J. of Multi. Fin. Manag.

40 (2017) 33–46

Contents lists available at ScienceDirect

Journal of Multinational Financial

Management
journal homepage: www.elsevier.com/locate/econbase

How does corporate social responsibility contribute to

investment efficiency?
Marwa Samet a,∗ , Anis Jarboui b
a
Faculty of Economics and Management, Airport Road Km 4, BP 3018, Sfax, Tunisia
b
Higher Institute of Business Administration, Airport Road Km 4, BP 1013, Sfax, Tunisia

a r t i c l e i n f o a b s t r a c t

Article history: This paper examines the direct and indirect link between CSR performance and investment
Received 22 February 2017 efficiency. Our panel dataset consists of 398 European companies listed in the STOXX Europe
Accepted 8 May 2017 600 during 2009–2014. Our first result shows that firms with high CSR performance invest
Available online 11 May 2017
more efficiently. Then, we perform our analysis distinguishing two alternative situations:
underinvestment and overinvestment. Focusing on under-investing firms, we highlight that
Jel classification: CSR performance enhances their investment levels through mitigating information asym-
G310 Capital Budgeting
metry. In contrast, for over-investing firms, CSR performance reduces investment excess
Fixed Investment and Inventory Studies
through mitigating free cash flow problems. Overall, these findings suggest a role for CSR
Capacity
in indirectly ameliorating firm-level investment efficiency through helping firms address
Keywords: agency problems and information asymmetry problems.
Corporate social responsibility © 2017 Elsevier B.V. All rights reserved.
Investment efficiency
Agency costs
Information asymmetry
STOXX Europe 600

1. Introduction

In perfect financial market, where investment decisions are independent from financial situation, firms should carry out
all positive net present value projects and forgo all negative net present value projects (Modigliani and Miller, 1958). In order
to maximize their values, companies invest until the marginal benefit equals the marginal cost of projects (Hayashi, 1982;
Abel, 1983). Nevertheless, a large body of literature contradicts this assumption (Hubbard, 1998; Stein, 2003; Chen et al.,
2014). Capital-market frictions may prevent managers from making better investment decisions. In this case, companies
deviate from their optimal levels of investment.
Prior literature suggests two main explanations as to why firms deviate from predicted investment levels: namely, agency
conflicts of free cash flow (Jensen, 1986; Guariglia and Yang, 2016) and information asymmetry (Myers and Majluf, 1984;
Biddle et al., 2009; Gomariz and Ballesta, 2014). Each explanation contributes to different distortion in the investment
decision-making process. Whereas the free cash flow problems can lead to overinvestment problems, the existence of
asymmetric information among various stakeholders is commonly related to underinvestment problems. Under agency
theory, there are various control mechanisms, which help to alleviate the opportunistic behavior of managers and to mitigate
asymmetric information, such as CSR activities (Waddock and Graves, 1997; Eccles et al., 2012; Lopatta et al., 2015). Thus,
CSR strategies may be used to monitor both underinvestment and overinvestment problems.

∗ Corresponding author.
E-mail addresses: marwasamet@gmail.com (M. Samet), anisjarboui@yahoo.fr (A. Jarboui).

http://dx.doi.org/10.1016/j.mulfin.2017.05.007
1042-444X/© 2017 Elsevier B.V. All rights reserved.
34 M. Samet, A. Jarboui / J. of Multi. Fin. Manag. 40 (2017) 33–46

Several researches have explored various beneficial aspects of CSR and have found evidence that CSR is associated with
higher firm value (Lin et al., 2009), lower financial constraints (Cheng et al., 2014), lower investment-cash flow sensitivity
(Attig et al., 2014), improved information quality (Cho et al., 2013; Cui et al., 2015 and Lopatta et al., 2015) and reduced
agency conflicts (Waddock and Graves, 1997; Harjoto and Jo, 2011 and Eccles et al., 2012). Building on this stream of research,
we explore the extent to which CSR involvement may influence investment decisions.
The main purpose of this study is to document the relation between corporate investment decisions and a firm’s engage-
ment in CSR activities in European context. Specifically, we aim to examine whether, and in what ways, CSR performance
influences investment efficiency. In other words, we aim to identify the channels through which CSR performance contributes
to the efficient allocation of capital.
While existing research examines only the direct link between CSR performance and investment efficiency (Benlemlih
and Bitar, 2016), this study focuses on the direct and indirect link between CSR performance and investment efficiency.
According to Baron and Kenny (1986), we develop a methodology to study how CSR performance affects firm-level invest-
ment efficiency. Does it manifest through reducing agency problems of free cash flow or through reducing asymmetric
information between insiders and outsiders?
We construct a panel datasets for non-financial listed companies in Europe STOXX 600, covering the period 2009–2014.
Our first result shows that firms with higher CSR performance invest more efficiently. Then, we perform our analysis distin-
guishing two alternative situations: underinvestment and overinvestment. Focusing on under-investing firms, we highlight
that CSR performance enhances their investment levels through mitigating information asymmetry problems. In contrast,
for over-investing firms, CSR performance reduces investment excess through mitigating free cash flow problems.
We contribute to the debate on whether CSR involvement is value-increasing by showing that high CSR performance
positively affects investment efficiency. In addition, we contribute to the literature by demonstrating that one mechanism
linking CSR performance and investment efficiency is a reduction of capital-market imperfections such as information
asymmetry and agency problems.
The remainder of the paper is organized as follows. Section 2 contains the literature review and hypothesis development.
Section 3 describes in detail the research design with the sample, the models and measures of variables. Section 4 presents
the empirical results. Section 5 concludes the paper.

2. Previous literature and hypotheses development

2.1. CSR performance and investment efficiency

According to neo-classical theory, firms should carry out all positive net present value projects and forgo all negative
net present value projects (Modigliani and Miller, 1958). In order to maximize their values, companies invest until the
marginal benefit equals the marginal cost of projects (Hayashi, 1982; Abel, 1983). Nevertheless, a large body of literature
contradicts this assumption (Hubbard, 1998; Stein, 2003; Chen el al. 2014). Capital-market frictions may prevent managers
from undertaking all profitable investments. In this case, companies may deviate from their optimal levels of investment
and thus suffer from two inefficient scenarios, underinvestment and overinvestment. The underinvestment scenario occurs
when firms reject some profitable projects due to funds constraints. The overinvestment scenario occurs when self-interested
managers undertake unprofitable projects in order to expropriate firms ‘resources.
Given that financially constrained firms are more likely to face underinvestment problems (Hubbard, 1998; Campello
et al., 2010), CSR performance may play a fundamental role in strategic investment decisions by influencing the firm s’
financial constraints. The adoption of CSR activities that leads to superior CSR performance contributes to facilitate the
access to external finance (Cheng et al., 2014), hence allowing firms to undertake all desired investments (Stein, 2003).
Consistent with this, El Ghoul et al. (2011, 2014) show that firms with better CSR scores exhibit cheaper equity financing.
This is especially true for companies that improve their responsible employee relations, environmental policies and product
strategies. Dhaliwal et al. (2011) further examine the benefit associated with the voluntary disclosure of CSR activities.
They find that firms with superior social responsibility performance enjoy a reduction in the cost of equity capital, while
attracting dedicated institutional investors and analyst coverage. Sharfman and Fernando (2008) point out that firms who
develop a strategy that improves their environmental risk management are rewarded by the financial markets. The latter
accept lower risk premiums on equity, which can result in reduced cost of capital. Similarly, Nandy and Lodh (2012) establish
that more eco-friendly firms, defined as firms with higher environment score get a favorable loan contract than firms with
lower environment score. Therefore, CSR can be a determinant of bank debt’s cost. Recently, El Ghoul et al. (2016a) posit
that CSR performance is associated with improved access to finance, greater investment, lower default risk and longer trade
credit period in countries with weaker market institutions.
Attig et al. (2014) provide evidence that CSR performance lead to decrease in investment-cash flow sensitivity. The findings
of this study stress the relevance of CSR in ameliorating firm-level investment efficiency. Lately, Benlemlih and Bitar (2016)
highlight that the implementation of CSR activities helps to reduce investment inefficiency. More precisely, dimensions that
are related to primary stakeholders such as employee relations, diversity, environment and product characteristics, are the
most relevant in improving investment efficiency.
Taken together, the discussion above suggests that CSR performance plays a prominent role in strategic investment
decisions. Firms with higher CSR performance invest more efficiently. According to these arguments, our first hypothesis is:
 M. Samet, A. Jarboui / J. of Multi. Fin. Manag. 40 (2017) 33–46 35

Informaon
(H2)
asymmetry

CSR Investment Underinvestment

(H1)
inefficiency Overinvestment

(H3) Agency Costs

Fig. 1. CSR and investment inefficiency.

H1: CSR performance reduces investment inefficiency

2.2. CSR performance, information asymmetry and investment efficiency

Jensen and Meckling (1976), Myers and Majluf (1984), Myers (1984) develop a framework for the role of information
asymmetry in investment decision-making process through information problems, such as adverse selection and moral
hazard. Adverse selection appears when the market is less well-informed about the firm’s or the project’s quality. In this
case, suppliers of capital may ratio the capital provided or raise its cost (Stiglitz and Weiss, 1981). This can oblige firms to
abandon some profitable investment due to financial constraints, with the consequence of underinvestment problems. Moral
hazard appears when managers deploy firm resources for their own benefit by making projects that may not be suitable for
shareholders, with the consequence of overinvestment problems.
Ascioglu et al. (2008) report that firms with high information asymmetry have greater investment-cash flow sensitiv-
ity, especially when they use the probability of informed trade to classify firms as constrained. Their results are consistent
with Mansour (2014), who confirms that firms with more pronounced moral hazard problem are deemed to exhibit higher
investment-cash flow sensitivity. Recently, Chowdhury et al. (2016) find that the implementation of SOX which is expected
to improve information quality result in lower investment-cash flow sensitivity. Other studies analyze the effect of infor-
mational asymmetry on investment efficiency. Firms with high-quality financial information are found to deviate less from
their optimal investment levels (McNichols and Stubben, 2008; Biddle et al., 2009; Chen et al., 2011; Gomariz and Ballesta,
2014). High levels of transparency facilitate the efficient allocation of capital through allowing managers to make better
investment decisions.
From the agency theory perspective, there are various control mechanisms to attenuate information risk. CSR can be
used as a bonding mechanism to improve firms’ information quality. As Cho et al. (2013) suggest, CSR performance plays
a positive role for investors by reducing information asymmetry and regulatory action may be appropriate to alleviate the
adverse selection problem faced by less- informed investors. Attig et al. (2013) point out that CSR performance conveys
important non-financial information, which can lead to lower financing costs resulting from higher credit ratings. Recent
supportive evidence on the role of CSR in enhancing firms’ information quality is provided by Lopatta et al. (2015). The latter
demonstrate that CSR activities can increase a company’s trust-worthiness via improving its moral standards, earnings
quality and transparency. This increase in turn helps to mitigate information asymmetry. Indeed, firms with strong CSR
performance induce managers to produce high quality financial report and reduce earnings management (Kim et al., 2012).
Employing an extensive US sample, Cui et al. (2015) find an inverse association between information asymmetry and a
firm’s engagement of CSR activities. They interpret these results as supporting the stakeholders-theory that considers CSR
engagement as a vehicle to build and maintain firm reputation. This is consistent with Attig et al. (2016) and Boubakri et al.
(2016), who shed light on the role of internationalization and cross-listing in influencing firms’ CSR activities. As they enter
foreign markets, firms are more likely to engage in CSR investments to strengthen their reputation. In fact, multinational
firms are associated with increased media attention, which positively affects CSR initiatives (El Ghoul et al., 2016b).
Based on the above literature, we posit that the negative impact of CSR performance on investment inefficiency problems
may be realized through reducing information asymmetry. Specifically, the existence of asymmetric information between
the different firms’ stakeholders is commonly associated to underinvestment problems. Stated formally, as shown in Fig. 1,
we hypothesize that:
H2: Reducing information asymmetry has a mediating effect on the relationship between CSR performance and
underinvestment problems
36 M. Samet, A. Jarboui / J. of Multi. Fin. Manag. 40 (2017) 33–46

2.3. CSR performance, agency costs and investment efficiency

Agency problems arise when managers or controlling shareholders divert the firm’s resources in ways that benefit them-
selves but which are not in the best interests of the other shareholders, including minority shareholders (Jensen and Meckling,
1976; Shleifer and Vishny, 1997; Denis and McConnell, 2003; Hermalin, 2005; Gillan, 2006 and Djankov et al., 2008). Agency
conflicts between management and shareholders, as well as between controlling shareholders and minority shareholders
have been found to significantly affect firms’ investment decisions. (Myers and Majluf, 1984; Jensen, 1986; Fazzari et al.,
1988; Jiang et al., 2010; Luo et al., 2015).
Investment inefficiency, which can be captured by investment-cash flow sensitivity, appears to be especially severe
for firms with substantial agency problems. Goergen and Renneboog (2001) analyze whether the investment-cash flow
sensitivity differs for companies with varying degrees of ownership control. They illustrate that the presence of institutional
blockholders contributes to reduce suboptimal investment by means of effective monitoring. Degryse and De Jong (2006)
point out that the sensitivity of investment expenditures to internal funds can be attributed to overinvestment resulting
from the abuse of managerial discretion. As for Andrén and Jankensgård (2015), they conclude that the investment-cash flow
sensitivity for large firms increases in the abundance period, suggesting that this relationship is driven by agency problems
related to free cash flow. This is in line with Pawlina and Renneboog (2005), who provide strong support for the free cash flow
theory as the main source of the observed investment-cash flow sensitivity. Lately, Guariglia and Yang (2016) document, in
the Chinese market, a strong evidence of investment inefficiency resulting from agency problems. Managers or Controlling
shareholders expropriate firm’s resources by making entrenched and self-interested decisions. As a result, they prefer to
spend the free cash flow on projects with negative net present value rather than paying dividends to shareholders, resulting
in overinvestment problem.
The conflict resolution hypothesis suggests that corporate social responsibility investments are made to reduce conflicts
of interest among various stakeholders to maximize the shareholders’ wealth (Jensen, 2001; Calton and Payne, 2003 and
Scherer et al., 2006). The adoption and implementation of CSR strategies limit the amount of free cash flow available, which
can be used by self-interested mangers to undertake unprofitable projects (Jensen, 1986). The monitoring role of CSR is also
supported by the good management hypothesis of Waddock and Graves (1997), who posit that investments in CSR activities
improve key stakeholder relations, such as community relations and employee relations.
Recently, a line of research has been developed on CSR’s role in mitigating agency problems. Borghesi et al. (2014)
investigate the factors that spur firm to make socially responsible investments. They find that firms with greater free cash
flow demonstrate higher levels of CSR. Harjoto and Jo (2011) prove that firms use governance mechanisms, along with CSR
engagement, to resolve conflicts between mangers and non-investing stakeholders, which can lead to better firm value. Eccles
et al. (2012) shed light on the organizational implications of integrating social and environmental issues into a company’s
strategy. They maintain that high sustainability companies are more likely to establish a formal stakeholder engagement
process that limits the likelihood of short-term opportunistic behavior. Last but not least, El Ghoul et al. (2016c) find that CSR
underperformance concentrates in family firms with greater agency problems, consistent with the expropriation hypothesis.
Based on this discussion, we postulate that the negative impact of CSR on financial investment inefficiency problems
may be realized through mitigating agency costs of free cash flow. Specifically, the free cash flow problems are commonly
related to overinvestment problems. Stated formally, as shown in Fig. 1, we hypothesize that:
H3: Reducing agency costs has a mediating effect on the relationship between CSR performance and overinvestment
problems.
3. Research design
3.1. Data and sample selection

The sample in this study consists of European companies listed in STOXX Europe 600 index between 2009 and 2014. The
sample includes 15 supersectors and 17 countries. Firms in the financial sector, such as banks and insurance companies,
are discarded from the study. We drop also firms with missing data. The final panel covers 397 firms, which corresponds to
2382 firm-year observation.
Table 1 summarizes the sample composition. Panel A presents the distribution of firms across sectors. Three sectors,
industrials, consumer goods and consumer services represent a large portion of the total number of firms, although the
remaining sectors are also populated. Panel B presents the distribution of firms across countries. Approximately 60 percent
of the sample originates from United Kingdom, France, Germany and Switzerland. For our empirical analysis, we extract
accounting and financial data from the DATASTREAM database. Data concerning CSR performance derive from Thomson
Reuters- ASSET 4. In order to alleviate the potential effects of extreme observations, we winsorize the data at the 1th and
99th percentile levels.

3.2. Variables measures

3.2.1. Dependent variable: investment inefficiency

Similar to Gomariz and Ballesta (2014), we measure investment inefficiency as deviation from the expected level of
investment, Therefore, underinvestment phenomena will exist when firms invest below their optimal investment, while
 M. Samet, A. Jarboui / J. of Multi. Fin. Manag. 40 (2017) 33–46 37

Table 1
Sample composition.

Panel A. Sample distribution across sectors

ICB code Industry N %

0001 Oil & Gas 22 5.54%

1000 Basic Materials 41 10.33%
2000 Industrials 114 28.72%
3000 Consumer Goods 63 15.87%
4000 Health Care 32 8.06%
5000 Consumer Services 64 16.12%
6000 Telecommunications 18 4.53%
7000 Utilities 23 5.79%
9000 Technology 20 5.04%
Total 397 100%

Panel B. Sample distribution across countries

Country N % Country N %

Austria 3 0.76% Luxembourg 2 0.50%

Belgium 9 2.27% Netherlands 19 4.79%
Denmark 13 3.27% Norway 10 2.52%
Finland 14 3.53% Portugal 3 0.76%
France 62 15.62% Spain 16 4.03%
Germany 44 11.08% Sweden 25 6.30%
Greece 2 0.50% Switzerland 30 7.56%
Ireland 5 1.26% UK 124 31.23%
Italy 16 4.03%

overinvestment phenomena will exist when firms invest above their optimal investment. We estimate the deviation from
the expected investment following the model developed by Chen et al. (2011).

Investmenti,t = ␤0 + ␤1 NEGi,t−1 + ˇ2 SalesGrowthi,t−1 + ˇ3 NEGi,t−1 ∗ SalesGrowthi,t−1 + ␧i,t

Where Investmenti,t is the total investment of firm i in year t, defined as the net increase in tangible and intangible assets
and scaled by lagged total assets. Sales growthi,t -1 is the percentage of change in sales of firm i from year t − 2 to year t.
NEGi,t-1 is a dummy variable that takes value one for negative sales growth, and zero otherwise.
We estimate the investment model for each industry-year. The residuals from the regression capture the deviation from
the expected level of investment. We use these residuals as our main proxy for investment inefficiency. A positive residual
signifies that real investment is more than expected, representing an overinvestment scenario. In contrast, a negative residual
signifies that a company is making investment at a lower level than expected according to sales growth, representing an
underinvestment scenario. Our dependent variable (INEFF V) is the absolute value of the residuals. Thereby a high value
reflects a high level of investment inefficiency.

3.2.2. Independent variable: CSR performance

For our analysis, we construct an aggregated CSR index, as Cheng et al. (2014) and Attig et al. (2016), by using the
annual environmental, social and corporate governance scores obtained from Thomson Reuters-ASSET 4. In the absence of
theoretical guidance about how to weight each measure, we follow the convention established by Sharfman (1996), Waddock
and Graves (1997). We assign equal importance to each of the three pillars. Thus, the variable CSR is the equally weighted
average of the environmental, the social and the governance score for each focal firm for every year.

3.2.3. Mediating variables

3.2.3.1. Information asymmetry. As there is no general agreement on the “best” measure of asymmetric, we choose one of
the most commonly used in the literature: the spread ratio. In line with Kanagaretnam et al. (2005), Cheng et al. (2011) and
Cho et al. (2013), we calculate the spread (SPREAD) by annually averaging the ratio of the daily bid-ask spread to the closing
price.

3.2.3.2. Agency costs. Conflicts of interest between managers and shareholders are especially severe when the company
generates substantial free cash flow (Jensen, 1986). Specifically, the availability of free cash flow under management control
will induce them to invest in non value-maximizing projects, creating an over-investment problem, and consequently
increasing the costs incurred by shareholders. Motivated by Chi and Lee (2010), we use the free cash flow as our proxy for
potential agency costs. We employ the free cash flow measure of undistributed cash flow established by Lehn and Poulsen
(1989). Thus, Free Cash Flow (FCF) is defined as operating income minus the sum of the following four components: income
taxes, interest expenses on debt, common stock dividend and preferred stock dividend. We scale this free cash flow measure
by the firm’s book value of assets.
38 M. Samet, A. Jarboui / J. of Multi. Fin. Manag. 40 (2017) 33–46

3.2.4. Control variables

Following previous researches, we include several control variables in our models. As proxy for age (AGE), we use the
natural the natural logarithm of the years since firm’s inception. Institutional ownership (INS) is measured as the percentage
of total shares in issue held by investment banks or institutions. We add also dummy variables to control for country, industry
and year fixed effects (COUNRTY, INDUSTRY and YEAR).

3.3. Model specification

Our point of departure in the multivariate analysis is the following model (1) for estimating the relationship between
CSR performance and investment inefficiency:


9

18

35

INEFF V i,t = ˛0 + ˛1 CSR i,t + ˛2 INS i,t + ˛3 AGE i,t + ˛j YEAR i,t + ˛K INDUSTRY i,t + ˛L COUNTRY i,t + ␧i,t
j=4 K =10 L=19

Where INEFF V is the investment inefficiency; CSR is the corporate social responsibility performance; INS represents insti-
tutional ownership; AGE represents firm age; YEAR, INDUSTRY and COUNTRY stand respectively for year, industry and
country fixed effects; ␧is an error term.
We perform our analysis of inefficient investment distinguishing two alternative situations: underinvestment and over-
investment. In the underinvestment scenario, we consider as dependent variable (UNDER) the negative residuals in the
investment model (the negative deviations from the expected investment). Thus, high value (i.e., close to zero) indicate
low underinvestment problem, that is, low inefficiency. In the overinvestment scenario, we consider as dependent variable
(OVER) the positive residuals in the investment model (the positive deviations from the expected investment). Thus, high
value indicates high overinvestment problem, that is, high inefficiency.
According to our first hypothesis, the coefficient on CSR is expected to be negative when the dependent variable is either
investment inefficiency or overinvestment, and it is expected to be positive when the dependent variable is underinvestment.
In the underinvestment scenario, the mediating role of information asymmetry is tested using the mediation procedure
outlined by Baron and Kenny (1986). At a first stage, the dependent variable (UNDER) is regressed on the independent
variable (CSR). At the second stage, the mediator (SPREAD) is regressed on the independent variable (CSR). Finally, the
dependent variable (UNDER) is regressed on the independent variable (CSR) and the mediator (SPREAD). Therefore, to test
our second hypothesis, we formulate the conceptual framework as the following three models:


9

18

35
UNDER i,t = ˛0 + ˛1 CSR i,t + ˛2 INS i,t + ˛3 AGE i,t + ˛j YEAR i,t + ˛K INDUSTRY i,t + ˛L COUNTRY i,t + ␧i,t
j=4 K =10 L=19


9 
18 
35
SPREADi,t = ˛0 + ˛1 CSR i,t + ˛2 INS i,t + ˛3 AGE i,t + ˛j YEAR i,t + ˛K INDUSTRY i,t + ˛L COUNTRY i,t + ␧i,t
j=4 K =10 L=19


10
UNDER i,t = ˛0 + ˛1 CSR i,t + ˛2 SPREADi,t + ˛3 INS i,t + ˛4 AGE i,t + ˛j YEAR i,t
j=5


19 
36
+ ˛K INDUSTRY i,t + ˛L COUNTRY i,t + ␧i,t
K =11 L=20

Where UNDER is the underinvestment; CSR is the corporate social responsibility performance; SPREAD is the bid-ask spread;
INS represents institutional ownership; AGE represents firm age; YEAR, INDUSTRY and COUNTRY stand respectively for year,
industry and country fixed effects; ␧ is an error term.
In the overinvestment scenario, we propose the following three multiple regression analyses to estimate the mediating
role of agency costs of free cash flow.


9 
18 
35

OVER i,t = ˛0 + ˛1 CSR i,t + ˛2 INS i,t + ˛3 AGE i,t + ˛j YEAR i,t + ˛K INDUSTRY i,t + ˛L COUNTRY i,t + ␧i,t
j=4 K =10 L=19


9

18

35
FCF i,t = ˛0 + ˛1 CSR i,t + ˛2 INS i,t + ˛3 AGE i,t + ˛j YEAR i,t + ˛K INDUSTRY i,t + ˛L COUNTRY i,t + ␧i,t
j=4 K =10 L=19
 M. Samet, A. Jarboui / J. of Multi. Fin. Manag. 40 (2017) 33–46 39

Table 2
Descriptive statistics.

Panel A. Summary statistics of the sample

Variable Mean Min Q1 Median Q3 Max Std.Dev

INEFF V 0.087 0.000 0.028 0.058 0.105 0.648 0.099

OVER 0.113 0.000 0.026 0.065 0.131 0.648 0.140
UNDER −0.073 −0.299 −0.095 −0.056 −0.030 0.000 0.060
CSR 72.735 6.857 65.650 78.350 86.083 96.083 18.299
FCF 0.033 −0.101 0.009 0.031 0.053 0.169 0.042
SPREAD 0.182 0.033 0.077 0.112 0.180 1.605 0.235
INS 5.008 0.000 0.000 0.000 8.000 67.000 7.788
AGE 4.004 0.693 3.296 4.190 4.762 6.475 0.939

Panel B. Average value of variables across countries

Variable INEFF V CSR FCF SPREAD INS AGE

Austria 0.039 61.414 0.011 0.183 2.111 4.441

Belgium 0.065 77.903 0.015 0.121 1.315 4.502
Denmark 0.103 65.660 0.058 0.203 3.577 3.881
Finland 0.067 80.534 0.010 0.148 4.012 3.862
France 0.067 75.732 0.024 0.131 6.083 4.126
Germany 0.080 63.641 0.022 0.137 3.216 3.936
Greece 0.103 56.265 0.034 0.329 6.250 4.074
Ireland 0.071 62.743 0.014 0.240 7.033 3.834
Italy 0.085 79.491 0.012 0.489 1.563 4.102
Luxembourg 0.061 68.092 0.018 0.116 0.000 2.574
Netherlands 0.090 73.711 0.036 0.111 5.675 3.825
Norway 0.115 64.094 0.021 0.151 2.267 3.391
Portugal 0.064 72.996 −0.008 0.194 0.944 4.480
Spain 0.068 71.970 0.014 0.596 2.510 3.662
Sweden 0.093 74.676 0.030 0.181 7.540 4.082
Switzerland 0.095 66.704 0.045 0.155 3.333 3.949
United Kingdom 0.102 75.803 0.048 0.153 6.565 4.072


10

19
OVER i,t = ˛0 + ˛1 CSR i,t + ˛2 FCF i,t + ˛3 INS i,t + ˛4 AGE i,t + ˛j YEAR i,t + ˛K INDUSTRY i,t
j=5 K =11


36
+ ˛L COUNTRY i,t + ␧i,t
L=20

Where OVER is the overinvestment; CSR is the corporate social responsibility performance; FCF is the free cash flow; INS
represents institutional ownership; AGE represents firm age; YEAR, INDUSTRY and COUNTRY stand respectively for year,
industry and country fixed effects; ␧ is an error term.

4. Results and discussion

4.1. Descriptive statistics

Table 2 provides descriptive statistics for the regression variables. Panel A presents descriptive statistics for the entire
sample, including the mean, minimum, first quartile, median, third quartile, maximum and standard deviation. Investment
inefficiency (INEFF V) shows a mean of 0.087. Separately, in an underinvestment scenario the mean value is −0.073, while
in an overinvestment scenario the mean value is 0.113. The figures are consistent with prior research (Gomariz and Ballesta,
2014). The CSR has a mean value of 72.735. The standard deviation of CSR is 18,299, implying that significant variation exists
across firms regarding the CSR involvement. Specifically, the distribution ranges from 6.857 for the least socially responsible
firm to 96.083 for the most socially responsible firm. Furthermore, the firms in our sample have an average a SPREAD of
0.182 and a FCF of 0.033. The institutional ownership percentage (INS) shows low ownership level (mean 5%).
Panel B presents the average values of the regression variables for each of the European countries represented in our
sample. The country factor plays a role for many variables. In particular, CSR index is clearly different from one country to
the next. Finland shows the highest index with an average score of 80.534, followed by Italy (79,491).
40 M. Samet, A. Jarboui / J. of Multi. Fin. Manag. 40 (2017) 33–46

Table 3
CSR performance and investment inefficiency.

INEFF V

Model 1 Model 1a Model 1b Model 1c

Constant 0.0758*** 0.0781*** 0.0717*** 0.0620***

(7.72) (8.24) (7.60) (6.87)
CSR −0.0002**
(−2.53)
Environmental −0.0002***
(−3.28) −0.0001***
Social (−2.97)
Governance 5.41e-05
(1.22)
INS 0.0003*** 0.0003*** 0.0003*** 0.0002**
(2.71) (2.79) (2.82) (2.25)
AGE −0.0047*** −0.0045*** −0.0047*** −0.0052***
(−3.68) (−3.57) (−3.71) (−3.92)
Year FE Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes
Country FE Yes Yes Yes Yes

Observations 2382 2382 2382 2382

R-squared 0.0630 0.0665 0.0660 0.0570

The dependent variable is investment inefficiency. CSR is the annual corporate social responsibility performance. Environmental is the annual environmental
performance of a corporation. Social is the annual social performance of a corporation. Governance is the annual corporate governance performance. INS
is institutional ownership. AGE is firm age. All the estimates have been carried out using cross-sectional time-series FGLS regression. T-statistic values are
in the brackets. Statistical significance at the 10%, 5% and 1% levels is indicated in bold face and by *, ** and ***, respectively.

4.2. Regression results

The results estimating Model (1), which is developed to analyze whether CSR performance either ameliorates or distorts
firm-level investment efficiency, are presented in Table 3. We find a strong support for our first hypothesis: the estimated
coefficient of CSR is negative and statistically significant (␣ = −0.0002, p < 5%), suggesting that CSR performance has a negative
effect on investment inefficiency. This finding is consistent with our expectation: firms with high CSR performance are
typically characterized by reduced investment-cash flow sensitivity, low financial constraints, better access to finance and
high management quality, which contributes to alleviate the inefficiency of investment. In other words, CSR performance
facilitates the efficient allocation of capital. Our evidence is in line with those reported by Benlemlih and Bitar (2016).
With regard to the control variables, firm age is negatively and significantly related to investment inefficiency
(␣ = −0.0047, p < 1%), indicating that older firms invest more efficiently than younger firms. In contrast, institutional own-
ership is positively and significantly related to investment inefficiency (␣ = 0.0003, p < 1%). This positive relation can be
explained in terms of low institutional ownership levels (mean of 5%). Such institutional investors are often referred to as
myopic, or transient investors, who exhibit a strong preference for current earnings (Bushee, 1998; Bushee, 2001). Given
that the role of institutional investors is likely to differ depending on their characteristics (Agnes Cheng and Reitenga, 2009
and Koh, 2003), short-term oriented institutional investors have few incentives to engage in effective monitoring. In this
case, the likelihood that firms deviate from their optimal level of investment increases (Attig et al., 2012).
As we mentioned earlier, CSR performance reflects a balanced view of a company’s performance in three areas: the
environmental, the social and the corporate governance performance. The environmental pillar reflects how well a company
uses best management practices to avoid environmental risks and capitalize on environmental opportunities. It covers three
categories including emission reduction, product innovation and resource reduction. The social pillar is a reflection of the
company’s reputation and the health of its license to operate. It covers seven categories including product responsibility,
diversity and opportunity, employment quality, health and safety, training and development, community and human rights.
The corporate governance pillar reflects a company’s capacity, through its use of best management practices, to direct
and control its rights and responsibilities through the creation of incentives, as well as checks and balances. It covers four
categories including vision and strategy, board function, board structure and compensation policy.
To better understand which dimensions have a consistent impact on investment decisions, we disaggregate the CSR
performance into its components and we estimate separate models for each one. The results are reported in Table 3. We find
that environmental and social performances have a negative and significant effect on investment inefficiency. However, the
corporate governance performance exhibits an insignificant effect. The results reveal that the key role of CSR in improving
investment efficiency is driven by both the environmental and the social dimension.
As an extension to our research, we divide our sample into underinvestment scenario (negative deviation with regard to
expected investment) and overinvestment scenario (positive deviation with regard to expected investment). In firms that
underinvest, we test whether CSR performance may mitigate underinvestment problems through reducing information
asymmetry. In firms that overinvest, we test whether CSR performance may mitigate overinvestment problems through
reducing free cash flow problems.
 M. Samet, A. Jarboui / J. of Multi. Fin. Manag. 40 (2017) 33–46 41

Table 4
CSR performance, information asymmetry and underinvestment.

UNDER SPREAD UNDER

Model 2 Model 3 Model 4

Constant −0.0668*** 0.4281*** −0.0660***

(−7.09) (17.98) (−7.04)
CSR 0.0002*** −0.0027*** -0.761e-04
(3.42) (−24.37) (−1.04)
SPREAD −0.0052**
(−2.19)
INS 0.956e-04 0.851e-04 0.888e-04
(0.77) (0.08) (0.71)
AGE 0.0035*** 0.0102 0.0037***
(3.04) (1.21) (3.21)
Year FE Yes Yes Yes
Industry FE Yes Yes Yes
Country FE Yes Yes Yes

Observations 1494 1494 1494

R-squared 0.1208 0.2343 0.1217

Models (2) and (4): The dependent variable is underinvestment. Model (3): The dependent variable is the bid-ask spread. CSR is the annual corporate social
responsibility performance. SPREAD is the bid-ask spread. INS is institutional ownership. AGE is firm age. All the estimates have been carried out using
cross-sectional time-series FGLS regression T-statistic values are in the brackets. Statistical significance at the 10%, 5% and 1% levels is indicated in bold
face and by *, ** and ***, respectively.

Table 4 presents the results estimating the mediating role of information asymmetry in the relationship between CSR
performance and underinvestment problems. Following the procedure used by Baron and Kenny (1986), three conditions
must be fulfilled to prove the existence of mediation process: (i) in the first regression, the independent variable (CSR) must
significantly predict the dependent variable (UNDER); (ii) in the second regressionl, the independent variable (CSR) must
significantly predict the mediator (SPREAD) and (iii) in the third regression, the mediator (SPREAD) must significantly predict
the dependent variable (UNDER). Partial mediation is revealed when the effect of the independent variable on the dependent
variable is less in the third regression than in the first. Perfect mediation is revealed if the independent variable has no effect
when the mediator is controlled. In Model (2), the estimated coefficient of CSR is positive and significant (␣ = 0.0002, p < 1%),
as predicted. The result suggests that higher CSR performance reduces underinvestment problems. More precisely, CSR is a
mechanism that helps companies to enhance their investments and thus move towards their optimal levels. This evidence
seems to support the view that CSR performance plays an important role in improving firms ‘ability to access finance (Cheng
et al., 2014) and to undertake profitable projects (Benlemlih and Bitar, 2016). Model (3) shows that the coefficient on CSR
is negative and significant (␣ = − 0.0027, p < 1%), indicating that an increase in CSR performance leads to a decrease in
information asymmetry. This result is in line with Cui et al. (2015), Cho et al. (2013) and Lopatta et al. (2015), who report
that firm’s CSR engagement makes information environment more transparent.
Model (4) shows that the coefficient on SPREAD is negative and significant (␣ = −0.0052, p < 5%), claiming that the asym-
metrical distribution of information between managers and stakeholders decreases the level of investment. Specifically,
when information environment is more opaque, the cost of external funds often exceeds the cost of internal funds. In
this circumstance, firms are obliged to forgo some profitable projects due to their difficulties in raising external capital,
with subsequent underinvestment (Guariglia et al., 2016 and Chen et al., 2011). However, the significant effect of CSR on
underinvestment is tenuous (␣ = −0.761e-04, p > 10%) when the SPREAD’s effect is controlled
In summary, these results meet the requirements of identifying a perfect mediation, according to Baron and Kenny
(1986). Therefore, our second hypothesis (H2) that reducing information asymmetry has a mediating effect on the relation-
ship between CSR performance and underinvestment problems is strongly supported. That is, the negative effect of CSR
performance on underinvestment problems follows the path through mitigating information asymmetry.
Table 5 reports the results of estimating Model (5), (6) and (7), developed to capture the mediating role of agency costs
of free cash flow in the relationship between CSR performance and overinvestment. In Model (5), the coefficient on CSR is
negative and statistically significant (␣ = −0.0006, p < 1%). In firms when investment is higher than expected, CSR performance
decreases investment excess. Hence, high CSR involvement diminishes investment inefficiency related to overinvestment.
Model (6) focuses on the effect of CSR performance on the FCF. The estimated coefficient of CSR is negative and statistically
significant (␣ = −0.0001, p < 1%), meaning that CSR performance attenuates the free cash flow problems. the adoption of CSR
strategies limits the amount of free cash flow available, which can be used by self-interested mangers to undertake non-value
adding projects (Jensen, 1986). Model (7) examines whether the free cash flow has a significant impact on overinvestment.
The estimated coefficient of FCF is positive and statistically significant (␣ = 0.2318, p < 1%), indicating that firms with greater
free cash flow suffer more from overinvestment phenomena because of the abuse of managerial discretion. Specifically,
managers tend to expropriate firm’s resources by making self-interested decisions. They prefer to spend the free cash flow
on unprofitable projects rather than paying dividends to shareholders, which result in overinvestment. Such evidence is in
line with previous empirical results (Guariglia and Yang, 2016; Pawlina and Renneboog, 2005). In addition, the inclusion of
42 M. Samet, A. Jarboui / J. of Multi. Fin. Manag. 40 (2017) 33–46

Table 5
CSR performance, agency costs and overinvestment.

OVER FCF OVER

Model 5 Model 6 Model 7

Constant 0.0739*** 0.1247*** 0.0653***

(3.79) (12.13) (3.60)
CSR −0.0006*** −0.0001*** −0.0013*
(−5.48) (−4.56) (−1.81)
FCF 0.2318***
(4.29)
INS 0.0016*** 0.0003*** 0.0017***
(7.46) (5.23) (8.16)
AGE −0.0021 −0.0035*** −0.0024
(−0.98) (−5.62) (−1.12)
Year FE Yes Yes Yes
Industry FE Yes Yes Yes
Country FE Yes Yes Yes

Observations 888 888 888

R-squared 0.0950 0.1525 0.0957

Models (5) and (7): The dependent variable is overinvestment. Model (6): The dependent variable is the Free Cash Flow. CSR is the annual corporate
social responsibility performance. FCF is the free cash flow. INS is institutional ownership. AGE is firm age. All the estimates have been carried out using
cross-sectional time-series FGLS regression. T-statistic values are in the brackets. Statistical significance at the 10%, 5% and 1% levels is indicated in bold
face and by *, ** and ***, respectively.

the variable FCF in Model (7) allows to keep the effect of CSR on OVER significant, but at lower level than it is the case in
Model (5) (␣ = −0.0013, p < 10%).
Collectively, according to Baron and Kenny (1986), these results meet the requirements of identifying a partial medi-
ation. Therefore, our hypothesis (H3) that reducing agency costs has a mediating effect on the relationship between CSR
performance and overinvestment is supported. That is, the negative effect of CSR performance on overinvestment problems
follows the path through reducing free cash flow.

4.3. Robustness checks

In this section, we examine whether our primary results are robust to addressing endogeneity issues, applying alternative
measures, and modifying the sample composition.

4.3.1. Endogeneity issues

One important concern in our analysis is potential endogeneity bias stemming from reverse causality. To address the
issue of potential endogeneity, we perform an instrumental variable (IV) estimation procedure. Following Attig et al. (2013)
and Benlemlih and Bitar (2016), we use two instruments to extract the exogenous component of CSR. The first instrument is
CSR IND, the industry-year average of CSR. The second instrument is CSR INI, the firm-level initial value of CSR. In the first
stage, we regress the CSR on the two instruments and all control variables. Results are reported in Table 6, Model (1). In the
second stage, we regress the investment inefficiency on the predicted value of CSR and all control variables. We employ two-
stage least-squares (2SLS), limited information maximum likelihood (LIML), and generalized method of moments (GMM)
estimations, respectively, in Models (2), (3), and (4). The first-stage regression results show that the coefficients on the two
instruments (CSR INI and CSR IND) load positively and are statistically significant. Importantly, the second-stage regressions
results show that the effect of CSR on investment inefficiency remains significantly negative, indicating that endogeneity
does not drive our main results.

4.3.2. Alternative measure of CSR

In Table 7, we use an alternative proxy for CSR performance. Following El Ghoul et al. (2106), the variable CSR is only
the equally weighted average of the environmental and the social scores. From Model (1), we can notice that our main
finding that firms with high CSR performance invest more efficiently is robust to the choice of CSR proxy. In particular,
Models (1a) and (1b) show the effect of two components of CSR individually. Model (1c) shows the effect of two components
simultaneously. The results reveal that the environmental dimension matters more to investment efficiency.

4.3.3. Alternative measure of investment inefficiency

We re-estimate the expected level of investment following the model developed by Biddle et al. (2009).

Investmenti,t = ␤0 + ␤1 SalesGrowthi,t−1 + ␧i,t

 M. Samet, A. Jarboui / J. of Multi. Fin. Manag. 40 (2017) 33–46 43

Table 6
Corporate social responsibility and investment inefficiency: addressing endogeneity.

First stage Second stage

2 SLS LIML GMM

(1) (2) (3) (4)

Constant −8.8163*** 0.1051*** 0.1051*** 0.1054***

(−4.97) (3.93) (3.93) (6.10)
CSR −0.0005*** −0.0005*** −0.0005***
(−3.99) (−3.99) (−3.55)
CSR IND 0.3351***
(20.92)
CSR INI 0.7524***
(66.40)
INS 0.0085 0.0004* 0.0004* 0.0004
(0.72) (1.71) (1.71) (1.51)
AGE 0.3167** −0.0062*** −0.0062*** −0.0060**
(2.27) (−2.70) (−2.70) (−2.50)
Year FE Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes
Country FE Yes Yes Yes Yes

Observations 2382 2382 2382 2382

R-squared 0.7450 0.0629 0.0629 0.0627

The table reports the results of instrumental variable (IV) regressions. We employ two instruments for CSR: (1) the industry-year average of CSR (CSR IND),
and (2) the firm-level initial value of CSR (CSR INI). Model (1) presents the first stage regression. The dependent variable is CSR. Models (2)–(4) shows
the results from the second stage regressions (2SLS, LIML, GMM). The dependent variable is investment inefficiency. CSR is the annual corporate social
responsibility performance. INS is institutional ownership. AGE is firm age. T-statistic values are in the brackets. Statistical significance at the 10%, 5% and
1% levels is indicated in bold face and by *, ** and ***, respectively.

Table 7
Corporate social responsibility and investment inefficiency: alternative measure of CSR.

INEFF V

Model 1 Model 1a Model 1b Model 1c

Constant 0.0760*** 0.0781*** 0.0717*** 0.1229

(8.02) (8.24) (7.60) (16.00)
CSR −0.0002***
(−3.30)
Environmental −0.0002*** −0.0002***
(−3.28) −0.0001*** (−3.13)
Social (−2.97) −0.0001*
(−1.91)
INS 0.0003*** 0.0003*** 0.0003*** 0.0003**
(2.83) (2.79) (2.82) (2.05)
AGE −0.0046*** −0.0045*** −0.0047*** −0.0047***
(−3.62) (−3.57) (−3.71) (−3.77)
Year FE Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes
Country FE Yes Yes Yes Yes

Observations 2382 2382 2382 2382

R-squared 0.0675 0.0665 0.0660 0.0675

The dependent variable is investment inefficiency. Models (1a) and (1b) show the effect of two components of CSR individually. Model (1c) shows the effect
of two components simultaneously. CSR is the annual corporate social responsibility performance. Environmental is the annual environmental performance
of a corporation. Social is the annual social performance of a corporation. INS is institutional ownership. AGE is firm age. All the estimates have been carried
out using cross-sectional time-series FGLS regression. T-statistic values are in the brackets. Statistical significance at the 10%, 5% and 1% levels is indicated
in bold face and by *, ** and ***, respectively.

Where Investmenti,t is the total investment of firm i in year t, defined as the net increase in tangible and intangible assets
and scaled by lagged total assets. Sales growthit-1 is the percentage of change in sales of firm i from year t − 2 to year t. Our
results reported in Table 8 remain unchanged.

4.3.4. Sample composition

Our sample consists of European companies listed in STOXX Europe 600 index. Three countries seem to dominate the
sample. Approximately 50 percent of the sample originates from United Kingdom, France and Germany. In another sup-
plementary test, we repeat the analysis after excluding observations from these countries. The results are similar to those
previously reported, as displayed in Table 9.
44 M. Samet, A. Jarboui / J. of Multi. Fin. Manag. 40 (2017) 33–46

Table 8
Sensitivity analyses related to the investment model (Biddle et al., 2009).

Investment inefficiency underinvestment scenario overinvestment scenario

INEFF V UNDER SPREAD UNDER OVER FCF OVER

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7

Constant 0.0739*** −0.0761*** 0.4226*** 0.0719*** 0.0747*** 0.0756***

−8.4 (−9.55) −17.27 −3.97 −4.27 −4.57
CSR −0.0001** 0.0001*** −0.0027*** −0.0001 −0.0008*** −0.0002*** -5.39E-05
(−2.25) −8.9 (−24.22) (−1.48) (−6.70) (−8.11) (−1.25)
SPREAD −0.0079*** 0.2493***
(−3.27) −4.53
FCF
INS 0.0003*** 5.12E-05 -1.05E-05 -1.17E-05 0.0008*** 0.0003*** 0.0009***
−2.97 −0.41 (−0.01) (−0.09) −2.98 −5.28 −3.25
AGE −0.0049*** 0.0035*** 0.0030** 0.0041*** −0.0040** −0.0032*** −0.0050**
(−3.88) −2.92 −2.07 −3.6 (−1.96) (−5.71) (−2.59)
Year FE Yes Yes Yes Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes Yes Yes Yes
Country FE Yes Yes Yes Yes Yes Yes Yes

Observations 2382 1487 1487 1487 895 895 895

R-squared 0.0627 0.1350 0.2314 0.1360 0.0917 0.1527 0.0927

Model (1): The dependent variable is investment inefficiency. Models (2) and (4): The dependent variable is underinvestment. Model (3): The dependent
variable is the bid-ask spread. Models (5) and (7): The dependent variable is overinvestment. Model (6): The dependent variable is the Free Cash Flow. CSR
is the annual corporate social responsibility performance. SPREAD is the bid-ask spread. FCF is the free cash flow. INS is institutional ownership. AGE is firm
age. All the estimates have been carried out using cross-sectional time-series FGLS regression. T-statistic values are in the brackets. Statistical significance
at the 10%, 5% and 1% levels is indicated in bold face and by *, ** and ***, respectively.

Table 9
Sensitivity analyses related to the sample (Without three countries).

Investment inefficiency Underinvestment scenario Overinvestment scenario

INEFF V UNDER SPREAD UNDER OVER FCF OVER

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7

Constant 0.0887*** −0.0856*** 0.3982*** −0.0851*** 0.0563** 0.0169 0.0516*

−6.71 (−8.30) −13.97 (−8.22) −2.13 −0.76 −1.91
CSR −0.0002** 0.0001*** −0.0022*** -3.15E-05 −0.0007*** −0.0001*** −0.0003*
(−2.12) −7.06 (−10.00) (−0.29) (−3.85) −3.81 (−1.94)
SPREAD 0.0069**
−2
FCF 0.2619***
−2.62
INS 2.58E-05 6.74E-06 −0.0005 -5.32E-06 0.0003 0.0007*** 0.0002
−0.09 −0.04 (−1.04) (−0.03) −0.63 −7.47 −0.14
AGE −0.0056** 0.0047** −0.0008 0.0045** −0.0078** −0.0013* −0.0083
(−2.51) (−0.26) −2.24 (−2.10) (−1.84) (−0.92)
Year FE Yes Yes Yes Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes Yes Yes Yes
Country FE Yes Yes Yes Yes Yes Yes Yes

Observations 1002 636 636 636 366 366 366

R-squared 0.0665 0.1274 0.2573 0.1287 0.1029 0.3200 0.1032

Model (1): The dependent variable is investment inefficiency. Models (2) and (4): The dependent variable is underinvestment. Model (3): The dependent
variable is the bid-ask spread. Models (5) and (7): The dependent variable is overinvestment. Model (6): The dependent variable is the Free Cash Flow. CSR
is the annual corporate social responsibility performance. SPREAD is the bid-ask spread. FCF is the free cash flow. INS is institutional ownership. AGE is firm
age. All the estimates have been carried out using cross-sectional time-series FGLS regression. T-statistic values are in the brackets. Statistical significance
at the 10%, 5% and 1% levels is indicated in bold face and by *, ** and ***, respectively.

5. Conclusion

Does the development of CSR strategies affect investment decisions and if so, how? This is the main question of this
study. We use a representative sample of European listed firms for the period 2009–2014. In the beginning, we investigate
the direct effect of CSR performance on investment inefficiency. Then, we investigate in what ways CSR performance affects
investment inefficiency. Therefore, we divide our sample into underinvestment scenario and overinvestment scenario. In
firms that underinvest, we test the mediating role of information asymmetry in the relationship between CSR performance
and underinvestment. In firms that overinvest, we test the mediating role of agency problems of free cash flow in the
relationship between CSR performance and overinvestment.
 M. Samet, A. Jarboui / J. of Multi. Fin. Manag. 40 (2017) 33–46 45

The results indicate that firms with higher CSR performance invest more efficiently. Consistent with our expectation,
socially responsible firms are typically characterized by reduced investment-cash flow sensitivity, lower capital constraints,
better access to finance, and high management quality, which contributes to alleviate the inefficiency of investment. Con-
sequently, the development of CSR strategies would improve firms ‘sustainability and competitive position (Legnick-Hall,
1996; Whitehouse, 2006).
The key premise of this study is that CSR performance not only directly affects firms’ investment policy but also affects
firms’ investment policy via its complementary effect on market imperfection, as well as agency conflicts and information
asymmetry. In particular, we can assert that there are two important channels through which CSR performance ameliorates
firm-level investment efficiency. First, CSR performance limits the amount of free cash flow available, which can be used
by self-interested mangers to undertake unprofitable projects. The monitoring role of CSR may avoid firms from overin-
vestment. Second, CSR performance makes information environment more transparent, thereby reducing the asymmetrical
distribution of information among various stakeholders. This improved information environment contributes to increas-
ing investment level and hence avoiding firms from underinvestment. Overall, CSR performance participates in decreasing
investment inefficiency in both scenarios through helping firms address agency problems and information asymmetry
problems. Our empirical results are consistent with the argument of Benlemlih and Bitar (2016).
Some practical managerial implications can be derived from the results of this study. The positive association between
CSR performance and investment efficiency suggests to organizations that the adoption of CSR strategies is an effective way
to foster firm growth and protect the interest of different stakeholders. Therefore, companies have to integrate social and
environmental concerns in their business, such as employment quality, health and safety, human right, natural resource
reduction and pollution reduction, which may represent a source of competitive advantage.

References

Abel, A.B., 1983. Optimal investment under uncertainty. Am. Econ. Rev. 73 (1), 228–233.
Agnes Cheng, C.S., Reitenga, A., 2009. Characteristics of institutional investors and discretionary accruals. Int. J. Acc. Inf. Manag. 17 (1), 5–26.
Andrén, N., Jankensgård, H., 2015. Wall of cash: the investment-cash flow sensitivity when capital becomes abundant. J. Bank. Finance 50, 204–213.
Ascioglu, A., Hegde, S.P., McDermott, J.B., 2008. Information asymmetry and investment–cash flow sensitivity. J. Bank. Finance 32 (6), 036–1048.
Attig, N., Cleary, S., El Ghoul, S., Guedhami, O., 2012. Institutional investment horizon and investment?cash flow sensitivity. J. Bank. Finance 36 (4),
1164–1180.
Attig, N., El Ghoul, S., Guedhami, O., Suh, J., 2013. Corporate social responsibility and credit ratings. J. Bus. Ethics 117 (4), 679–694.
Attig, N., Cleary, S.W., El Ghoul, S., Guedhami, O., 2014. Corporate legitimacy and Investment–Cash flow sensitivity. J. Bus. Ethics 121 (2), 297–314.
Attig, N., Boubakri, N., El Ghoul, S., Guedhami, O., 2016. Firm internationalization and corporate social responsibility. J. Bus. Ethics 134 (2), 171–197.
Baron, R.M., Kenny, D.A., 1986. The moderator-mediator variable distinction in social psychological research: conceptual, strategic, and statistical
considerations. J. Pers. Soc. Psychol. 51 (6), 1173.
Benlemlih, M., Bitar, M., 2016. Corporate social responsibility and investment efficiency. J. Bus. Ethics, 1–25.
Biddle, G.C., Hilary, G., Verdi, R.S., 2009. How does financial reporting quality relate to investment efficiency? J. Acc. Econ. 48 (2–3), 112–131.
Borghesi, R., Houston, J.F., Naranjo, A., 2014. Corporate socially responsible investments: CEO altruism, reputation, and shareholder interests. J. Corporate
Finance 26, 164–181.
Boubakri, N., El Ghoul, S., Wang, H., Guedhami, O., Kwok, C.C., 2016. Cross-listing and corporate social responsibility. J. Corporate Finance 41, 123–138.
Bushee, B., 1998. The influence of institutional investors on myopic R & D investment behavior. Acc. Rev. 73 (3), 305–333.
Bushee, B., 2001. Do institutional investors prefer near-term earnings over long-run value? Contemp. Acc. Res. 18 (2), 207–246.
Calton, J.M., Payne, S.L., 2003. Coping with paradox multistakeholder learning dialogue as a pluralist sensemaking process for addressing messy problems.
Bus. Soc. 42 (1), 7–42.
Campello, M., Graham, J.R., Harvey, C.R., 2010. The real effects of financial constraints: evidence from a financial crisis. J. Financ. Econ. 97 (3), 470–487.
Chen, F., Hope, O., Li, Q., Wang, X., 2011. Financial reporting quality and investment efficiency of private firms in emergingmarkets. Acc. Rev. 86 (4),
1255–1288.
Chen, R., El Ghoul, S., Guedhami, O., Wang, H., 2014. Do state and foreign ownership affect investment efficiency? Evidence from privatizations. J.
Corporate Finance.
Cheng, M., Dhaliwal, D., Neamtiu, M., 2011. Asset securitization, securitization recourse, and information uncertainty. Acc. Rev. 86 (2), 541–568.
Cheng, B., Ioannou, I., Serafeim, G., 2014. Corporate social responsibility and access to finance. Strateg. Manage. J. 35 (1), 1–23.
Chi, J.D., Lee, D.S., 2010. The conditional nature of the value of corporate governance. J. Bank. Finance 34 (2), 350–361.
Cho, S.Y., Lee, C., Pfeiffer Jr., J.Pr., 2013. Corporate social responsibility performance and nformation asymmetry. J. Acc. Public Policy 32 (1), 71–83.
Chowdhury, J., Kumar, R., Shome, D., 2016. Investment–cash flow sensitivity under changing information asymmetry. J. Bank. Finance 62, 28–40.
Cui, J., Jo, H., Na, H., 2015. Does corporate social responsibility affect information asymmetry? J. Bus. Ethics, 1–24.
Degryse, H., De Jong, A., 2006. Investment and internal finance: asymmetric information or managerial discretion? Int. J. Ind Organiz 24 (1), 125–147.
Denis, D.K., McConnell, J.J., 2003. International corporate governance. J. Financ. Quant. Anal. 38 (1), 1–36.
Dhaliwal, D., Li, O.Z., Tsang, A.H., Yang, Y.G., 2011. Voluntary non-financial disclosure and the cost of equity capital: the case of corporate social
responsibility reporting. Acc. Rev. 86 (1), 59–100.
Djankov, S., La Porta, R., Lopez-de-Silanes, F., Shleifer, A., 2008. The law and economics of self-dealing. J. Financ. Econ. 88 (3), 430–465.
Eccles, R., Ioannou, I., Serafeim, G., 2012. The Impact of Corporate Sustainability on Organizational Processes and Performance, Working Paper. Harvard
Business School Harvard University, Boston MA.
El Ghoul, S., Guedhami, O., Kwok, C.C.Y., Mishra, D.R., 2011. Does corporate social responsibility affect the cost of capital? J. Bank. Finance 35 (9),
2388–2406.
El Ghoul, S., Guedhami, O., Kim, H., Park, K., 2014. Corporate environmental responsibility and the cost of capital: international evidence. J. Bus. Ethics,
1–27.
El Ghoul, S., Guedhami, O., Kim, Y., 2016a. Country-level institutions, firm value, and the role of corporate social responsibility initiatives. J. Int. Bus. Stud.
El Ghoul, S., Guedhami, O., Nash, R., Patel, A., 2016b. New evidence on the role of the media in corporate social responsibility. J. Bus. Ethics, 1–29.
El Ghoul, S., Guedhami, O., Wang, H., Kwok, C.C., 2016c. Family control and corporate social responsibility. J. Bank. Finance 73, 131–146.
Fazzari, S., Hubbard, G., Petersen, B., 1988. Financing constraints and corporate Investment. Brook. Pap. Econ. Activity 1988 (1), 141–206.
Gillan, S., 2006. Recent developments in corporate governance: an overview. J. Corporate Finance 12, 381–402.
Goergen, M., Renneboog, L., 2001. Investment policy, internal financing and ownership concentration in the UK. J. Corporate Finance 7 (3), 257–284.
Gomariz, F.C., Ballesta, J.P.S., 2014. Financial reporting quality, debt maturity and investment efficiency. J. Bank. Finance 40, 494–506.
46 M. Samet, A. Jarboui / J. of Multi. Fin. Manag. 40 (2017) 33–46

Guariglia, A., Yang, J., 2016. A balancing act: managing financial constraints and agency costs to minimize investment inefficiency in the Chinese market. J.
Corporate Finance 36, 111–130.
Harjoto, M.A., Jo, H., 2011. Corporate governance and CSR nexus. J. Bus. Ethics 100 (1), 45–67.
Hayashi, F., 1982. Tobin’s marginal q and average q: A neoclassical interpretation. Econometrica 50 (1), 213–224.
Hermalin, B., 2005. Trends in corporate governance. J. Finance 60, 2351–2384.
Hubbard, R.G., 1998. Capital-market imperfections and investment. J. Econ. Lit. 36 (1), 193–225.
Jensen, M., Meckling, W.H., 1976. Theory of the firm: managerial behaviour, agency costs and ownership structure. J. Financ. Econ. 3, 305–360.
Jensen, M., 1986. Agency costs of free cash flow, corporate finance and takeovers. Am. Econ. Rev. Pap. Proc. Vo76 (2), 323–329.
Jensen, M., 2001. Value maximization, stakeholder theory, and the corporate objective function. J. Appl. Corporate Finance 14 (3), 8–21.
Jiang, G., Lee, C.M.C., Yue, H., 2010. Tunneling through intercorporate loans: the China experience. J. Financ. Econ. 98 (1), 1–20.
Kanagaretnam, K., Lobo, G.J., Whalen, D.J., 2005. Relationship between analyst forecast properties and equity bid- ask spreads and depths around
quarterly earnings announcements. J. Bus. Finance Acc. 32 (9–10), 1773–1799.
Kim, Y., Park, M.S., Wier, B., 2012. Is earnings quality associated with corporate social responsibility? Acc. Rev. 87 (3), 761–796.
Koh, P.S., 2003. On the association between institutional ownership and aggressive corporate earnings management in Australia. Br. Acc. Rev. 35 (2),
105–128.
Legnick-Hall, C.A., 1996. Customer contributions to quality: a different view of the customer-oriented firm. Acad. Manage. Rev. 21, 791–824.
Lehn, K., Poulsen, A., 1989. Free cash flow and stockholder gains in going private transactions. J. Finance 44 (3), 771–787.
Lin, C.H., Yang, H.L., Liou, D.Y., 2009. The impact of corporate social responsibility on financial performance: evidence from business in Taiwan. Technol.
Soc. 31 (1), 56–63.
Lopatta, K., Buchholz, F., Kaspereit, T., 2015. Asymmetric information and corporate social responsibility. Bus. Soc., 1–31.
Luo, Q., Li, H., Zhang, B., 2015. Financing constraints and the cost of equity: evidence on the moral hazard of the controlling shareholder. Int. Rev. Econ.
Finance 36, 99–106.
Mansour, W., 2014. Information asymmetry and financing constraints in GCC. J. Econ. Asymmetries 11, 19–29.
McNichols, M., Stubben, S., 2008. Does earnings management affect firms’ investment decisions. Acc. Rev. 86, 1571–1603.
Modigliani, F., Miller, M.H., 1958. The cost of capital, corporation finance and the theory of investment. Am. Econ. Rev. 48 (3), 261–297.
Myers, S.C., Majluf, N.S., 1984. Corporate financing and investment decisions when firms have information that investors do not have. J. Financ. Econ. 13,
187–221.
Myers, S.C., 1984. The capital structure puzzle. J. Finance 39 (3), 574–592.
Nandy, M., Lodh, S., 2012. Do banks value the eco-friendliness of firms in their corporate lending decision? Some empirical evidence. Int. Rev. Financ.
Anal. 25, 83–93.
Pawlina, G., Renneboog, L., 2005. Is investment-Cash flow sensitivity caused by agency costs or asymmetric information? evidence from the UK. Eur.
Financ. Manag. 11 (4), 483–513.
Scherer, A., Palazzo, G., Baumann, D., 2006. Global rules and private actors: toward a new role of the TNC in global governance. Bus. Ethics Q. 16, 502–532.
Sharfman, M.P., Fernando, C.S., 2008. Environmental risk management and the cost of capital. Strateg. Manage. J. 29 (6), 569–592.
Sharfman, M., 1996. The construct validity of the Kinder, Lydenberg & Domini social performance ratings data. J. Bus. Ethics 15 (3), 287–296.
Shleifer, A., Vishny, R.W., 1997. A survey of corporate governance. J. Finance 52 (2), 737–783.
Stein, J.C., 2003. Agency, information and corporate investment. Handb. Econ. Finance 1, 111–165.
Stiglitz, J., Weiss, A., 1981. Credit rationing in markets with imperfect information. Am. Econ. Rev. 71, 393–410.
Waddock, S.A., Graves, S.B., 1997. The corporate social performance-financial performance link. Strateg. Manage. J. 18 (4), 303–319.
Whitehouse, L., 2006. Corporate social responsibility: views from the frontline. J. Bus. Ethics 63, 279–296.