Firm Misvaluation and Corporate Social Responsibility

Abstract

We show that firm misvaluation positively affects firm’s corporate social responsibility (CSR) ratings. And the positive effect is only significant when firms are heavily overvalued. The result holds when we include net equity issue and net debt issue in the regression, and when we exclude observations that have positive net equity issue or net debt issue during the previous three years. Contrary to the prediction of equity financing channel, the positive CSR effect of misvaluation is more pronounced for firms with better financial strength. And the effect is stronger in periods when CSR sentiment is high, and stronger for firms where long-term institutional ownership and socially responsible investors’ ownership is higher and for firms where CEOs’ wealth is more sensitive to firm value. Overall, the empirical results reveal the incentive of managers to increase CSR activities in overvaluation to cater to investors who have a taste for better CSR performance.