We explore whether firms’ corporate social responsibility (CSR) activities provide added value to capital market participants through seasoned equity offerings (SEOs). SEOs represent cleaner exogenous activity alleviating the reverse causality issue plaguing many prior studies examining the relation between firm performance and CSR. Using a large sample of U.S. SEOs, we find high-CSR issuers experience fewer negative market reactions to SEO announcements. We also show ethical issuers have incentive to provide extensive and informative disclosures, which mitigate the degree of information asymmetry, thereby decreasing SEO underpricing. Among CSR categories, we find issuers engaging in community and environmental CSR activities and improving the rights of women and minorities are more effective at reducing SEO negative announcement returns and underpricing. Our findings remain robust after controlling for possible self-selection bias and endogeneity problems. Overall, our findings support the stakeholder value maximization view of stakeholder theory and ethical theory.

Introduction

The concept of corporate social responsibility (CSR) is increasingly important in today’s business climate as companies actively pursue economic growth through internationalization.1 Over the past decade, many U.S. companies, from high-tech firms in Silicon Valley to Starbucks, actively invest in CSR due to pressure from stakeholders or as a strategy to maintain a competitive advantage. In Cisco’s 2015 CSR report, the CEO states, I am proud to introduce Cisco’s Corporate Social Responsibility (CSR) report, which shows in so many ways our focus on combining human and technological innovation is helping people and our planet.… In FY15 we also made solid progress on our environmental goals. Effective use of CSR strategies can obtain activist support, achieve subconscious advertising, and help firms engage in competitive markets (Fry et al., 1982). However, in the wake of the growing importance of CSR investment, prior literature reports mixed evidence, questioning whether investing in CSR maximizes shareholder wealth or simply becomes a firm’s heavy burden at the expense of shareholders. This study intends to examine the effect of these increasingly important corporate CSR activities on shareholder wealth through the announcement of seasoned equity offerings (SEOs) and provide new evidence for the ongoing debate. We focus on SEOs for three reasons. First, SEOs are an important research topic associated with corporate financing and capital expenditure decisions and have a significant impact on shareholder wealth. Second, spending on CSR could be profitable through its brand and reputation effect (Baron 2001) and better CSR practices could help a firm build a positive image and reduce information asymmetry for various stakeholders in an SEO. Finally, SEOs represent cleaner exogenous activity that alleviates the reverse causality issue that plagues many prior studies examining the relation between firm performance and CSR. Surely, CSR corporations may command higher value, but it can also be argued that better-valued firms are more conscious about CSR. Therefore, we use SEOs as an unexpected event to examine the effect of CSR activities on SEO announcement returns.