Volume 55, Issue 4 p. 697-716
ORIGINAL ARTICLE

How do independent directors view corporate social responsibility (CSR)? Evidence from a quasi-natural experiment

Pandej Chintrakarn

Pandej Chintrakarn

Business Administration Division, Mahidol University International College (MUIC), Nakhon Pathom, Thailand

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Pornsit Jiraporn

Pornsit Jiraporn

School of Graduate Professional Studies, Pennsylvania State University, Malvern, Pennsylvania

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Shenghui Tong

Corresponding Author

Shenghui Tong

School of Business, Siena College, Loudonville, New York

Correspondence

Shenghui Tong, Siena College, Loudonville, 515 Loudon Road, Loudonville NY 12211.

Email: tongshenghui@yahoo.com

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Napatsorn Jiraporn

Napatsorn Jiraporn

School of Business, State University of New York at Oswego, Oswego, New York

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Richard Proctor

Richard Proctor

School of Business, Siena College, Loudonville, New York

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First published: 07 August 2020
Citations: 42

Part of this research was carried out while Pornsit Jiraporn served as a visiting scholar at The National Institute of Development Administration (NIDA) and at SASIN Graduate Institute of Business Administration, Chulalongkorn University in Bangkok, Thailand.

The Supporting Information can be found at the journal website at https://financialreview.poole.ncsu.edu.

Abstract

We investigate how independent directors view corporate social responsibility (CSR). Exploiting the passage of the Sarbanes-Oxley (SOX) Act and the associated exchange listing requirements as an exogenous regulatory shock, we document that independent directors view CSR activities unfavorably. In particular, firms forced to raise board independence reduce CSR engagement significantly relative to those not required to increase board independence. Our results are consistent with the risk-mitigation view and the agency cost hypothesis where managers over-invest in CSR to mitigate their own exposure to nonsystematic risk. The over-investments in CSR are curbed in the presence of a stronger, more independent, board of directors. Several robustness checks confirm the results, including fixed-effects and random-effects regressions, dynamic panel data analysis, instrumental-variable analysis, propensity score matching, Lewbel's heteroscedastic identification, and Oster's method for coefficient stability. We also confirm the risk-mitigation hypothesis by showing that CSR activities reduce firm risk significantly. Our research design is much less vulnerable to endogeneity and is therefore likely to show a causal effect of board independence on CSR.

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