Essays on corporate social responsibility

This thesis explores the topical yet contentious issue of Corporate Social Responsibility (CSR). The thesis consists of three empirical essays on CSR. The first essay analyses the association between CSR engagement, vis-a-vis Shariah-compliance, and financial reporting quality. The second essay investigates the relationship between CSR engagement and tax avoidance. The third essay assesses the link between ownership identity and CSR engagement. The first essay examines the association of two forms of ethical principles, i.e., CSR and religion, with the degree of earnings management. Using a large sample of firms domiciled across ten European Union countries for the period between 2003 and 2011, our empirical results show that firms with high CSR scores are less likely to engage in accruals earnings management. On the contrary, inclusion in the Shariah index, which proxies for conformity with religious principles, has the opposite relation with earnings quality. The results also indicate that firms with high CSR ratings and Shariah compliant firms are more likely to use ethical codes as a symbolic management to engage in earnings management and gain organisational legitimacy. Our results are robust to using each main component of the CSR pillars, alternative earnings quality metrics, and the instrumental variable (IV) regression method. Institutional factors, e.g., cultural values and the degree of market liberalization, are also important in determining the link between CSR values, Shariah-compliance, and financial reporting quality. On the whole, the findings suggest that whilst CSR engagement is important in ameliorating managerial ethical behaviour in earnings management, membership of the Shariah index may serve as a legitimacy mechanism so as to be viewed as conforming to stakeholders’ expectations. The second essay investigates the relationship between CSR engagement and tax avoidance. It questions whether socially responsible firms sacrifice profits in order to balance the interests of various stakeholders (by engaging with CSR), or whether firms only engage in CSR when it helps to maximise profits. The essay seeks to empirically examine corporate acts of ‘organised hypocrisy’, where firms claim to champion ethical issues but simultaneously engage in socially irresponsible behaviour; for example, by not paying their fair share of taxes. The analysis is conducted on a sample of firms domiciled in 12 countries for the period of 2005-2011. The empirical results show a positive and significant association between firms’ CSR scores and tax avoidance. This suggests that firms with high CSR scores are more likely to engage in tax avoidance, providing evidence in support the hypothesis of organised hypocrisy. This suggests that a gap exists between corporate talk and action. The results are also consistent with the views of shareholder theory, which suggests that profit maximisation may be the sole social responsibility that firms aim to achieve. The results are robust when using alternative measures of CSR engagement and tax avoidance. Additional analyses using the Heckman two-stage treatment effect approach as well as the IV regression method also yield qualitatively similar results to that of our main model. Furthermore, the home-country corporate governance mechanism, the financial system, as well as the level of industry risk, are important in determining the link between CSR engagement and tax avoidance.The third essay assesses the association between different types of ownership and CSR engagement. It also considers the influence of the institutional landscape within each jurisdiction on the link between ownership identity and CSR engagement. Employing a large sample of firms domiciled across 14 European countries for the period between 2005 and 2012, the empirical results suggest that the proportion of ownership by government and institutional investors is positively and significantly associated with the level of CSR engagement. On the contrary, shareholding by insiders, other firms, and individual investors exerts the opposite effect on CSR engagement. These results are robust when using alternative measures for ownership. In addition, our findings indicate that widely-held firms domiciled in the UK and Ireland have higher degree of CSR engagement in comparison to their counterparts domiciled in other European countries. On the whole, the analysis demonstrates that preference towards CSR engagement is not homogeneous across various types of ownership groups. This may depend on the objectives behind the investment by each group, as well as their respective roles and positions within society