CEO Ability and Corporate Social Responsibility Activities

Bok Baik
College of Business
Seoul National University
bbaik@snu.ac.kr

David B. Farber
College of Business Administration
University of Texas at El Paso
dbfarber@utep.edu

Sam Lee
College of Business Administration
University of Illinois at Chicago
sunghanl@uic.edu

November 2013

Abstract: In recent years, firms spend enormous resources on corporate social responsibility
(CSR) activities, yet determinants and consequences of CSR activities are not well understood.
In this study, we examine the impact of CEO ability on CSR activities. Using a large sample of
firms from KLD for the period of 1995 to 2005, we document that CSR ratings increase in CEO
ability. We find evidence that the impact of CEO ability on CSR investment is more important
for high profitability firms, growth firms, and firms with greater long-term institutional
ownership. Furthermore, we find evidence that CSR activities associated with firms that have
high (low) ability CEOs are likely to enhance (reduce) firm value. These results suggest that
managerial ability is an important determinant in CSR and high ability managers make
investment in CSR that benefit shareholders by alleviating moral hazard.
1. Introduction

In recent years, firms spend enormous resources on corporate social responsibility (CSR)

activities. Speaking as a member of the Wall Street Journal’s CEO Council, Sir Martin Sorrel

highlight the importance of CSR activities by saying that “companies should talk less about

benefits to shareholders of short-term profits and focus on customer needs, investment in labor,

and sustainability”. Although there exists a large literature about corporate social responsibility

(CSR),1 we still know very little about why firms engage in CSR. Moreover, the evidence about

the impact of CSR on firm value is mixed. The ongoing debate about CSR has centered on

whether firms do well by doing good (Griffin and Mahon, 1997; Margolis and Walsh, 2003).

There are two popular perspectives about CSR. One perspective argues that managers make CSR

expenditures to enhance their own value at shareholder expense and therefore reflect an agency

problem (Friedman 1970; Barnea and Rubin 2010; Hong et al., 2011; Cheng et al. 2013; Kruger

2013). From this perspective, managers opportunistically invest in CSR for their private benefits.

A different perspective suggests that CSR expenditures create a “warm glow” about the firm that

leads to improved firm performance (Fisman et al., 2005; Scherer et al. 2006; Cespa and Ceston

2007; Lev et al., 2009). Similarly, Servaes and Tamayo (2012) show that CSR and firm value

are positively related for firms with high advertising expenses.

To gain insights on the debate surrounding firms’ CSR activities, we examine the impact

of CEO ability on CSR activities. Our main contribution to the literature is to demonstrate that a

manager-specific characteristic – ability – is related to CSR ratings and their impact on firm

value.

1
Throughout this paper, we define corporate social responsibility (CSR) as a firm’s activities related to social,
environmental, and ethical issues.