.61)***
-0.389
(28.13)***
-0.382
(28.87)***
DEBTR 0.216
(4.50)***
0.306
(6.80)***
0.294
(6.76)***
RNDR 0.290
(2.62)***
0.145
(1.46)
0.214
(2.16)**
CAPXR 0.479
(8.87)***
0.211
(4.17)***
0.235
(4.61)***
ADVR 1.373
(4.72)***
0.847
(3.20)***
0.855
(3.23)***
SGROWTH 0.321
(8.86)***
0.265
(9.00)***
0.261
(8.94)***
LAMBDA (inverse Mills ratio) -0.657
(14.75)***
-0.499
(11.70)***
-0.457
(11.36)***
FF 48 industry Yes Yes Yes
Wald Chi-square 4594.23 5876.81 6005.28
Observations 11,741 11,741 11,741
367 Corporate Governance and Firm Value
adversely affects rm value, which is consistent with
Cremers and Nair (2005) and GIM (2003).
Model (3) shows that the results based on Bebchuk
et al.s (2009) entrenchment index are even more
signicantly and inversely associated with industry-
adjusted Tobins q, conrming the adverse effects of
managerial entrenchment on rm value. More
importantly, the positive associations between CSR
and ADJTOBINQ and LOGANAL and ADJTO-
BINQ remain unchanged. Although unreported, the
above results do not change when we run the
regressions with each governance variable separately
to reduce potential problems due to multicollinear-
ity. Consistent with Agrawal and Knoeber (1996),
we also nd a negative association between ADJT-
OBINQ and the proportion of outside independent
directors. The coefcients on lambda (inverse Mills
ratio), however, are signicantly negative in all three
models, implying a possibility that the above results
contain some sample selection bias.
Thus, to address the selection bias problem, we
report the results based on the instrumental variables
approach in Table VII. The results, in general, clo-
sely mirror the Heckman two-stage results based on
endogeneity control. Most notably, both the coef-
cients on the CSR dummy and the CSRCOM-
POSITE (CSR combined score) suggest that CSR
engagement is positively associated with rm value
with or without governance variables as independent
variables, supporting our hypothesis 2 (a) of CSR as
a conict-resolution. The positive impact of analyst
following on rm value is also strongly signicant in
all models. The results remain robust under various
specications using the Heckman two-stage, OLS
(unreported), and instrumental variables approach,
strongly supporting hypothesis 2(b) for the external
monitoring role of security analysts. Notably, how-
ever, the coefcients on PCTINSTI become insig-
nicant, possibly because of their dual roles of
monitors and investors.
The visual effects of these relations are depicted in
Figure 1 for industry-adjusted Tobins q. In gen-
eral, these gures indicate that rms with higher
engagement in CSR activities are more likely to be
followed by security analysts and tend to have a
higher industry-adjusted Tobins q, while rms with
a higher analyst following tend to have a higher
industry-adjusted Tobins q.
To examine the effects of individual CSR-
inclusive criteria on rm value, we report the
coefcients of the estimates from the instrumental
variable method in Table VIII. Our choice of an
instrumental variable is FIRMAGE, which is highly
correlated with CSR, but is uncorrelated with
industry-adjusted Tobins q. The dependent variable
in the second stage is industry-adjusted Tobins q
(ADJTOBINQ). In these regressions, we include
only the sample that has positive scores for each
category of CSR engagement to focus on the pure
impact of CSR engagement on rm value. Model
(1) includes each CSR combined score for ve
inclusive criteria. Models (2) and (3) include the
internal and external governance variables. The
results indicate that while the coefcients on DI-
VERSITY, EMPLOYEE RELATIONS, and
PRODUCT are positive and signicant at least at
the ve-percent level, the coefcients on COM-
MUNITY and ENVIRONMENT are, in general,
insignicant, suggesting that rms CSR engage-
ment directly related to their rms internal social
TABLE VI
continued
Heckman two-stage model Model (1) Model (2) Model (3)
Number of rms 2463 2463 2463
This table reports the coefcients of estimates from Heckman two-stage treatment effect models. In the rst stage, we run
the probit model with same specication in Table III. We include Lambda (inverse Mills ratio) in the second stage with
control variables. The dependent variable in the second stage is industry-adjusted Tobins q (ADJTOBINQ). Model (1)
reports the results of control variables. Models (2) and (3) include internal and external corporate governance variables.
FamaFrench 48 industry is included all Models. T-statistics are reported in parentheses. See Appendix B for variable
denitions. ***, **, *Statistically signicant at the 1%, 5%, and 10% levels, respectively.
368 Hoje Jo and Maretno A. Harjoto
TABLE VII
Industry-adjusted Tobins q regressions based on the instrument variables approach
Model (1) Model (2) Model (3) Model (4)
Dependent variable ADJTOBINQ ADJTOBINQ ADJTOBINQ ADJTOBINQ
INTERCEPT 0.119
(3.26)***
0.151
(4.22)***
0.089
(1.94)
0.316
(6.15)***
CSR 0.007
(10.10)***
0.0023
(7.28)***
CSRCOMPOSITE 0.493
(3.32)***
0.564
(3.75)***
Governance variables
GINDEX -0.010
(3.98)***
-0.013
(5.09)***
DUALITY -0.056
(4.14)***
-0.056
(4.16)***
CEONOM -0.017
(1.45)
-0.020
(1.74)
PCTDIRSHR 0.075
(2.45)**
0.076
(2.34)**
PCTINDEP -0.099
(2.98)***
-0.130
(3.86)***
PCTINSTI -0.000
(0.24)
0.001
(1.83)
LOGANAL 0.332
(28.29)***
0.318
(27.18)***
Control variables
LOGTA -0.084
(15.88)***
-0.078
(14.19)***
-0.138
(23.40)***
-0.152
(24.08)***
DEBTR -0.052
(1.46)
0.028
(0.78)
0.134
(4.07)***
0.200
(5.80)***
RDNR 0.079
(0.94)
0.238
(2.91)***
0.515
(6.40)***
0.500
(6.09)***
CAPXR 0.444
(9.96)***
0.436
(9.77)***
0.111
(2.57)**
0.092
(2.11)**
ADVR 0.631
(2.37)**
0.525
(1.85)
0.352
(1.42)
0.010
(0.04)
SGROWTH 0.373
(9.35)***
0.341
(9.09)***
0.278
(8.61)***
0.282
(8.76)***
Adjusted R
2
0.0440 0.0802 0.1502 0.1597
Observations 11,741 11,741 11,741 11,741
This table reports the coefcients on the estimates from two-stage instrumental variable method. Our choice of instru-
mental variable is FIRMAGE that is highly correlated with CSR, but is uncorrelated with industry-adjusted Tobins q.
The dependent variable in the second stage is industry-adjusted Tobins q (ADJTOBINQ). Model (1) and (2) include
CSR dummy and CSRCOMPOSITE (CSR combined score) with control variables, respectively. Models (3) and (4)
include internal and external governance variables. The CSR scores are from the Kinder, Lydenberg, and Dominis (KLD)
Socrates database. T-statistics are reported in parentheses. See Appendix B for variable denitions. ***, **, *Statistically
signicant at the 1%, 5%, and 10% levels, respectively.
369 Corporate Governance and Firm Value
enhancement improves rm value more than their
CSR involvement in broader external enhancement,
such as community and environmental concerns.
Indeed, our interviews with a few top managers of
the rms which are considered as socially responsible
(i.e. Patagonia and Vapur) reveal that top managers
original intention for their CSR activities was to
enhance their product quality and improve rela-
tionship with their employees. Thus, our interview
results are consistent with our empirical nding.
The above ndings also might be affected by
multicollinearity. Thus, to check the individual
impact of the various governance variables, we run
the regressions for each governance variable with
control variables separately and nd that the main
results do not change. Since the coefcients on the
control variables are similar to those reported in
Table VII, we do not report those coefcients for
brevity.
10
The calculation procedures of the com-
posite strength scores and the combined strength and
composite scores are reported in Appendix B.
There could also be a potential simultaneity bias
between CSRCOMPOSITE and ADJTOBINQ.
To adjust for a potential simultaneity bias, we esti-
mate the regressions in a simultaneous equation
framework, where CSRCOMPOSITE is specied
as a function of governance and monitoring vari-
ables, rm size, ADJTOBINQ, advertising expen-
diture divided by sales, the R&D expenditure ratio,
and leverage, following Table III. The results are
reported in Table IX, and we nd qualitatively
similar results to those reported in Tables VI through
VIII. Specically, models (1) and (2) suggest that
after controlling for the simultaneity bias, industry-
adjusted Tobins q is signicantly and positively
associated with CSRCOMPOSITE. Model (2)
adds the FamaFrench industry adjustment and
shows that the impact of CSRCOMPOSITE on
ADJTOBINQ is more signicant (with t-values of
12.2315.52) than the impact of ADJTOBINQ on
CSRCOMPOSITE (with t-values of 4.2711.42).
Additionally, LOGANAL suggests that the inuence
of analyst following on rm value (with t-values of
16.7520.96) is greater than that of analyst coverage
on CSR engagement (with t-values of 3.433.69),
supporting our hypothesis 2(b). Overall, a potential
simultaneity bias does not appear to change our
inferences concerning the positive association be-
tween corporate social responsibility and rm value.
Additional tests
Next, we run various simultaneous regressions of
analyst following and industry-adjusted Tobins q
and report the independent impact of analyst fol-
lowing and CSR, respectively, in Table X. The
coefcients on other variables are qualitatively sim-
ilar to those reported in Table IX. To conserve
space, we report only the results of the coefcients
on the interaction variables. First, we compare CSR
versus no-CSR rms with high and low analyst
following, so that we can examine the effect of CSR
engagement and analyst following on rm value.
Panel A reports the results of the Chow test in each
comparison. The difference is signicant in all
comparisons except the comparison between high
and low analyst coverage for no-CSR rms. Simi-
larly, we compare rms with high and low CSR
scores with high and low analyst following, so that
we can examine the effect of CSR scores and analyst
following on rm value. Panel B summarizes the
results of the differences between groups in separate
simultaneous regressions. The difference between
high and low CSR, when analyst following is high,
Q1
Q2
Q3
Q4
Q5
Loganal1
Loganal2
Loganal3
Loganal4
Loganal5
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
A
D
J
T
O
B
I
N
Q
CSR Quintiles
LOGANAL
Quintiles
Figure 1. The relation among industry-adjusted Tobins
q, CSR, and analyst coverage. This gure shows the
relation among industry-adjusted Tobins q, analyst fol-
lowing, and the CSR engagement. We divide the sam-
ple by ve quintiles of CSR and analysts following.
CSR is the CSR combined score. CSR Q1 is the low-
est CSR group while CSR Q5 is the highest CSR
group of rms. Similarly, Loganal1 is the lowest analyst
following and Loganal5 is the highest analyst following.
370 Hoje Jo and Maretno A. Harjoto
TABLE VIII
Industry-adjusted Tobins q regressions of each CSR subcategory
(1) (2) (3)
Dependent variable ADJTOBINQ ADJTOBINQ ADJTOBINQ
INTERCEPT 0.356
(2.36)**
0.646
(4.61)***
0.609
(4.46)***
CSR criteria
COMMUNITY 0.181
(2.00)**
0.137
(1.60)
0.102
(1.22)
ENVIRONMENT 0.035
(0.39)
0.070
(0.83)
0.095
(1.13)
DIVERSITY 0.304
(4.24)***
0.271
(4.01)***
0.278
(4.15)***
EMPLOYEE RELATIONS 0.584
(8.43)***
0.523
(7.92)***
0.522
(7.96)***
PRODUCT 0.364
(4.33)***
0.162
(2.06)**
0.159
(2.03)**
Governance variable
GINDEX -0.019
(6.50)***
ENTINDEX -0.074
(12.14)***
DUALITY -0.027
(1.57)
-0.025
(1.50)
CEONOM 0.019
(1.53)
0.022
(1.72)
PCTINDEP -0.206
(4.72)***
-0.158
(3.64)***
PCTDIRSH 0.065
(1.30)
0.051
(1.13)
LOGBLKS -0.012
(9.32)***
-0.012
(9.42)***
PCTINSTI 0.003
(6.99)***
0.004
(7.97)***
LOGANAL 0.395
(26.00)***
0.393
(26.10)***
Control variables Yes Yes Yes
FF 48 Industry Yes Yes Yes
Adjusted R
2
0.2583 0.3602 0.3695
Observations 6479 6479 6479
Number of rms 1677 1677 1677
This table reports the coefcients of estimates from two-stage instrumental variable method. Our choice of instrumental
variable is FIRMAGE that is highly correlated with CSR, but is uncorrelated with industry-adjusted Tobins q. The
dependent variable in the second stage is industry-adjusted Tobins q (ADJTOBINQ). In these regressions, we only
include the sample that has positive scores of each category of the CSR engagement. Model (1) includes each CSR
combined score of ve categories. Models (2) and (3) include internal and external governance variables. FamaFrench 48
industry is included all Models. T-statistics are reported in parentheses. See Appendix A for variable denitions and
Appendix C for the calculation of CSR criteria including COMMUNITY, ENVIRONMENT, DIVERSITY, EM-
PLOYEE RELATIONS, and PRODUCT. The CSR scores are from the Kinder, Lydenberg, and Dominis (KLD)
Socrates database. ***, **, *Statistically signicant at the 1%, 5%, and 10% levels, respectively.
371 Corporate Governance and Firm Value
TABLE IX
Simultaneous regressions of industry-adjusted Tobins q and the CSR composite score
Simultaneous method Model (1) Model (2)
Dependent variable ADJTOBINQ CSRCOMPOSITE ADJTOBINQ CSRCOMPOSITE
INTERCEPT -0.387
(4.28)***
0.411
(83.48)***
-1.927
(8.87)***
0.386
(26.95)***
CSRCOMPOSITE 2.356
(15.52)***
5.920
(12.23)***
ADJTOBINQ 0.013
(11.42)***
0.026
(4.27)***
Governance variables
GINDEX -0.017
(5.32)***
0.001
(3.10)***
-0.019
(5.53)***
0.001
(3.73)***
DUALITY -0.045
(2.43)**
0.002
(1.25)
-0.051
(2.53)**
0.003
(1.94)*
CEONOMI 0.006
(0.44)
0.0003
(0.34)
0.004
(0.27)
0.0001
(0.09)
PCTDIRSHR 0.032
(0.98)
0.009
(3.44)***
-0.0002
(0.01)
0.007
(2.57)**
PCTINDEP -0.130
(2.89)***
0.010
(2.54)**
-0.161
(3.32)***
0.011
(2.75)***
LOGBLKS -0.011
(8.01)***
-0.00008
(0.69)
-0.010
(6.68)***
0.0002
(1.43)
PCTINSTI 0.0002
(0.46)
-0.0003
(7.75)***
0.001
(2.44)**
-0.0003
(7.43)***
LOGANAL 0.317
(20.96)***
0.004
(3.69)***
0.276
(16.75)***
0.004
(3.42)***
Control variables
LOGTA -0.169
(26.37)***
0.003
(6.67)***
-0.167
(24.58)***
0.004
(3.65)***
DEBTR 0.204
(4.62)***
-0.016
(4.45)***
0.243
(5.08)***
-0.003
(0.58)
RNDR 0.764
(8.02)***
0.063
(7.68)***
0.879
(8.52)***
0.092
(6.08)***
CAPXR -0.070
(0.97)
0.172
(2.49)**
ADVR 0.762
(2.89)***
0.548
(2.02)**
SGROWTH 0.248
(10.33)***
0.200
(8.60)***
FF 48 INDUSTRY No No Yes Yes
Adjusted R
2
0.1690 0.0845 0.2290 0.1716
Observations 6479 6479 6479 6479
This table shows the results from the two-stage estimation method in which one of the dependent variables is industry-
adjusted Tobins q and the other dependent variable is the CSR composite scores. In these regressions, we only include
the sample that has positive CSR scores. The CSR scores are from the Kinder, Lydenberg, and Dominis (KLD) Socrates
database. T-statistics are adjusted for robust and clustered (by rm) standard errors and reported in parentheses. See
Appendix B for variable denitions. ***, **, *Statistically signicant at the 1%, 5%, and 10% levels, respectively.
372 Hoje Jo and Maretno A. Harjoto
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373 Corporate Governance and Firm Value
is the most signicant with a chi-square of 96.03,
while the differences between groups in all possible
comparisons are signicant. Overall, this evidence
suggests further that the individual impact of CSR
engagement on industry-adjusted Tobins q is sig-
nicant (supporting the conict-resolution hypoth-
esis 2(a)) and so is the individual impact of analyst
following on industry-adjusted Tobins q. The value
addition of CSR engagement is greatest when CSR
engagement is high with high analyst following,
supporting the important monitoring role of secu-
rities analysts in CSR activities, stated in hypothesis
2(b).
11
In addition, the above results suggest that the
value addition of CSR engagement and the moni-
toring impact of analyst following on rm value
remain robust in the full sample, as well as in the
sub-sample containing only the positive CSR scores.
We also conduct the Heckman two-stage regres-
sions, the instrumental variable approach, and the
OLS regressions based only on the Riskmetrics
available year observations of 1993, 1995, 1998,
2000, 2002, and 2004 to check the robustness of our
results. Our unreported results suggest that overall
results are essentially identical and that the main re-
sults of the positive associations between CSR
(CSRCOMPOSITE) and ADJTOBINQ and be-
tween analyst following and ADJTOBINQ remain
unchanged. In addition, to check the individual
impact of the various governance variables due to
potential multicollinearity, we run the regressions for
each governance variable with the control variables
separately and nd that the main results remain intact.
To further examine the robustness of our results,
we also run regressions on the change of ADJTO-
BINQ as a function of the change in CSRCOM-
POSITE. Our untabulated results suggest that the
change in CSRCOMPOSITE has a positive impact
on the change in ADJTOBINQ, with a t-value
range of 2.574.37 (all signicant, at least at the ve-
percent level) in various samples with and without
the governance and control variables, again sup-
porting CSR engagement as a conict resolution.
Discussion
The goal of this paper was to investigate the empirical
association between corporate governance (CG) and
rm value through corporate social responsibility
(CSR). As a main core of the paper, we test two
competing hypotheses, the over-investment hypoth-
esis based on agency theory and the conict-resolu-
tion hypothesis based on stakeholder theory. The
over-investment explanation posits that top manage-
ment uses the CSR engagement to enhance her pri-
vate benets of social-citizen reputation that could
hurt the market value of rm, whereas the conict-
resolution explanation postulates that using CSR
activities to reduce potential conicts between top
management and various stakeholders could eventu-
ally improve rmvalue by mitigating agency conicts.
To examine the relative importance between the
two competing hypotheses, we employ two-stage
regression analyses consisting of the rst-step CSR
CG choice issue and the second-step CGCSR-rm
value association. Before we summarize our empir-
ical results from two-stage regressions, as a pre-
liminary step, we rst report the results from various
univariate tests, which suggest that on average, the
characteristics of rms that engage in CSR are dif-
ferent from those of rms that do not engage in
CSR activities. Specically, CSR rms are more
diversied, older, larger, more levered, more prof-
itable, higher in advertising expense ratio, and higher
in Tobins q. CSR rms are also associated with
more active board leadership measured by a higher
proportion of CEOs who are also chairs of the
boards or chairs or members of nomination com-
mittees, and more anti-takeover provisions, respec-
tively. In addition, CSR engagement is adopted by
rms with higher total block ownership, higher
board independence, and a higher percentage of
institutional share ownership. They are also covered
by more security analysts.
Next, we discuss our major ndings from two-
stage regressions, and their implications in detail
below. First, the rst-stage probit regression results
indicate that CSR engagement is inuenced by rm
characteristics such as its size, protability, nancial
leverage, research and development, and product
diversication. CSR engagement is also driven by
both internal and external corporate governance and
monitoring systems, such as board leadership, board
independence, institutional ownership, analyst fol-
lowing, and anti-takeover provisions. Among all
governance system, we nd analyst following and
the percentage of independent board have the most
signicant and positive effect on rm decision to
374 Hoje Jo and Maretno A. Harjoto
engage in CSR. We also nd that CSR intensity
(after the rm decided to engage in CSR) is also
inuenced by internal and external corporate
governance and monitoring systems and rm char-
acteristics. Analysts following and percentage of
independent board have the most signicant and
positive effect on rms CSR intensity. This positive
empirical relationship between CSR and internal
and external corporate governance system is consis-
tent with the conict-resolution hypothesis.
Second, to correct for both simultaneity bias and
endogeneity issue, we use the second-stage Heckman
regressions and instrumental variables approach using
simultaneous regression framework after considering
the rst-stage CSR choice issue, and nd that that
CSR engagement is positively associated with rm
value measured by industry-adjusted Tobins q. The
second-stage results are also supportive of the con-
ict-resolution hypothesis as opposed to the CSR
over-investment argument. The impact of CSR
intensity on rm value is both statistically and eco-
nomically signicant indicating that CSR intensity
plays an important role to increase the rms value.
We consider this nding important because previous
studies were unclear about the CGCSR-value
relationships after controlling for both simultaneity
and endogeneity. We also nd evidence that cor-
porate governance system inuences the rm value,
which is consistent with prior literature (Coles et al.,
2008; GIM, 2003, 2010; Jo and Kim, 2007, 2008).
Third, rms CSR subcategory that is directly
related to their rms internal social enhancement,
such as diversity, employee relations, and product
quality, enhances the value of rm more than their
CSR subcategory in broader external enhancement,
such as community and environmental concerns.
Fourth, we nd that while the impact of analyst
coverage on rm value is signicant and strongly
positive, other governance and monitoring mecha-
nisms including board leadership, board indepen-
dence, blockholders ownership, and institutional
ownership play a relatively weaker role in enhancing
rm value. In general, corporate governance is a
system of checks and balances that trade-off benets
and costs of rm decisions such as CSR engagement,
and is a system of controls, regulations, and incen-
tives to minimize conicts of interest and to prevent
fraud. Unfortunately, however, this trade-off is
usually very complicated, and no one governance or
monitoring channel works for all rms. Although
security analysts are neither formal evaluator nor
direct monitor of potentially overcondent CEOs
who are over-investing CSR activities for their own
reputation building purpose, it turns out that
nancial analysts do provide an effective external
monitoring services by frequently contacting top
management for the purpose of collecting and pro-
ducing information regarding rms future prospects
as an important mechanism of information inter-
mediary. To produce independent valuations of the
rm, analysts collect and analyze as much informa-
tion as they can so that they can make buy and sell
recommendation to their clients. Through this
information collecting, analyzing, and dissemination
process, they become an expert on the rm and its
competitors by pouring over a rms nancial
statements, lings, and earnings forecasts. Thus, we
interpret our empirical results as evidence that ana-
lyst coverage provides an important check-and-
balance function to ensure that rms engagement in
CSR activities enhances value.
Conclusion
The impact of corporate social responsibility and cor-
porate governance on rm value has become a great
interest for shareholders, practitioners, and govern-
ment regulators. There are, however, only a few lim-
ited empirical studies that examine this issue. This
paper attempts to ll the void by examining what the
determinants of CSR engagement are, and whether
CSR engagement along with corporate governance
and monitoring mechanisms enhance rm value.
We contribute to the existing literature on cor-
porate social responsibility and corporate governance
in three ways. First, we extend the existing literature
by examining the determinants of CSR engagement
from a full spectrum of corporate governance sys-
tem. Consistent with the prior literature and eco-
nomic intuition, we nd that several governance
characteristics positively affect the choice of CSR
engagement. Second, by controlling for the endog-
enous treatment effects and simultaneity bias, we
nd that CSR engagement enhances rm value.
Third, we show evidence that the impact of external
monitoring by security analysts over rms CSR
activities on rm value is more signicant than other
internal and external governance and monitoring
375 Corporate Governance and Firm Value
mechanisms. Furthermore, managers can direct their
attention to CSR activities within internal rm (i.e.
diversity, employee relations, and product quality)
which are proven to increase rm value.
Since our data of KLDare based on snapshot over a
number of companies social ratings by KLD analysts
in binary responses (yes or no), the data are subject to a
sample selection bias and it is qualitative in nature.
Future study of the CSRCG-rm value relations
using large-scale survey data incorporating various
stakeholders input should be worthwhile. Despite
this limitation, our ndings contribute to managerial
practice by providing some empirical evidence of the
CSRCG association along with CSRCG-value
relationship after controlling for both endogeneity
and simultaneity. While we nd that CSR is one
important factor in the cross-sectional differences in
CG-rm value relationship, we do not attempt to
determine the optimal level of CSR engagement nor
the causality among CSR, CG, and rm value, which
is beyond the scope of this paper. We leave these
important questions to future research.
Notes
1
One notable exception is Harjoto and Jo (2011)
who control for the endogeneity problem. They, how-
ever, do not formally correct for potential simultaneity
bias that invalidates the single-equation procedures
when there exists a simultaneous nature of economic
relations. In this paper, in contrast to Harjoto and Jo
(2011), we not only control for the simultaneity bias
using simultaneous equation system, but also address the
impact of CSR subcategories on rm value along with
deeper analysis regarding the impact of various internal
and external governance mechanisms on the choice of
CSR engagement and the market value of rm.
2
Social capital is described as a resource of individu-
als that emerges from social ties (Coleman, 1990). Guiso
et al. (2004) assert that the source of social capital lies
with the people to whom a person is related.
3
Some researchers interpret CSR engagement as a
signaling device. For instance, Fisman, et al. (2006) and
Goyal (2006) interpret CSR investment as a signal in
competitive industries and in foreign direct investments,
respectively. Other studies focus on corporate contribu-
tions. Schwart (1968) asserts prot maximization along
with the CEOs psychological motivation as the
underlying rationale behind corporate philanthropic
contributions. He claims that both CSR and corporate
contributions can be viewed as an indirect investment
in society, yielding reputation building, potential reve-
nue increases and cost reductions, and therefore a rm
value increase. Navarro (1988) maintains that prot-
maximization factors and managerial discretionary fac-
tors can explain corporate contributions. Brown et al.
(2006) examine the relation between corporate philan-
thropic contributions and agency costs.
4
Notice that the improvement of accounting prot-
ability does not necessarily lead to higher rm value.
5
Some IVs will yield more precise estimates. The
more highly correlated the IV is with the choice of
CSR engagement, the more precise the estimates of per-
formance impact will be. Thus, the challenge in an IV
estimation is to nd an appropriate instrumental variable
that is highly correlated with the rst-pass choice, but
uncorrelated with the second-pass performance. Unfor-
tunately, it is often hard to nd variables that meet both
of these requirements, and therefore, it is difcult to nd
good IVs among the many potential IVs.
6
Similar methodology is also used by Harjoto and Jo
(2011) and Jo and Harjoto (2011).
7
When we perform logistic regression models to exam-
ine the likelihood of a choice decision, the results are quali-
tatively the same as those of the probit models shown in
Table III. We also control risk with the standard deviation
of stock returns, and the unreported results remain intact.
8
We further analyze the impact of LOGANAL on CSR
separately using two-stage least-square (2SLS) in Table V.
9
Recent study by Jo and Harjoto (2011) focuses on the
causality issue between CSR and corporate governance.
10
We also examine the association between the KLD
exclusionary scores and ADJTOBINQ. Our unreported
results suggest that the KLD exclusionary scores from
alcohol, tobacco, military, and nuclear-related revenues
are inversely associated with rm value when we do
not include the governance and control variables. How-
ever, when we include the governance and control
variables, only alcohol scores remain signicantly nega-
tive. The coefcients on gambling scores are insigni-
cant in all models examined.
11
The results are qualitatively the same when we use
Tobins q instead of industry-adjusted Tobins q. The
results are also essentially identical when we exclude
nancial and utility rms from the sample.
Acknowledgments
We thank an anonymous referee, Sanjiv Das, Carrie
Pan, and Mark Seasholes for valuable comments. Donna
Maurer provided editorial assistance. Jo acknowledges
the Leavey Research Grant for nancial support.
376 Hoje Jo and Maretno A. Harjoto
List of the strength and concern items in the KLD social ratings database
Category Strength items Concern items
Community Generous giving Investment controversies
Innovative giving Negative economic impact
Support for housing Indigenous peoples relations (0001)
Support for education (added 94) Other concern
Indigenous peoples relations (added 00, moved 02)
Non-U.S. charitable giving
Other strength
Environment Benecial products & services Hazardous waste
Pollution prevention Regulatory problems
Recycling Ozone depleting chemicals
Alternative fuels Substantial emissions
Communications (added 96) Agricultural chemicals
Property, plant, and equipment (ended 95) Climate change (added 99)
Other strength Other concern
Diversity CEO Controversies
Promotion Non-representation
Board of directors Other concern
Family benets
Women/minority contracting
Employment of the disabled
Progressive gay & lesbian policies
Other strength
Employee relations Strong union relations Poor union relations
No layoff policy (ended 94) Health safety concern
Cash prot sharing Workforce reductions
Employee involvement Pension/benets (added 92)
Strong retirement benets Other concern
Health and safety strength (added 03)
Other strength
Product quality and safety Quality Product safety
R&D/Innovation Marketing/contracting controversy
Benets to economically disadvantaged Antitrust
Other strength Other concern
KLD exclusionary items Alcohol
Gambling
Tobacco
Firearms
Military
Nuclear
Notes: All items are listed in their corresponding category. Unless otherwise indicated, the item has been included in the
data from 19942004. Items that were add to the data or discontinued (i.e., ended) in intermediate years are indicated, as
are the cases in which an item was moved from one category to another. Further details on the denition of each indicator
are available from KLD Research & Analytics, Inc at http://www.kld.com/research/ratings_indicators.html.
APPENDIX A
377 Corporate Governance and Firm Value
Variable denitions and measures
Variable [Name] Variable denitions
CSR (1, 0) [CSR] Dummy variable equals to 1 if a rm has
engaged in corporate social responsibility
(CSR)
CSR combined score [CSRCOMPOSITE] Arithmetic average of the combined scores of
KLD strengths and concerns of community,
environment, diversity, employee, and
product dimensions. (source: KLD Socrates
database)
Family rm (1, 0) [FAMFIRM] Dummy variable equals to 1 if a rm is family
owned rm and otherwise equals to zero
State law [STATELAW] A rm incorporated in states with anti-take-
over laws (source: GIM index, RiskMetrics
data)
ROA [ROA] Return on asset (source: COMPUSTAT)
Change ROA [CHGROA] Change in ROA from t -1 to t.
(source: COMPUSTAT)
Diversication [SEGDIV] Dummy variable equals to 1 if a rm has
more than one business segment
(COMPUSTAT)
GINDEX [GINDEX] Gompers, Ishii and Metrick index
(source: RiskMetrics data)
Entrenchment index [ENTINDEX] Bebchuk et al. (2009) Entrenchment Index
(source: RiskMetrics data)
Duality (1, 0) [DUALITY] Dummy variable equals to 1 if a CEO is also
chair of the board. (source: RiskMetrics data)
CEO nomination committee [CEONOM] Dummy variable equals to 1 if a CEO is a
chair or a member of nomination committee
% of director share [PCTDIRSHR] Percentage of director shares (source: Risk-
Metrics data)
Board size [BSIZE] Total number of board members (source:
RiskMetrics data)
% of independent directors [PCTINDEP] Number of independent outside directors/
Number of total directors (source: Risk-
Metrics data)
Log of Blockholdings [LOGBLKS] Log of sum of total blockholdings (5% or
more)
% of institutional ownership [PCTINSTI] Percentage of institutional share ownerships
(CDA/Spectrum 13(f) ling)
Log (Number of Analysts + 1) [LOGANAL] Log of (number of analysts + 1) (source: I/B/
E/S database)
Log total asset [LOGTA] Log of total asset (data 6) (source:
COMPUSTAT)
Debt/total asset [DEBTR] Long-term debt divided by total asset
(source: COMPUSTAT)
APPENDIX B
378 Hoje Jo and Maretno A. Harjoto
APPENDIX B
continued
Variable [Name] Variable denitions
R&D expenditure ratio [RNDR] Research and development expense divided
by total sales (source: COMPUSTAT)
Capital expenditure ratio [CAPXR] Capital expenditure expense divided by total
sales (source: COMPUSTAT)
Advertising exp. ratio [ADVR] Advertising expense divided by total sales
(source: COMPUSTAT)
Tobins q [TOBINQ] Tobin q = Total debt (data 9 + data
34) + preferred stock (data56) + market va-
lue of equity (data24*data25)/Total asset
(data 6) [Chung and Pruitt (1994)]
Industry-adjusted Tobins q [ADJTOBINQ] The natural log of rms q divided by the
median q in the rms industry [Campbell
(1996)]
Firm age [FIRMAGE] Firm age is calculated from the beginning of
the year from the CRSP database
S&P 500 (1, 0) [SP500] Dummy variable equals to 1 if a rm is in
S&P 500 index.
Sales growth [SGROWTH] Sales growth rate from t -1 to t. (source:
COMPUSTAT)
Dividend/book equity [DIVR] Dividend divided by book value of equity
(data21/data60) (source: COMPUSTAT)
Calculation of the combined strength and composite scores and the combined strength scores
Combined strength and concern scores
COMMUNITY(i,t) = (sum of all community strength score for rm i at year t minus the sum of all community concern
score for rm i at year t plus total maximum possible number of community concern score at year t) divided by (total
maximum possible number of community strength score during year plus total maximum possible number of community
concern score at year t)
ENVIRONMENT(i,t) = (sum of all environment strength score for rm i at year t minus the sum of all environment
concern score for rm i at year t plus total maximum possible number of environment concern score at year t) divided by
(total maximum possible number of environment strength score during year plus total maximum possible number of
environment concern score at year t)
DIVERSITY(i,t) = (sum of all diversity strength score for rm i at year t minus the sum of all diversity concern score for
rm i at year t plus total maximum possible number of diversity concern score at year t) divided by (total maximum
possible number of diversity strength score during year plus total maximum possible number of diversity concern score at
year t)
EMPLOYEE RELATIONS(i,t) = (sum of all employee strength score for rm i at year t minus the sum of all employee
concern score for rm i at year t plus total maximum possible number of employee concern score at year t) divided by
(total maximum possible number of employee strength score during year plus total maximum possible number of
employee concern score at year t)
APPENDIX C
379 Corporate Governance and Firm Value
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APPENDIX C
continued
EMPLOYEE RELATIONS(i,t) = (sum of all employee strength score for rm i at year t minus the sum of all employee
concern score for rm i at year t plus total maximum possible number of employee concern score at year t) divided by
(total maximum possible number of employee strength score during year plus total maximum possible number of
employee concern score at year t)
PRODUCT(i,t) = (sum of all product strength score for rm i at year t minus the sum of all product concern score for
rm i at year t plus total maximum possible number of product concern score at year t) divided by (total maximum
possible number of product strength score during year plus total maximum possible number of product concern score at
year t)
Strength scores
COMSTR(i,t) = (sum of all community strength score for rm i at year t) divided by (total maximum possible number of
community strength score during year t)
ENVSTR(i,t) = (sum of all environment strength score for rm i at year t) divided by (total maximum possible number of
environment strength score during year t)
DIVSTR(i,t) = (sum of all diversity strength score for rm i at year t) divided by (total maximum possible number of
diversity strength score during year t)
EMPSTR(i,t) = (sum of all employee strength score for rm i at year t) divided by (total maximum possible number of
employee strength score during year t)
PROSTR(i,t) = (sum of all product strength score for rm i at year t) divided by (total maximum possible number of
product strength score during year t)
Corporate social combined score
CSRCOMPOSITE = (COMMUNITY + ENVIRONMENT + DIVERSITY + EMPLOYEE + PRODUCT)/5
Social strength score
CSRSTRENGTH = (COMSTR + ENVSTR + DIVSTR + EMPSTR + PROSTR)/5
Source: The Kinder, Lydenberg, and Dominis (KLD) Stats database
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382 Hoje Jo and Maretno A. Harjoto
Hoje Jo
Leavey School of Business,
Santa Clara University,
500 El Camino Real, Santa Clara,
CA 95053-0388, U.S.A.
E-mail: hjo@scu.edu
Maretno A. Harjoto
Graziadio School of Business and Management,
Pepperdine University,
24255 Pacic Coast Highway, Malibu,
CA 90263, U.S.A.
E-mail: Maretno.Harjoto@Pepperdine.edu
383 Corporate Governance and Firm Value
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