**4. Practice**

Socially responsible actions by a firm can bring customer loyalty from those who care about the public; this leads to less elastic demand. With a lower demand elasticity, firm's profit is less sensitive to market fluctuations and provides a less risky stream of financial returns to investors. Thus, corporate social responsibility is a tool of risk management [19]. There are

ing variety, responsible products distribute over *i* ∈ (0, *μ*) and regular products distribute over

A firm can choose to invest in a production technology for a product among the continuous variety of products. It takes a fixed cost investing in one of these technologies. The fixed cost of socially responsible technology follows a distribution with a lower bound that is smaller than the fixed cost of the regular products. After acquiring the technology, production has constant returns to scale. Investors are endowed with stocks and cash. They allocate endowment into consumption, stock holdings, and bonds. In period one, investment decisions are made and there is an aggregate consumption good which is not differentiated. It is found that responsible products sell at a premium to regular products. Shares of responsible firms trade

Another approach explores the interlinked relationships among the public and private goods, being complementary or substitutive. Consumer utility contains multiple private goods that exhibit different degrees of complementarity and substitutivity with the public good [28, 29]. There is no cost advantage in public good production tied with any product. The public good has differential effects on private products; it may be complementary to one and substitutive to another. For example, roads will increase the marginal utility of automobiles; this is a public good complementary to private products. On the other hand, national defense and police force will decrease the marginal utility of privately owned firearms; this is a public good substitutive to private products. PBS programs will increase the marginal utility of television sets and at the same time decrease the marginal utility of television programs. Without assumptions like cost advantage in joint production or indivisibility, complementarity is enough to explain the endogenous demand increase caused by a public good. When there are products that are complementary or substitutive to the public good in various degrees, it is apparent that firms whose products that are more complementary to the public good will face demand increases with a higher public good. Thus, there are incentives to contribute to the public. Firms whose products that are more substitutive to the public good suffer a demand decrease

A model of monopolistic competition with differentiated products and a public good is presented in Ref. [20]. Individuals and firms contribute at the same time but for different reasons. Individuals are looking to enjoy the public good directly, while firms contribute to induce demand increases. Consumers and firms can choose quantities freely in the market (products

*<sup>i</sup>* <sup>∈</sup> (*μ*, 1). A responsible product has a lower elasticity of substitution *σ<sup>r</sup>*

∫

0 *μ ci <sup>σ</sup><sup>r</sup> di*) \_\_*α <sup>σ</sup><sup>r</sup>* + (∫

*i*

*μ* 1 *ci <sup>σ</sup><sup>n</sup> di*) \_\_\_\_ 1−*α*

are labeled on the unit interval represent-

*<sup>σ</sup><sup>n</sup>* (5)

. The parameter *α* is the share of expenditure on

and a regular prod-

two types of products in the market. All products *c*

responsible goods. Representative investor's utility is

uct has a higher elasticity of substitution *σ<sup>n</sup>*

on average higher than those of regular firms.

with a higher public good level.

*C* = (

106 Firm Value - Theory and Empirical Evidence

In practice, companies engage in responsible activities for a few main reasons. First, the tax code provides 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. Second, making charitable contributions improves the corporate image. In addition, these contributions support the communities in which their employees live making the community a better place to live. Corporate giving garners respect from the employees. Third, these contributions support the communities in which their employees live making the community a better place to live. Fourth, corporate giving garners respect from the employees. Klara Kozlov, head of corporate clients at the Charities Aid Foundation cites companies desire to "do good" as motivation for corporate gifts. Moreover, these contributions also serve to increase the popularity of the business which may increase consumer loyalty to the company. Fifth, companies involved with social corporate philanthropy receive media exposure and positive public attention/recognition. Hence providing the company with valuable advertising and marketing.

There are numerous examples of companies who are involved in corporate social responsibility. We provide some examples here, highlighting some of the companies that have recently been recognized for their generosity. In the United States, the Motley Fool in 2017 ranked the 12 most charitable US companies with health care, bank, and technology companies leading the list [35]. While there were two notable exceptions in Exxon and Walmart on the leading charitable company list, the remaining companies were comprised of health care, banking, and technology. The key component that drives corporate donations is company profitability. Companies that are not profitable or are losing money do not have money to give away for public goods. The US companies which dominate the most charitable list of Motley Fool share a common attribute - there are considerable barriers to entry, for example, the pharmaceutical companies on the list are Pfizer, Gilead, Merck, Bristol Myers Squibb, and Eli Lily, all have block buster drug patents that generate millions in profits for the companies. These health care companies may be trying to change the narrative when it comes to negative media attention about outlandish drug prices. For example, President Donald Trump tweeted on March 7, 2017: "I am working on a new system where there will be competition in the drug industry. Pricing for the American people will come way down!" [36].

as explained by David Hollinger (Managing Partner of Texas Roadhouse in Greenville, NC) since Texas Roadhouse views making charitable contributions to non-profit organizations as a "part of the fabric of the community. In return, we hope that people choose to eat at our

Corporate Social Responsibility and Firm Value: Recent Developments

http://dx.doi.org/10.5772/intechopen.76160

109

Additional evidence that corporations make charitable contributions as a form of advertising comes from outside the restaurant industry. Consider Allstate Insurance company which makes a contribution to the universities general scholarship fund for each field goal that lands in a net with the Good Hands logo of Allstate. There are 90 college and university stadiums as well as championship and bowl game events that carry the Good Hands logo. Moreover, the television broadcasters also mention the contribution that Allstate is making to the scholarship fund. Clearly, Allstate is receiving "free" advertising for these contributions. Upon further examination of the Allstate contributions to the Good Hands Field Goal Net Program for the 10-year period 2005–2014, it has been found that Allstate contributed \$3.4 million to scholarships or about \$340,000 per year in scholarships [41]. Given that 90 universities carry the Good Hands logo on their nets, this translates to about \$3778 per school per year which would cover about 50% of one semester tuition and fees for an instate resident to attend the University of Michigan. Given that the cost of a 30-section television ad on ESPN during the National Championship game in 2016 is \$1 million [42], it is no wonder that Allstate has cho-

Companies may feel compelled to undertake socially responsible actions for a variety of reasons including to lower their taxable earnings, to become a fabric of the community, to encourage consumer loyalty, foster employee pride/satisfaction, and to receive "free" advertising/publicity. Companies that are more inclined to make charitable contributions may also have more profits to share with the community. Moreover, the most charitable companies in the USA possess the characteristics of being both highly profitable and these companies have a market dominant position in their industry, which may explain why high technology, big pharmaceutical companies, and large financial institutions predominantly comprise the most charitable companies in the United States. There is overwhelming evidence provided on both continents that firms which engage in corporate social responsibility have higher firm valuations. At the heart of these companies that voluntarily choose to go above and beyond by making contributions to society is the creation of trust. This trust encourages loyalty among consumers and loyalty among employees. When financial difficulty does arise, this loyalty that companies have accrued through being good corporate citizens gets repaid in terms of

Empirical studies confirm the positive impact of corporate social responsibility on firm value. Yet, there are different types of socially responsible actions, such as environmental and social compliance, donation to charitable causes, and public good linked products. Their impacts may realize in investors' expectation of a better company perspective or in consumer's preferences bringing in a higher product demand. Future research may aim to identify and distinguish the

restaurant" (interview with author January 11, 2018).

sen the "free" advertising of the Good Hands Field Goal Net Program.

better stock market performance during the financial crisis.

**5. Conclusion**

In the technology industry, Alphabet (parent company of Google), Microsoft, and Cisco also appear on the Motley Fool's 12 most charitable US companies list. These high-technology companies are highly profitable and due to their market dominant position they possess, market power. Moreover, their leading position creates a significant barrier to entry for competitors. What is driving these companies to make charitable contributions? One research study found that people received greater happiness from giving away money to others rather than spending money on themselves [37]. In corporate giving, Alphabet has taken this approach in its corporate gifts as it has provided money to its clients to donate to charity, where the client chooses who receives the donation via the nonprofit web site. Such actions by Alphabet promote Google's mantra of "don't be evil" while earning loyalty and respect of its employees and clients.

Financial companies Goldman Sachs and Wells Fargo appear on the charitable list as well. It is ironic that Wells Fargo appears on the most charitable list, given since 2009 to 2015 Wells Fargo created 3.5 fake bank and credit card accounts. In an effort to re-gain consumer and public trust Wells Fargo may feel compelled to continue to make charitable contributions in an attempt to change the perception of Wells Fargo. The financial industry also has significant barriers to entry with the market structure being monopolistically competitive. Charitable contributions by financial institutions are not limited to the United States, since in the United Kingdom the industry sector with the largest average cash and in-kind gifts occurs in the finance industry [38].

One of the most competitive industries in the United States is the airline industry. Since September 11, 2001 there have been 12 chapter 7 filings (company closes) and 29 chapter 11 filings (re-organization). Of the four largest US carriers today, three of them (American Airlines, United Airlines, and Delta Airlines) were at some point in Chapter 11 bankruptcy since 2001. The remaining exception is Southwest Airlines which has never declared bankruptcy. Hence, we should expect to find larger charitable contributions for Southwest Airlines compared to its peers. In 2017, Southwest Airlines provided nearly 39,000 free flights for a combined value of more than \$19 million in total charitable gifts [39]. In 2016, American Airlines provided \$23.5 million in total charitable giving [40].

Next, we examine reasons beyond profitability to explain corporate social responsibility. Some businesses may choose to make charitable contributions in lieu of advertising/marketing expenditures as these businesses may see the chance for possible public recognition as "free" advertising and marketing. For example, Texas Roadhouse operates in such a fashion as explained by David Hollinger (Managing Partner of Texas Roadhouse in Greenville, NC) since Texas Roadhouse views making charitable contributions to non-profit organizations as a "part of the fabric of the community. In return, we hope that people choose to eat at our restaurant" (interview with author January 11, 2018).

Additional evidence that corporations make charitable contributions as a form of advertising comes from outside the restaurant industry. Consider Allstate Insurance company which makes a contribution to the universities general scholarship fund for each field goal that lands in a net with the Good Hands logo of Allstate. There are 90 college and university stadiums as well as championship and bowl game events that carry the Good Hands logo. Moreover, the television broadcasters also mention the contribution that Allstate is making to the scholarship fund. Clearly, Allstate is receiving "free" advertising for these contributions. Upon further examination of the Allstate contributions to the Good Hands Field Goal Net Program for the 10-year period 2005–2014, it has been found that Allstate contributed \$3.4 million to scholarships or about \$340,000 per year in scholarships [41]. Given that 90 universities carry the Good Hands logo on their nets, this translates to about \$3778 per school per year which would cover about 50% of one semester tuition and fees for an instate resident to attend the University of Michigan. Given that the cost of a 30-section television ad on ESPN during the National Championship game in 2016 is \$1 million [42], it is no wonder that Allstate has chosen the "free" advertising of the Good Hands Field Goal Net Program.
