We examine whether corporate social responsibility (CSR) creates value for seasoned equity issuers. Using a sample of seasoned equity offerings (SEOs) by U.S. companies between 2004 and 2013, we find a positive association between CSR performance and the stock price reaction to SEO announcements. Surprisingly, however, further tests reveal that seasoned equity issuers with high CSR scores tend to have higher post-SEO increases in cash holdings, and lower investments in real assets, than issuers with low CSR scores. Moreover, high-CSR issuers have worse post-SEO operating and stock price performance than low-CSR issuers. Together, our findings suggest that high CSR scores mislead shareholders into attributing value-increasing motives to seasoned equity issues.

Introduction

Corporate social responsibility (CSR) generally refers to firms’ actions towards stakeholders, including employees, customers, communities, and society, in ways that go beyond legal requirements (Freeman, 1994; Barnea and Rubin, 2010; Jo and Harjoto, 2014). Over the period 2011 to 2013, Fortune Global 500 firms spent on average $20 billion per year on CSR (EPG, 2015). While CFOs and investment professionals seem to believe that CSR activity creates value for shareholders (McKinsey & Company, 2009), academic studies examining the link between CSR and shareholder value provide mixed evidence.2 This suggests the need for further research on the economic benefits of investments in CSR. In this paper, we examine whether CSR activity creates shareholder value for seasoned equity issuers. We focus our analysis on seasoned equity offerings (SEOs) for two reasons. First, SEOs are frequent and important corporate events. U.S. firms conducted approximately 2,000 SEOs between 2004 and 2013, with a total value of $216 billion.3 Second, while firm-specific and macroeconomic characteristics affect the likelihood of an SEO (Bayless and Chaplinsky, 1991), SEO announcements are largely unanticipated, which can mitigate reverse causality problems associated with studies of the relation between CSR activities and firm value (Deng et al., 2013). Our main analysis addresses the impact of firms’ CSR activity, as measured by externally provided CSR performance scores, on the stock price reaction to SEO announcements. We hypothesize that investors interpret CSR performance as signaling firms’ underlying motives for SEOs. The signal content, however, is not clear a priori. Under the ‘stakeholder value maximization’ view, investors may interpret strong CSR performance as signaling that a firm’s management has an altruistic orientation and is unlikely to use SEO proceeds to reduce value, leading to lower agency costs associated with equity financing (Jensen, 1986; Freeman, 1994; Godfrey et al., 2009). Conversely, under the ‘shareholder expense’ view, investors may interpret strong CSR performance as signaling a firm’s tendency to undertake wasteful investment, leading to higher agency costs associated with equity financing (Friedman, 1998; Pagano and Volpin, 2005; Barnea and Rubin, 2010; Jo and Harjoto, 2012). CSR performance could also affect the stock price reaction to SEOs through its impact on the level of information asymmetry about a firm’s assets in place (Myers and Majluf, 1984), but the relation between CSR performance and information asymmetry is ambiguous (Dhaliwal et al., 2011; El Ghoul et al., 2011). The direction of the impact of CSR performance on the stock price reaction to SEOs is, therefore, an empirical question.