Purpose – There is evidence that corporate social responsibility (CSR) practices predict higher firm value, but little evidence on which specific aspects of CSR drive this relationship. The purpose of this paper is to study this question in a sample drawn from 35 countries over 2003-2016. Design/methodology/approach – The authors employ a research design that analyzes observational data with panel data methods including ordinary least squares, firm-random effects, and firm-fixed effects. Findings – The authors find in a sample drawn from 35 countries over 2003-2016 an economically significant relationship between an overall CSR measure and firm value. The overall CSR score builds on data from Asset4 and is comprised of three indices for environmental, social, and corporate governance aspects of CSR. The authors find that the social index consistently predicts higher market value. The authors also show that the use of particular elements of CSR can lead to substantial omitted variables bias when predicting firm value. The results also suggest a similar bias in studies that focus on a single index, which captures a specific aspect of CSR, but omits the remaining aspects. Research limitations/implications – The study is subject to limitations common to observational studies. Practical implications – The authors find robust evidence that CSR predicts market value using a countrybenchmarked overall CSR index. The power to predict firm value comes solely from the social dimension of this measure, which captures firm-level practices related to treatment of employees and stakeholder relations including those with customers and the broader community. Three elements drive the social index: customer/ product responsibility, human rights, and employment quality. None of the remaining 12 elements significantly predicts firm vale in an empirical setting with firm-FE and extensive covariates. The authors also show that omitted aspects of CSR can easily lead to an omitted variable bias and that the magnitude of this bias is potentially greater with an OLS specification. Social implications – Among the many dimensions of CSR, only a subset drives firm value. Policies that target to improve the CSR performance of firms adopt a broader definition of CSR. Originality/value – The authors provide first-hand evidence on which specific aspects of CSR drive firm market value.

Introduction

The last decade has witnessed that corporate social responsibility (CSR) has become a significant theme in strategic business decisions (The Economist, 2008). In PwC’s (2014) 17th Annual Global CEO Survey, 75 percent of CEOs suggest that satisfying societal needs, beyond those of investors, customers and employees, and protecting the interests of future generations is important. A similar view emerges from the Edelman Trust Barometer (2014) suggesting that 84 percent of responding consumers believe that business can pursue its self-interest while doing good work for society. While the emphasis on CSR is shaping the relationship between companies and their stakeholders, there is a lack of agreement on the antecedents and consequences of CSR, and perhaps more importantly, a unified definition of CSR (Griffin and Mahon, 1997; Orlitzky et al., 2003; Margolis and Walsh, 2003; Margolis et al., 2009). CSR is a complex and multifaceted concept and comprises a broad range of activities of the firm with its various stakeholders. While for some companies, the social dimension of CSR (e.g. the treatment of employees) is important, other companies may care more about their relationship with suppliers and expect them to meet certain standards. Still for some others, environmental aspects (e.g. control of emissions) may be more relevant. Such CSR activities involve that companies go beyond country-level statutory requirements in the provision of goods and services with a public character and in internalizing the externalities they create. CSR can benefit firms through various channels. CSR may improve, for example, brand value, and enhance reputational effects (Baron, 2001). Some CSR activities can make the firm more attractive to employees (Turban and Greening, 1997), increase productivity (McGuire et al., 1988; Waddock and Graves, 1997), contribute to smoother relationships with regulators, and help the firm meet the standards and expectations of its customers and thereby increase revenues (Teraji, 2009). Better CSR performance is also related to better stakeholder engagement and thereby reduce information asymmetries, agency problems, and other types of transaction costs. CSR can also be an insurance mechanism against reputational risks (Godfrey et al., 2009; Koh et al., 2014) and create intangible assets (Gardberg and Fombrun, 2006). This suggests that contracting with stakeholders takes place based on mutual trust and cooperation ( Jones, 1995). However, some of these issues can be costly (Palmer et al., 1995), both in terms of direct costs (e.g. when expenditures for charitable donations or environmental protection increase) and so reduce profits. CSR activities can also reduce firms’ flexibilty by introducing additional constraints and thereby lead to lower operating efficiency, which contributes indirectly to the costs of the CSR activities (Claessens and Yurtoglu, 2013).