**2. Empirical evidence**

Prior work in the academic literature on corporate social responsibility and its impact on shareholders has found that idiosyncratic volatility (the portion of companies' stock returns that are not explained by the stock market) is positively correlated with aggregate corporate social responsibility. In addition, some researchers believe that corporate social responsibility reduces flexibility to the company in responding to productive shocks and as a result earnings become less predictable hence the rise in idiosyncratic volatility [21].

How does corporate social responsibility impact shareholders? There is a debate in the literature about this issue as some researchers find at low contribution levels corporate social responsibility has a positive impact on firm value, while this relationship turns negative at high levels of corporate social responsibility expenditures [4]. This initially positive and then negative shaped relationship between corporate social responsibility suggests an optimal level of corporate social responsibility, a result documented by Gillan et al. [5].

On the other hand, there is considerable evidence that companies which take a more active role in corporate social responsibility experience higher stock returns by establishing greater trust among employees, customers, and shareholders. While some may question giving a portion of companies profits to charitable causes, these investments provide considerable benefits especially during financial crises. There are numerous studies that have documented the positive benefits from increased social corporate philanthropy. We will highlight a few of those now. Developing a valuation model, prior work finds through model simulation a positive relationship between firm valuation and corporate responsibility. The authors attribute the higher firm valuation to a firm's commitment to social responsibility contributions which can increase the firm's probability of survival, improvement in a firm's intermediate and longrun cash flows, and reduce its cost of capital [6]. In addition, the authors also cite a more loyal customer base, more dedicated and committed employees, less likelihood of confrontations with labor unions, consumer advocacy groups or governmental agencies as reasons for higher probability of survival and lower cost of capital.

Companies that are not profitable, have no excess profits to share with society in the public good provision. Hence, we expect to find more sustainable corporate giving in monopolistically competitive markets where an existing barrier to entry may allow companies to earn profits which can be shared with society. There are explanations such as tax incentives which provide incentives for companies to make charitable contributions as doing so lowers their taxable income. The highest US corporate tax rate is 35% and when combined with state and local taxes, the actual corporate tax rate is closer to 39%. Hence, for every \$1 contributed to charitable causes, the company can save about 39 cents in lower tax payments. We note that

Beyond tax incentives, we also expect to find companies that are attempting to either improve on their public image or maintain their public image will seek to make charitable contributions and conducting social corporate responsibility seriously. For example, tobacco companies may feel compelled to be a good community citizen. Pharmaceutical companies with blockbuster drugs which generate large corporate profits may also be seeking to improve their corporate image by contributing to social causes. Companies that have recently experienced a public black eye (e.g., United Airlines received lots of negative media attention for forcing a passenger off a plane) may also be seeking to improve their public image by provid-

Prior work in the academic literature on corporate social responsibility and its impact on shareholders has found that idiosyncratic volatility (the portion of companies' stock returns that are not explained by the stock market) is positively correlated with aggregate corporate social responsibility. In addition, some researchers believe that corporate social responsibility reduces flexibility to the company in responding to productive shocks and as a result earnings

How does corporate social responsibility impact shareholders? There is a debate in the literature about this issue as some researchers find at low contribution levels corporate social responsibility has a positive impact on firm value, while this relationship turns negative at high levels of corporate social responsibility expenditures [4]. This initially positive and then negative shaped relationship between corporate social responsibility suggests an optimal

On the other hand, there is considerable evidence that companies which take a more active role in corporate social responsibility experience higher stock returns by establishing greater trust among employees, customers, and shareholders. While some may question giving a portion of companies profits to charitable causes, these investments provide considerable benefits especially during financial crises. There are numerous studies that have documented the positive benefits from increased social corporate philanthropy. We will highlight a few of those now. Developing a valuation model, prior work finds through model simulation a positive relationship between firm valuation and corporate responsibility. The authors attribute

in December 2017, the Tax Cut bill reduced the corporate tax rate to 20%.

become less predictable hence the rise in idiosyncratic volatility [21].

level of corporate social responsibility, a result documented by Gillan et al. [5].

ing contributions to social causes.

100 Firm Value - Theory and Empirical Evidence

**2. Empirical evidence**

Others have also found a positive relationship between shareholder value and corporate social responsibility. Using an instrumental variable approach as an identification strategy, they show that firms that are managed effectively have fewer agency concerns (e.g., protection for minorities, strong pay-for-performance incentives, and less cash abundance) are more likely to participate in corporate social responsibility. These results run counter to the belief that corporate social responsibility contributions are a waste of company resources. Hence, the conclusion that corporate social responsibility can be consistent with maximizing shareholder wealth [7].

Other approaches include examining corporate social responsibility in the areas of environment, social, and governance (ESG) sustainability to determine whether investors (short sellers) take into consideration a companies' ESG [22]. They find lower valuations, worse future financial performance, lower return on equity and return on assets for firms that have low composite ESG scores. They also find a negative relationship between short selling and ESG composite scores. Hence, their findings suggest that investors (short sellers) are aware and take into consideration corporate social responsibility when making investment decisions.

More research has found evidence that corporate social responsibility is positively linked with higher firm value [23, 24]. This research has found that corporate social responsibility policies are similar for companies that are located close to one another (within the same 3-digit zip code) [23]. Examining CEO power (as measured by CEO pay slice, CEO tenure, and CEO duality), prior work has found CEO power to be negatively correlated with a firm's participation in corporate social responsibility [24].

Examining stock returns during the 2008–2009 financial crisis, research has found that companies with higher corporate social responsibility intensity had between 4 and 7 percentage points higher stock returns compared to firms that had low social capital [24]. These results highlight the importance of firms establishing trust through engaging in corporate social responsibility. Companies are rewarded for these social capital investments in times when financial markets experience negative shocks.

Other researchers have found higher average stock returns for both US and European companies between 2003 and 2006 for firms that have great corporate social responsibility [25]. They find that the stock returns are larger for the US companies compared to their European counterparts. The robustness of their results that corporate social responsibility holds for companies in both continents lends strength to its importance. When examining large European companies' finances between 2009 and 2014, further evidence that corporate social responsibility matters in Europe is provided as companies with more efficient investors have higher corporate social responsibility. These results also suggest that corporate social responsibility helps firms address both agency problems and information asymmetry problems [26].
