Corporate Social Responsibility and Investment Efficiency

Using a sample of 21,030 US firm-year observations that represents more than 3,000 individual firms over the period 1998-2000, we investigate the relationship between Corporate Social Responsibility (CSR) and investment efficiency. In consistency with our expectations that high CSR firms enjoy low information asymmetry and high stakeholder solidarity (stakeholder theory), we find strong and robust evidence that high CSR involvement decreases investment inefficiency and consequently increases investment efficiency. Moreover, our findings suggest that CSR components that are directly related to firms’ primary stakeholders (e.g., employees’ relations, product characteristics, environment, and diversity) are more relevant in reducing investment inefficiency as compared to those related to secondary stakeholders (e.g., human rights and community involvement). Finally, additional results show that the effect of CSR on investment efficiency was more pronounced during the subprime crisis. Taken together, our results highlight the important role that CSR plays in shaping firm's investment behavior and efficiency.