Hostname: page-component-cd9895bd7-hc48f Total loading time: 0 Render date: 2024-12-25T08:20:50.322Z Has data issue: false hasContentIssue false
  • English
  • Français

Rhetoric, Reality, and Reputation: Do CSR and Political Lobbying Protect Shareholder Wealth against Environmental Lawsuits?

Published online by Cambridge University Press:  18 January 2019

Chelsea Liu Open the ORCID record for Chelsea Liu [Opens in a new window] ,
Chee Seng Cheong  and
Ralf Zurbruegg
Get access Rights & Permissions [Opens in a new window]

Abstract

We investigate whether firms’ corporate social responsibility (CSR) reputations and environmental lobbying efforts protect shareholder wealth in the event of environmental lawsuits. Using a sample of lawsuits filed in United States Federal Courts, we find that firms with superior CSR reputations suffer worse market reactions to environmental allegations. In contrast, lobbying cushions filing-date valuation losses, providing insurance-like protection against lawsuits. Our results are robust to subsample analyses, a falsification test, propensity score matching, and alternative empirical proxies and model specifications.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 2 , March 2020 , pp. 679 - 706
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

We are grateful to Efraim Benmelech, Philip Bond, Paul Brockman, Jean Canil, Ran Duchin, Alex Edmans, Andrea Eisfeldt, Huasheng Gao, Umit Gurun, Jarrad Harford, Alan Hess, Christopher Hrdlicka, Avraham Kamara, Jonathan Karpoff, Sanne Knudsen, Jennifer Koski, Juan Luo, Paul Malatesta (the editor), Sarah McVay, George Mihaylov, Thuc Anh Nguyen, Edward Rice, Stephan Siegel, Avanidhar Subrahmanyam, Victoria Vanasco, Eric Wehrly (the referee), and participants at a seminar presentation at the University of Washington for their helpful comments and discussions.

References

Aharony, J.; Liu, C.; and Yawson, A.. “Corporate Litigation and Executive Turnover.” Journal of Corporate Finance, 34 (2015), 268–292.Google Scholar
Amore, M. D., and Bennedsen, M.. “The Value of Local Political Connections in a Low-Corruption Environment.” Journal of Financial Economics, 110 (2013), 387–402.Google Scholar
Ball, R., and Brown, P.. “An Empirical Evaluation of Accounting Income Numbers.” Journal of Accounting Research, 6 (1968), 159–178.Google Scholar
Bansal, P., and Kistruck, G.. “Seeing Is (Not) Believing: Managing the Impressions of the Firm’s Commitment to the Natural Environment.” Journal of Business Ethics, 67 (2006), 165–180.Google Scholar
Barnett, M. L., and Salomon, R. M.. “Does It Pay to Be Really Good? Addressing the Shape of the Relationship between Social and Financial Performance.” Strategic Management Journal, 33 (2012), 1304–1320.Google Scholar
Bebchuk, L.; Cohen, A.; and Ferrell, A.. “What Matters in Corporate Governance?” Review of Financial Studies, 22 (2009), 783–827.Google Scholar
Ben-Nasr, H.; Boubakri, N.; and Cosset, J.-C.. “The Political Determinants of the Cost of Equity: Evidence from Newly Privatized Firms.” Journal of Accounting Research, 50 (2012), 605–646.Google Scholar
Bereskin, F.; Byun, S. K.; Officer, M. S.; and Oh, J.-M.. “The Effect of Cultural Similarity on Mergers and Acquisitions: Evidence from Corporate Social Responsibility.” Journal of Financial and Quantitative Analysis, 53 (2018), 1995–2039.Google Scholar
Bhagat, S.; Bizjak, J. M.; and Coles, J. L.. “The Shareholder Wealth Implications of Corporate Lawsuits.” Financial Management, 27 (1998), 5–27.Google Scholar
Bhandari, A., and Javakhadze, D.. “Corporate Social Responsibility and Capital Allocation Efficiency.” Journal of Corporate Finance, 43 (2017), 354–377.Google Scholar
Bhattacharya, U.; Galpin, N.; and Haslem, B.. “The Home Court Advantage in International Corporate Litigation.” Journal of Law and Economics, 50 (2007), 625–659.Google Scholar
Bizjak, J. M., and Coles, J. L.. “The Effect of Private Antitrust Litigation on the Stock-Market Valuation of the Firm.” American Economic Review, 85 (1995), 436–461.Google Scholar
Borisov, A.; Goldman, E.; and Gupta, N.. “The Corporate Value of (Corrupt) Lobbying.” Review of Financial Studies, 29 (2016), 1039–1071.Google Scholar
Boubakri, N.; El Ghoul, S.; Wang, H.; Guedhami, O.; and Kwok, C. C. Y.. “Cross-Listing and Corporate Social Responsibility.” Journal of Corporate Finance, 41 (2016), 123–138.Google Scholar
Boubakri, N.; Guedhami, O.; Mishra, D.; and Saffar, W.. “Political Connections and the Cost of Equity Capital.” Journal of Corporate Finance, 18 (2012), 541–559.Google Scholar
Bradley, D.; Pantzalis, C.; and Yuan, X.. “The Influence of Political Bias in State Pension Funds.” Journal of Financial Economics, 119 (2016), 69–91.Google Scholar
Carhart, M. M.“On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.Google Scholar
Chava, S.“Environmental Externalities and Cost of Capital.” Management Science, 60 (2014), 2223–2247.Google Scholar
Chin, M. K.; Hambrick, D. C.; and Treviño, L. K.. “Political Ideologies of CEOs: The Influence of Executives’ Values on Corporate Social Responsibility.” Administrative Science Quarterly, 58 (2013), 197–232.Google Scholar
Christensen, H. B.; Floyd, E.; Liu, L. Y.; and Maffett, M.. “The Real Effects of Mandated Information on Social Responsibility in Financial Reports: Evidence from Mine-Safety Records.” Journal of Accounting and Economics, 64 (2017), 284–304.Google Scholar
Claessens, S.; Feijen, E.; and Laeven, L.. “Political Connections and Preferential Access to Finance: The Role of Campaign Contributions.” Journal of Financial Economics, 88 (2008), 554–580.Google Scholar
Cline, B. N., and Williamson, C. R.. “Individualism, Democracy, and Contract Enforcement.” Journal of Corporate Finance, 46 (2017), 284–306.Google Scholar
Cooper, M. J.; Gulen, H.; and Ovtchinnikov, A. V.. “Corporate Political Contributions and Stock Returns.” Journal of Finance, 65 (2010), 687–724.Google Scholar
Correia, M. M.“Political Connections and SEC Enforcement.” Journal of Accounting and Economics, 57 (2014), 241–262.Google Scholar
Crilly, D., and Ioannou, I.. “Talk Is Not Always Cheap: What Firms Say, How They Say It, and Social Performance.” Working Paper, London Business School (2018).Google Scholar
Crilly, D.; Ni, N.; and Jiang, Y.. “Do-No-Harm Versus Do-Good Social Responsibility: Attributional Thinking and the Liability of Foreignness.” Strategic Management Journal, 37 (2016), 1316–1329.Google Scholar
Dawkins, C., and Fraas, J. W.. “Coming Clean: The Impact of Environmental Performance and Visibility on Corporate Climate Change Disclosure.” Journal of Business Ethics, 100 (2010), 303–322.Google Scholar
Delmas, M.; Lim, J.; and Nairn-Birch, N.. “Corporate Environmental Performance and Lobbying.” Academy of Management Discoveries, 2 (2016), 175–197.Google Scholar
Deng, X.; Kang, J.-K.; and Low, B. S.. “Corporate Social Responsibility and Stakeholder Value Maximization: Evidence from Mergers.” Journal of Financial Economics, 110 (2013), 87–109.Google Scholar
Di Giuli, A., and Kostovetsky, L.. “Are Red or Blue Companies More Likely to Go Green? Politics and Corporate Social Responsibility.” Journal of Financial Economics, 111 (2014), 158–180.Google Scholar
Donaldson, T., and Preston, L. E.. “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications.” Academy of Management Review, 20 (1995), 65–91.Google Scholar
Du, S.; Bhattacharya, C. B.; and Sen, S.. “Corporate Social Responsibility and Competitive Advantage: Overcoming the Trust Barrier.” Management Science, 57 (2011), 1528–1545.Google Scholar
Duchin, R., and Sosyura, D.. “The Politics of Government Investment.” Journal of Financial Economics, 106 (2012), 24–48.Google Scholar
Edmans, A.“Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices.” Journal of Financial Economics, 101 (2011), 621–640.Google Scholar
Edmans, A.“The Link between Job Satisfaction and Firm Value, with Implications for Corporate Social Responsibility.” Academy of Management Perspectives, 26 (2012), 1–19.Google Scholar
Faccio, M.“Politically Connected Firms.” American Economic Review, 96 (2006), 369–386.Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.Google Scholar
Fernando, C. S.; Sharfman, M. P.; and Uysal, V. B.. “Corporate Environmental Policy and Shareholder Value: Following the Smart Money.” Journal of Financial and Quantitative Analysis, 52 (2017), 2023–2051.Google Scholar
Ferrell, A.; Liang, H.; and Renneboog, L.. “Socially Responsible Firms.” Journal of Financial Economics, 122 (2016), 585–606.Google Scholar
Flammer, C.“Corporate Social Responsibility and Shareholder Reaction: The Environmental Awareness of Investors.” Academy of Management Journal, 56 (2013), 758–781.Google Scholar
Flammer, C.“Does Corporate Social Responsibility Lead to Superior Financial Performance? A Regression Discontinuity Approach.” Management Science, 61 (2015), 2549–2568.Google Scholar
Flammer, C.“Corporate Green Bonds.” Working Paper, Boston University (2018).Google Scholar
Flammer, C., and Kacperczyk, A.. “The Impact of Stakeholder Orientation on Innovation: Evidence from a Natural Experiment.” Management Science, 62 (2016), 1982–2001.Google Scholar
Gande, A., and Lewis, C. M.. “Shareholder-Initiated Class Action Lawsuits: Shareholder Wealth Effects and Industry Spillovers.” Journal of Financial and Quantitative Analysis, 44 (2009), 823–850.Google Scholar
Godfrey, P. C.“The Relationship between Corporate Philanthropy and Shareholder Wealth: A Risk Management Perspective.” Academy of Management Review, 30 (2005), 777–798.Google Scholar
Godfrey, P. C.; Merrill, C. B.; and Hansen, J. M.. “The Relationship between Corporate Social Responsibility and Shareholder Value: An Empirical Test of the Risk Management Hypothesis.” Strategic Management Journal, 30 (2009), 425–445.Google Scholar
Goldman, E.; Rocholl, J.; and So, J.. “Do Politically Connected Boards Affect Firm Value?” Review of Financial Studies, 22 (2009), 2331–2360.Google Scholar
Goldman, E.; Rocholl, J.; and So, J.. “Politically Connected Boards of Directors and the Allocation of Procurement Contracts.” Review of Finance, 17 (2013), 1617–1648.Google Scholar
Gössling, T., and Buijter, B.. “Socially Responsible Investment Engagement.” In Stakeholder Engagement: Clinical Research Cases, Freeman, R. E., Kujala, J., and Sachs, S., eds. Cham, Switzerland: Springer (2017), 113–135.Google Scholar
Gounopoulos, D.; Kallias, A.; Kallias, K.; and Tzeremes, P. G.. “Political Money Contributions of U.S. IPOs.” Journal of Corporate Finance, 43 (2017), 19–38.Google Scholar
Gupta, A.; Briscoe, F.; and Hambrick, D. C.. “Red, Blue, and Purple Firms: Organizational Political Ideology and Corporate Social Responsibility.” Strategic Management Journal, 38 (2017), 1018–1040.Google Scholar
Gurun, U. G.“Benefits of Publicity.” Working Paper, University of Texas at Dallas (2016).Google Scholar
Gurun, U. G., and Butler, A. W.. “Don’t Believe the Hype: Local Media Slant, Local Advertising, and Firm Value.” Journal of Finance, 67 (2012), 561–598.Google Scholar
Hamilton, J. T.“Pollution as News: Media and Stock Market Reactions to the Toxics Release Inventory Data.” Journal of Environmental Economics and Management, 28 (1995), 98–113.Google Scholar
Hasan, I.; Hoi, C. K.; Wu, Q.; and Zhang, H.. “Social Capital and Debt Contracting: Evidence from Bank Loans and Public Bonds.” Journal of Financial and Quantitative Analysis, 53 (2017), 1017–1047.Google Scholar
Haslem, B.“Managerial Opportunism During Corporate Litigation.” Journal of Finance, 60 (2005), 2013–2041.Google Scholar
Heinkel, R.; Kraus, A.; and Zechner, J.. “The Effect of Green Investment on Corporate Behavior.” Journal of Financial and Quantitative Analysis, 36 (2001), 431–449.Google Scholar
Hong, H., and Liskovich, I.. “Crime, Punishment and the Value of Corporate Social Responsibility.” Working Paper, Columbia University (2017).Google Scholar
Igan, D., and Mishra, P.. “Wall Street, Capitol Hill, and K Street: Political Influence and Financial Regulation.” Journal of Law and Economics, 57 (2014), 1063–1084.Google Scholar
Ioannou, I., and Serafeim, G.. “The Impact of Corporate Social Responsibility on Investment Recommendations: Analysts’ Perceptions and Shifting Institutional Logics.” Strategic Management Journal, 36 (2015), 1053–1081.Google Scholar
Jayachandran, S.“The Jeffords Effect.” Journal of Law and Economics, 49 (2006), 397–425.Google Scholar
Karpoff, J. M.“Does Reputation Work to Discipline Corporate Misconduct?” In The Oxford Handbook of Corporate Reputation, Barnett, M. L. and Pollock, T. G., eds. Oxford: Oxford University Press (2011), 361–382.Google Scholar
Karpoff, J. M.; Lee, D. S.; and Martin, G. S.. “The Cost to Firms of Cooking the Books.” Journal of Financial and Quantitative Analysis, 43 (2008), 581–612.Google Scholar
Karpoff, J. M., and Lott, J. R. Jr. “The Reputational Penalty Firms Bear from Committing Criminal Fraud.” Journal of Law and Economics, 36 (1993), 757–802.Google Scholar
Karpoff, J. M.; Lott, J. R. Jr.; and Wehrly, E. W.. “The Reputational Penalties for Environmental Violations: Empirical Evidence.” Journal of Law and Economics, 48 (2005), 653–675.Google Scholar
Kim, C.; Pantzalis, C.; and Chul Park, J.. “Political Geography and Stock Returns: The Value and Risk Implications of Proximity to Political Power.” Journal of Financial Economics, 106 (2012), 196–228.Google Scholar
Koh, P.-S.; Qian, C.; and Wang, H.. “Firm Litigation Risk and the Insurance Value of Corporate Social Performance.” Strategic Management Journal, 35 (2014), 1464–1482.Google Scholar
Kölbel, J. F.; Busch, T.; and Jancso, L. M.. “How Media Coverage of Corporate Social Irresponsibility Increases Financial Risk.” Strategic Management Journal, 38 (2017), 2266–2284.Google Scholar
Krüger, P.“Corporate Goodness and Shareholder Wealth.” Journal of Financial Economics, 115 (2015), 304–329.Google Scholar
Luo, X.; Wang, H.; Raithel, S.; and Zheng, Q.. “Corporate Social Performance, Analyst Stock Recommendations, and Firm Future Returns.” Strategic Management Journal, 36 (2015), 123–136.Google Scholar
Lys, T.; Naughton, J. P.; and Wang, C.. “Signaling through Corporate Accountability Reporting.” Journal of Accounting and Economics, 60 (2015), 56–72.Google Scholar
Matejek, S., and Gössling, T.. “Beyond Legitimacy: A Case Study in BP’s ‘Green Lashing’.” Journal of Business Ethics, 120 (2014), 571–584.Google Scholar
Neslen, A.“EU Dropped Climate Policies after BP Threat of Oil Industry ‘Exodus’.” In The Guardian, Vol. 20, (Apr. 20, 2016).Google Scholar
Petrenko, O. V.; Aime, F.; Ridge, J.; and Hill, A.. “Corporate Social Responsibility or CEO Narcissism? CSR Motivations and Organizational Performance.” Strategic Management Journal, 37 (2016), 262–279.Google Scholar
Porter, M. E., and van der Linde, C.. “Green and Competitive: Ending the Stalemate.” Harvard Business Review, 73 (1995), 120–134.Google Scholar
Ramchander, S.; Schwebach, R. G.; and Staking, K.. “The Informational Relevance of Corporate Social Responsibility: Evidence from DS400 Index Reconstitutions.” Strategic Management Journal, 33 (2012), 303–314.Google Scholar
Schuler, D. A.; Rehbein, K.; and Cramer, R. D.. “Pursuing Strategic Advantage through Political Means: A Multivariate Approach.” Academy of Management Journal, 45 (2002), 659–672.Google Scholar
Servaes, H., and Tamayo, A.. “The Impact of Corporate Social Responsibility on Firm Value: The Role of Customer Awareness.” Management Science, 59 (2013), 1045–1061.Google Scholar
Stanfield, J., and Tumarkin, R.. “Does the Political Power of Nonfinancial Stakeholders Affect Firm Values? Evidence from Labor Unions.” Journal of Financial and Quantitative Analysis, 53 (2018), 1101–1133.Google Scholar
Tonin, M., and Vlassopoulos, M.. “Corporate Philanthropy and Productivity: Evidence from an Online Real Effort Experiment.” Management Science, 61 (2015), 1795–1811.Google Scholar
Unsal, O.; Hassan, M. K.; and Zirek, D.. “Corporate Lobbying and Labor Relations: Evidence from Employee-Level Litigations.” Journal of Corporate Finance, 46 (2017), 411–441.Google Scholar
Werner, T.“Gaining Access by Doing Good: The Effect of Sociopolitical Reputation on Firm Participation in Public Policy Making.” Management Science, 61 (2015), 1989–2011.Google Scholar
Yu, F., and Yu, X.. “Corporate Lobbying and Fraud Detection.” Journal of Financial and Quantitative Analysis, 46 (2011), 1865–1891.Google Scholar
Zyglidopoulos, S. C.; Georgiadis, A. P.; Carroll, C. E.; and Siegel, D. S.. “Does Media Attention Drive Corporate Social Responsibility?” Journal of Business Research, 65 (2012), 1622–1627.Google Scholar