**1. Introduction**

Business corporations contribute significant amounts to the public. Giving USA reported that total giving by corporations in 2016 is \$18.55 billion. The Committee Encouraging Corporate Philanthropy (CECP, 2017) report that the median total giving by a corporation increased

© 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. © 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

from \$20.7 to \$21.2 million between 2014 and 2016 among 209 companies surveyed [1]. The median of total giving as a percentage of revenue and that as a percentage of pre-tax profit also increased in this period, despite decreases in total revenue and profits. These contributions are directed to diverse programs that are not relevant to production. For example, they are donated to health and social services, education, environment, disaster relief, and so on. Why would corporations contribute to consumption of public goods from which only consumers receive direct benefits? Corporate responsibility is defined as "actions that appear to further some social good, beyond the interest of the firm and what is required by law," or alternatively, "actions which reduce the extent of externalized social costs" [2, 3]. Why would a profit-maximizing firm be interested in social corporate responsibility by making charitable contributions?

products associated with charity or environmental friendliness [9]. Sample data from eBay auction show that the winning prices for items linked to charitable donations through eBay Giving are higher than those matched items not linked to donations. And this charity premium decreases with item value [10]. Companies market products with environmental labeling, which is a signal hard to verify by consumers. Experimental studies of laboratory markets show that such signaling of a product increases the product's trade volume even when buyers are subject to various forms of incomplete information [11]. Green products can sell at significant premiums. For example, customers of Patagonia, an outdoor sportswear brand, are

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This demand shift induces corporate giving in the environment of imperfect competition. External activists may initiate boycotts successfully when a firm does not conform to responsible standards. Fearing a profit loss from boycotts, the firm will behave responsibly [13]. Consumers may choose joint production of the product and public good over producing separately when the former has a cost advantage [14]. Yet, corporate giving may result in the same equilibrium outcome as individual voluntary contribution [15]. Giving can be an outcome of oligopolistic competition [16]. When investors can choose a portfolio composed of shares of responsible firms and regular firms, those with a higher substitution parameter for corporate giving will buy shares of the responsible firm, and those with a lower parameter would prefer personal giving [17, 18]. The above approaches suffer various degrees of limitations. For example, the warm glow effect is an extra assumption that appeals to personal emotions of giving in addition to public consumption. Portfolio choice models assume fixed profits or arbitrary profit functions, which are not based on market foundations. Recently, models of general industry equilibrium were proposed. The incentive for corporate giving is embedded in the properties of market demand. Consumer loyalty brought by socially responsible actions results in a lower elasticity of demand. This can help a firm to lower the risk in profit stream and induce a premium to its product price [19]. Some private products are complementary to

willing to pay significant premiums for organic cotton garments [12].

the public good. Stronger complementarity induces higher corporate giving [20].

positive public attention/recognition.

A few practical reasons cause companies to engage in responsible activities. First, the tax code provides incentives for companies to make charitable contributions as doing so lowers their taxable income. Second, making charitable contributions improves the corporate image. 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. 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 valuable advertising and marketing from media exposure and

Given the reasons mentioned above for charitable contributions, which companies are more likely to be involved in corporate social responsibility? We expect that companies which are currently profitable have a greater incentive to provide contributions to social causes. In addition, it may also prove easier to make contributions when a company is profitable than when a company is losing money. The more competitive the industry, the less likely a company is to be profitable which reduces the likelihood of the corporation making charitable contributions.

This is a first survey on the link between corporate social responsibility and firm value. We focus on how and why companies engage in responsible activities and how such activities can increase product demand and shareholder value. The plan of this chapter is to focus on recent developments. In the following three sections, we discuss recent findings in empirical evidences, theoretical models, and trends in practice. It is not intended to be a comprehensive survey of the literature. With this survey, we introduce this growing literature to the audience and hope to bring more research attention to bridging the fields of business strategy and the provision of the public good. We discuss empirical studies that confirm positive impacts of corporate social responsibility on indicators of firm value. Theoretical models provide possible mechanisms and economic foundations of why socially responsible actions can increase demand in different market structures. Responsible actions can be induced by external activists for fear of boycotts. Investors may prefer to hold shares of responsible firms when corporate giving can substitute for personal giving. A public good may be produced jointly with a private good. Models of general industry equilibrium find that demand increase due to the public good may come from the endogenous market effects. Companies in industries with entry barriers, such as health care, banking and finance, and high technology, are among top charitable givers. We discuss how corporate social responsibility is conducted in practice with companies in these industries as examples.

Studies on charitable contributions found considerable evidence that corporate social responsibility has a positive impact on shareholders. Some have suggested that low contribution levels of corporate social responsibility can improve a firm's value [4], yet too much corporate contributions can pull down shareholder wealth [5]. Most academic research has found that companies that are engaged in corporate social responsibility experience greater stock returns [6, 7] due to establishing greater trust among its employees, customers, and shareholders. The benefits from corporate social responsibility are especially prevalent during times of financial market uncertainty. Investors appear to reward companies that have a history of making charitable contributions with higher stock returns during the financial market crisis of 2008–2009 with between 4 and 7 percentage point returns to companies that exhibited higher corporate social responsibility intensity [8].

Theoretical investigations into corporate social responsibility explore mainly the fact that consumer demand for products increases with the public good. Empirical and experimental evidence on behavior beyond surveys confirm that consumers are willing to pay more for products associated with charity or environmental friendliness [9]. Sample data from eBay auction show that the winning prices for items linked to charitable donations through eBay Giving are higher than those matched items not linked to donations. And this charity premium decreases with item value [10]. Companies market products with environmental labeling, which is a signal hard to verify by consumers. Experimental studies of laboratory markets show that such signaling of a product increases the product's trade volume even when buyers are subject to various forms of incomplete information [11]. Green products can sell at significant premiums. For example, customers of Patagonia, an outdoor sportswear brand, are willing to pay significant premiums for organic cotton garments [12].

from \$20.7 to \$21.2 million between 2014 and 2016 among 209 companies surveyed [1]. The median of total giving as a percentage of revenue and that as a percentage of pre-tax profit also increased in this period, despite decreases in total revenue and profits. These contributions are directed to diverse programs that are not relevant to production. For example, they are donated to health and social services, education, environment, disaster relief, and so on. Why would corporations contribute to consumption of public goods from which only consumers receive direct benefits? Corporate responsibility is defined as "actions that appear to further some social good, beyond the interest of the firm and what is required by law," or alternatively, "actions which reduce the extent of externalized social costs" [2, 3]. Why would a profit-maximizing firm be interested in social corporate responsibility by making charitable contributions? This is a first survey on the link between corporate social responsibility and firm value. We focus on how and why companies engage in responsible activities and how such activities can increase product demand and shareholder value. The plan of this chapter is to focus on recent developments. In the following three sections, we discuss recent findings in empirical evidences, theoretical models, and trends in practice. It is not intended to be a comprehensive survey of the literature. With this survey, we introduce this growing literature to the audience and hope to bring more research attention to bridging the fields of business strategy and the provision of the public good. We discuss empirical studies that confirm positive impacts of corporate social responsibility on indicators of firm value. Theoretical models provide possible mechanisms and economic foundations of why socially responsible actions can increase demand in different market structures. Responsible actions can be induced by external activists for fear of boycotts. Investors may prefer to hold shares of responsible firms when corporate giving can substitute for personal giving. A public good may be produced jointly with a private good. Models of general industry equilibrium find that demand increase due to the public good may come from the endogenous market effects. Companies in industries with entry barriers, such as health care, banking and finance, and high technology, are among top charitable givers. We discuss how corporate social responsibility is conducted in practice with

Studies on charitable contributions found considerable evidence that corporate social responsibility has a positive impact on shareholders. Some have suggested that low contribution levels of corporate social responsibility can improve a firm's value [4], yet too much corporate contributions can pull down shareholder wealth [5]. Most academic research has found that companies that are engaged in corporate social responsibility experience greater stock returns [6, 7] due to establishing greater trust among its employees, customers, and shareholders. The benefits from corporate social responsibility are especially prevalent during times of financial market uncertainty. Investors appear to reward companies that have a history of making charitable contributions with higher stock returns during the financial market crisis of 2008–2009 with between 4 and 7 percentage point returns to companies that exhibited higher

Theoretical investigations into corporate social responsibility explore mainly the fact that consumer demand for products increases with the public good. Empirical and experimental evidence on behavior beyond surveys confirm that consumers are willing to pay more for

companies in these industries as examples.

98 Firm Value - Theory and Empirical Evidence

corporate social responsibility intensity [8].

This demand shift induces corporate giving in the environment of imperfect competition. External activists may initiate boycotts successfully when a firm does not conform to responsible standards. Fearing a profit loss from boycotts, the firm will behave responsibly [13]. Consumers may choose joint production of the product and public good over producing separately when the former has a cost advantage [14]. Yet, corporate giving may result in the same equilibrium outcome as individual voluntary contribution [15]. Giving can be an outcome of oligopolistic competition [16]. When investors can choose a portfolio composed of shares of responsible firms and regular firms, those with a higher substitution parameter for corporate giving will buy shares of the responsible firm, and those with a lower parameter would prefer personal giving [17, 18]. The above approaches suffer various degrees of limitations. For example, the warm glow effect is an extra assumption that appeals to personal emotions of giving in addition to public consumption. Portfolio choice models assume fixed profits or arbitrary profit functions, which are not based on market foundations. Recently, models of general industry equilibrium were proposed. The incentive for corporate giving is embedded in the properties of market demand. Consumer loyalty brought by socially responsible actions results in a lower elasticity of demand. This can help a firm to lower the risk in profit stream and induce a premium to its product price [19]. Some private products are complementary to the public good. Stronger complementarity induces higher corporate giving [20].

A few practical reasons cause companies to engage in responsible activities. First, the tax code provides incentives for companies to make charitable contributions as doing so lowers their taxable income. Second, making charitable contributions improves the corporate image. 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. 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 valuable advertising and marketing from media exposure and positive public attention/recognition.

Given the reasons mentioned above for charitable contributions, which companies are more likely to be involved in corporate social responsibility? We expect that companies which are currently profitable have a greater incentive to provide contributions to social causes. In addition, it may also prove easier to make contributions when a company is profitable than when a company is losing money. The more competitive the industry, the less likely a company is to be profitable which reduces the likelihood of the corporation making charitable contributions. 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 in December 2017, the Tax Cut bill reduced the corporate tax rate to 20%.

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

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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

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

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].

probability of survival and lower cost of capital.

participation in corporate social responsibility [24].

financial markets experience negative shocks.

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 providing contributions to social causes.
