Kirsten A. Cook

The Influence of Corporate Social Responsibility on Investment Efficiency and Innovation

We examine two important channels through which corporate social responsibility (CSR) affects firm value: investment efficiency and innovation. We find that firms with higher CSR performance invest more efficiently: these firms are less prone to invest in negative NPV projects (overinvestment) and less prone to forego positive NPV projects (underinvestment). We also find that firms with higher CSR performance generate more patents and patent citations. Mediation analysis indicates that firms with higher CSR performance are more profitable and valuable, consequences partially attributable to efficient investments and innovation. These results, robust to alternate model specifications, lend support to enlightened stakeholder theory (Jensen 2001).

Managing Earnings by Manipulating Inventory: The Effects of Cost Structure and Valuation Method

Using absorption costing, manufacturing firms can manipulate production (relative to sales) to shift fixed costs between cost of goods sold and inventory accounts, thereby managing earnings either upward or downward. Considering two earnings targets (avoiding losses and consensus analyst forecasts), we use a large sample of manufacturing firms to study how production cost structure and inventory valuation method affect this strategy. We report the following results: Firms with high fixed-cost ratios are more likely to manipulate inventory but make smaller abnormal inventory changes than companies with low fixed-cost ratios. Because LIFO firms in the manufacturing sector may also manage earnings by liquidating LIFO layers and releasing the LIFO reserve, LIFO firms are less likely than other companies to manage earnings by shifting fixed costs between COGS and inventory.