**3.3. Institutional void analysis**

**Figure 4.** Average Tobin's Q.

ficient β<sup>1</sup>

**3.2. Tobin's Q in cross-sectional regressions**

84 Firm Value - Theory and Empirical Evidence

*Tobin*" *s Qi*,*<sup>t</sup>* = *β<sup>0</sup>* + ∑

to 2014. Empirically, we estimate the following equations below:

To assess the CSR-firm value relation, we examine the impact of CSR on firm value, utilizing monthly Tobin's Q (TOBINW) in our analyses. We define Tobin's Q as the market value of equity minus the book value of equity plus the book value of total assets divided by total assets (e.g., [13]). To mitigate the effect of outliers on our observations, we winsorize Tobin's Q at the 2.5 and 97.5 percentiles. **Figure 4** shows that firms in both developed and emerging markets generally experience similar patterns of firm valuation over the time period of 2009

*Tobin*" *s Qi*,*<sup>t</sup>* = *<sup>0</sup>* + *<sup>1</sup> CSR Overalli*,*t*−*<sup>1</sup>* + *<sup>2</sup> Xi*,*t*−*<sup>1</sup>* + *<sup>i</sup>*,*<sup>t</sup>* (1)

here, *Tobin's Qi,t* is firm *i*'s Tobin's Q at time *t*. *CSR Overalli,t-1* is the overall index measure of CSR for firm *i* at time *t-1*. *CSRi,d,t-1* is the individual dimension index measures of CSR for firm *i* relative to dimension *d* (i.e., environment, social, governance) at time *t-1*. *Xi,t-1* is a vector of firm-level controls obtained from FactSet at time *t-1*, which include return on assets (LROAW), leverage-to-equity ratio (LLEVW), capital expenditure-to-asset ratio (LCAPXW), cash-to-asset ratio (LCASHW), year-on-year sales growth (LSGRW), advertising expenditure-to-total asset ratio (LADW), log of total assets (LASSET), and a dummy variable if the firm paid out dividends (LDDUM). In particular, we take special care to collect data on advertising expenditure as prior research has suggested that the valuation effect of CSR is moderated by firm visibility (e.g., [3, 52]). In order to mitigate the effect of outliers on our observations, we winsorize firm-level characteristics defined as ratios, namely, LROAW, LLEVW, LCAPXW, LCASHW, LSGRW, and LADW, at the 2.5 and 97.5 percentiles. We also include year dummies to account for yearly sources of heterogeneity. *εi,t* is the stochastic error term, assumed to be independent and identically distributed random variables with zero mean and constant variance. Similarly, we also include industry and country dummies to account for industry and country sources of heterogeneity. We are interested in the coef-

for Eq. (1) and βd for Eq. (2), which measures whether a firm's CSR drives changes

*β<sup>d</sup> CSRi,d,t−<sup>1</sup>* + *<sup>4</sup> Xi*,*t*−*<sup>1</sup>* + *<sup>i</sup>*,*<sup>t</sup>* (2)

*d*=1 *D*

Next, we explore how the CSR-valuation relation changes in the presence of different institutional voids related to financial, economic, and governmental institutions. To capture the complex and multidimensional nature of a country's institutional framework, we collect a variety of county-level measures to serve as proxies for the presence of institutional voids. We then utilize these measures to observe the sensitivity of the CSR-valuation relation to institutional voids in financial, economic, and governmental institutions (e.g., [21, 49]).

First, we collect measures related to economic development. These include the log of gross domestic product (GDP) per capita (GDPPC) from the Economist Intelligence Unit, Index of Economic Freedom (FREE), and the ratio of total investment to GDP (CINV) from the International Monetary Fund (IMF) to capture the rate of infrastructural development.

Second, we collect measures related to financial market development. This includes the ratio of bank deposits to GDP (GFDDB) from the International Financial Statistics and IMF, the ratio of the outstanding domestic private debt securities to GDP (GFDDP) from the Bank for International Settlements, and the ratio of stock market capitalization to GDP (GFDDS) from the Global Stock Markets Factbook and Standard and Poor's.

Lastly, we collect measures related to governmental institution development. We follow Low, Tee, and Kew [18] in utilizing the World Bank Governance Indexes (WBGI). The World Bank constructs indices from 441 variables taken from 35 different sources produced by 33 organizations (Kaufmann, Kraay and Mastruzz [53]). WBGI measures six dimensions of country governance, which include voice and accountability (WGIVA), government effectiveness (WGIGE), regulatory quality (WGIRQ), rule of law (WGIRL), control of corruption (WGICC), and political stability (WGIPS). **Table 3** reports the summary statistics of the key variables as well as these institutional void measures.

To explore the moderating effect of institutional voids on the CSR-valuation relation, we construct a series of dummy variables. For each measure, we sort countries according to their performance and assign them a value of 1 if they place in the lower 50th percentile for that month. The only exception is the ratio of total investment to GDP, where we assign countries a value of 1 if they place in the upper 50th percentile for that month. For each measure of institutional voids, we rerun our regression estimates with the inclusion of the dummy term and the interaction term of the dummy and CSR. This models the marginal valuation effect of CSR in the presence of institutional voids. Thus, we estimate the following equation:

$$\text{Tobin's } \mathbb{Q}\_{\downarrow t} = \beta\_o + \sum\_{d=1}^{D} \beta\_d \text{ CSR}\_{\downarrow, t-1} + \beta\_4 \text{ IFV}\_{\downarrow t} + \sum\_{u=1}^{\mathbb{N}} \beta\_u \text{ CSR}\_{\downarrow, u, t-1} \times \text{IFV}\_{\downarrow t} + \beta\_s \text{ X}\_{\downarrow t-1} + \varepsilon\_{\downarrow t} \tag{3}$$

here, *IFVi,t* is a dummy that takes a value of 1 if the country that firm i operates in scores in the lower 50th percentile for a given measure of institutional framework strength at time t and


This table displays both the full sample and subsample (i.e., developed/emerging market) summary statistics for key variables for the time period of 2009 to 2014.

CSR score is related to an increase in Tobin's Q of about 0.0029, representing an increase of

This table displays full sample regression estimates of 1- and 2-month forward Tobin's Q on CSR from 2009 to 2014. The main independent variables are the firm's (lagged) environment (E), social (S), and governance (G) scores. Refer to Appendix A for variable definitions. Regressions include industry and country dummies as indicated. Models 1 and 2 report estimates of Fama-MacBeth [54] regressions of 1-month forward Tobin's Q on aggregated and disaggregated CSR. Models 3 and 4 report estimates of Fama-MacBeth [54] regressions of 2-month forward Tobin's Q on aggregated and disaggregated CSR. Standard errors are clustered on year and country. T-Statistics are reported in parentheses. \*, \*\*,

**Model 1 Model 2 Model 3 Model 4**

(18.97) (17.91)

Can Corporate Social Responsibility Fill Institutional Voids?

http://dx.doi.org/10.5772/intechopen.76164

87

(−9.05) (−6.96)

(−2.87) (−1.53)

ESG 0.0001\*\* 0.0002\*\*\*

(2.59) (4.46) E 0.0007\*\*\* 0.0007\*\*\*

S −0.0003\*\*\* −0.0002\*\*\*

G −0.0001\*\*\* −0.0001

Obs. 134,823 134,823 126,749 126,749 R-Squared 0.71 0.71 0.70 0.70 Control Yes Yes Yes Yes Ind. dum Yes Yes Yes Yes Ctr. dum Yes Yes Yes Yes

Model 2 shows that the three subdimensions have different relations to the firm value. The environmental CSR has a statistically significant positive effect on firm value. These results are in line with prior findings (e.g., [2, 13, 14, 20, 51, 55]). Anecdotally, we also note that actors in the global business environment (i.e., policy-makers, activists, etc.) have long argued for the importance of environmental performance for shareholders, drawing significant attention to corporate environmental conscientiousness (e.g., the toughening of oil sands rules in

and America's continued push for carbon emission reduction6

representing an increase of about 1.4% from the mean of 1.63.

and \*\*\* indicate the significance level at the 10, 5, and 1%, respectively.

deviation increase in environmental CSR is related to an increase in Tobin's Q of about 0.02,

http://www.bloomberg.com/news/articles/2015-03-13/oil-sands-rules-get-tougher-as-alberta-seeks-less-damage,

http://www.bloomberg.com/news/articles/2015-03-07/china-pollution-film-vanishes-as-xi-makes-pledge-on-environ-

http://www.bloomberg.com/politics/articles/2015-03-19/obama-orders-40-reduction-in-carbon-emissions-by-u-s-agen-

, China's renewed pledge to fight smog post-release of the viral documentary "Under

). One standard

about 0.18% from the mean of 1.63.

**Table 4.** The relationship between CSR and firm value.

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**Table 3.** Summary statistics of the main variables.

*CSRi,n,t-1 × IFVi,t* is the individual dimension index measures of CSR for firm *i* relative to dimension *n* (i.e., environment, social, governance) interacted with the dummy.
