Estimating the Effect of Corporate Social Responsibility on Firm Value Using Geographic Identification

• DOI: http://doi.org/10.1111/ajfs.12170
• Author: Travis Davidson,Pornsit Jiraporn,Napatsorn Jiraporn,Pandej Chintrakarn
• Published date: 01 April 2017
• Date: 01 April 2017

Estimating the Effect of Corporate Social

Responsibility on Firm Value Using

Geographic Identification

Pandej Chintrakarn

Mahidol University International College (MUIC), Thailand

Pornsit Jiraporn*

School of Graduate Professional Studies (SGPS), Pennsylvania State University, United States

Napatsorn Jiraporn

State University of New York (SUNY) at Oswego, United States

Travis Davidson

Ohio University, United States

Received 26 August 2016; Accepted 25 December 2016

Abstract

We argue that firms located close to one another tend to have similar corporate social

responsibility (CSR) policies, due to investor clienteles, local competition, as well as social

interactions. Our results are consistent with this notion. In particular, firms located in the

same 3-digit zip code exhibit a similar degree of CSR. Exploiting the variation in CSR across

zip codes, we estimate the effect of CSR on firm value. Part of the firm’s CSR is induced by

the surrounding firms in the same zip code and can be considered exogenous as it is deter-

mined outside the firm. Because zip code allocation is based on efficiency in mail delivery,

and not on corporate policies or outcomes, it is likely exogenous. Our instrumental variable

analysis reveals that more socially responsible firms enjoy significantly higher firm value. We

confirm the results using phone number area codes, instead of zip codes, and reach the same

conclusion.

Keywords Corporate social responsibility; Geography; Firm value; CSR; Social responsibility;

Instrumental variable; Endogeneity

JEL Classification: G32, G34

*Corresponding author: Pornsit Jiraporn, School of Graduate Professional Studies (SGPS),

Pennsylvania State University, 30 E Swedesford Road, Malvern, PA 19355, USA. Tel: +1-484-

753-3655, Fax: +1-610-725-5296, email: pjiraporn@gmail.com

Asia-Pacific Journal of Financial Studies (2017) 46, 276–304 doi:10.1111/ajfs.12170

276 ©2017 Korean Securities Association

1. Introduction

The issue of corporate social responsibility (CSR) has recently captured a great deal

of attention both in the media and among academics. Each year, corporations

spend enormous amounts of money on CSR. Mutual funds that pursue investment

strategies based on CSR command billions of dollars around the world.

1

In acade-

mia, research on this issue has spanned a number of disciplines, such as manage-

ment, marketing, economics, and finance. The importance of CSR thus cannot be

overemphasized.

There are two major strands of research in this area. First, researchers have

attempted to determine factors that influence a firm’s CSR policy (Barnea and Rubin,

2010; Jo and Harjoto, 2011). Second and more importantly, what is the impact of CSR

on firm value? An immense volume of research has been dedicated to the intensely

debated question: Does CSR improve firm value? (Solomon and Hansen, 1985, 1985;

Pava and Krausz, 1996; Preston and O’Bannon, 1997; Stanwick and Stanwick, 1998;

Verschoor, 1998; Ruf et al., 2001; Bauer et al., 2002; Becchetti et al., 2009). In spite of

the tremendous volume of research and the large expenditures on CSR by corporations,

there is surprisingly no conclusive evidence on the effect of CSR on firm value.

Our study is related to both strands of the literature in CSR. First, we investi-

gate the effect of geography on CSR. Owing to market segmentation, investor clien-

teles, social interactions, and local competition, we hypothesize that firms located

geographically close to one another tend to have similar CSR policies.

2

Second, we

exploit the variation in CSR across geographic locations and estimate the effect of

CSR on firm value. Our geographic identification is based on zip codes. The US

Postal Service (USPS) allocates zip codes based on efficiency in mail delive ry. Zip

code changes are also rare and usually reflect changes in macroeconomic factors

such as demographics and urban development. Thus, zip code assignments are unli-

kely related to corporate policies or outcomes and can be considered exogenous.

We start our analysis by exploring the geographic peer effects on CSR. A num-

ber of prior studies find that geographic proximity has tangible effects on a wide

range of corporate activities, such as charitable actions (Galaskiewicz and Wasser-

man, 1989; Marquis et al., 2007), political contributions (Mizruchi, 1989), acquisi-

tion decisions (Haunschild, 1993), anti-takeover provisions (Davis and Greve, 1997;

John et al., 2008), and corporate compensation policy (Kedia and Rajgopal, 2009).

We apply this concept to CSR. Corporations that invest in CSR have strong incen-

tives to publicize their CSR activities and make them as visible as they can because

social spending is “akin to advertising” (Webb and Farmer, 1996). Therefore, CSR

activities are highly observable. We argue that the observable nature of CSR makes

1

In the US, the professionally managed assets of socially screened portfolios reached $2.3 tril-

lion in 2003, growing by 1200% from $162 billion in 1995 (Renneboog et al., 2007).

2

Following the literature, we identify firm location using the location of the headquarters.

More discussion on this issue can be found in Pirinsky and Wang (2010).

CSR and Firm Value

©2017 Korean Securities Association 277