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Impact of media on corporate social responsibility: E vidence from corporate philanthropic contribution

Impact of media on corporate social responsibility: E vidence from corporate philanthropic contribution. IKEA founder pledges £1bn to charity following Nazi past revelations. He instructed the IKEA foundation to more than double its charitable spending.

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Impact of media on corporate social responsibility: E vidence from corporate philanthropic contribution

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  1. Impact of media on corporate social responsibility: Evidence from corporate philanthropic contribution

  2. IKEA founder pledges £1bn to charity following Nazi past revelations • He instructed the IKEA foundation to more than double its charitable spending. • The move follows last month’s revelations by Swedish journalist Elisabeth Åsbrink that MrKamprad at the age of 17 had been an active recruiter and a registered member of the SvenskSocialistiskSamling (SSS), the successor to the Swedish Nazi party. • 18th Sep 2011, The Telegraph

  3. Nov 8th, 2009

  4. Negativity in public opinion about Goldman Sachs

  5. Goldman’s Philanthropic Contribution (PC, hereafter) jumped to rank #2 in 2010 [$70m315m!] Source: The Chronicle of Philanthropy + Compustat

  6. Research questions • Should a firm spend shareholders’ money on PC in response to negative public opinion about the firm in the media? • Is spending more on PC in response to media negativity (especially CSR news) a symptom of agency problem? Or is it consistent with stakeholder value maximization?

  7. Goldman Sachs • They belong to stronger governance group • Low E index group (the index value=2) • High independent directors group (82%) • Warren Buffet, the mastermind of long-term investor, bought perpetual preferred stock of GS for $5 billion in Nov.2008, and has been monitoring the bank.

  8. Stakeholder value maximization story • Firm is a nexus of contracts between shareholders and other stakeholders (Coase, 1939). • CSR is a signal that the firm is committed to its implicit contracts with the various stakeholders (Deng, Kang, & Low 2013). • Media is an outlet of the opinions of the stakeholders (Dyck & Zingales, 2003). • PC in response to negative media coverage would not only improve CEO’s reputation but also improve the firm’s relationship with important stakeholders.

  9. Stakeholder value story (cont.) • In the long run, PC spending would signal the commitment to stakeholder value, and contribute to the firm’s long-term performance. • Also, PC spending would enhance the reputation of the CEO in the outside labor market, and increase the probability of being appointed as an independent director. • Stock price response to the announcement of PC spending would be mixed or unclear because: • PC spending could be anticipated as the investors read negative media coverage in CSR beforehand • Difficult to price in the stock market (Edmans 2011)

  10. Shareholder value maximization (Agency problem) story • The only way a corporation can do good in society is to maximize shareholder value (Friedman, 1970). • Media is not a producer of information but that of entertainment (Jensen, 1979). • Market is efficient (Fama, 1970), so no need to care about the tone in the media. • PC spending is a waste of shareholders’ money (Masulis& Reza, 2013). • Weakly governed firms would spend more on PC • Investors’ response would be negative • Unless there is a friction in the director labor market, CEOs who spend $ on PC would have smaller chance of being appointed as independent directors.

  11. Summary of findings • Supporting stakeholder value maximization hypotheses. • Firms spend more on PC when the tone of the CSR news is more negative with extensive coverage. • PC spending is not a function of governance strength (E-index/%ind.dir./small board). • Rather, firms with high ownership by long-term oriented institutions spend more on PC (as well as R&D). • Consistent result when using ∆CSR score of KLD instead of PC spending. • Insignificant price response to PC spending ann. • CEOs with PC spending (t) face better chance of being appointed as independent directors (t+1). • Negative CSR news tone (t)  market share declines (t+1) • PC spending is effective in reducing the negativity of media and in strengthening Tobin’s Q.

  12. Empirical design 1 • Firms that (1) contact more retail customers (2) are heavily regulated (3) are known to be environmentally hazardous would spend more on PC.  industry fixed effects • Firms would spend more on PC when natural disasters take place. year fixed effects • Significant persistence in PC due to multi-year commitments: “$1 billion commitment over the next 4 years” = 250 million per year control for current year’s PC spending

  13. Empirical design 2 • Measure of negativity about the firm in the media: • Tetlock’s (2007, 2008) measure [untabulated, but consistent results] • Loughran & McDonald’s (2011) measure refined for finance and accounting [V]. • Aggregate all the news articles about the firm (i) in a given fiscal year (t).

  14. Empirical design 3 • Measure of negativity about the firm in the media: • Predicts future earnings and Q (Gurun & Butler, 2012) • Concern: linguistic negativity measure could be a proxy for soft information that is otherwise hard to quantify about the future fundamentals (Tetlock et al., 2008) • Solution: • Filter out the news about fundamentals & focus on CSR news: use Factiva News codes

  15. Data 1 • The Chronicle of Philanthropy • Top 300 out of Fortune 500 firms, 2000~2010 • Survey data augmented by hand collected data based on tax return (Forms 990-PF) for firms with foundations. • 202 unique firms • 1.7m (0.5m) Factiva news articles of Execucomp firms (sample firms) • top sources: Dow Jones News Wires, Reuters Newswires, WSJ, FT, NYT, etc. • Use tags of 841 unique news codes in the XML format to filter: • Non financial (580 codes) • CSR (66 codes)

  16. Data 2 • Risk Metrics: E-index • Thomson Financial 13F – institutional ownership • Brian Bushee’s website – classification of dedicated/quasi-indexer/transient institutions

  17. Table 1. primary result • Other controls: lag(ln(PC /assets)), size, ad margin, R&D margin, CEO tenure, %TRA, %QIX, %ind.directors, leverage ratio, industry FE, year dummies.

  18. Table 2. PC spending, regulated industry, and “sin stocks”

  19. Do better governed firms respond more sensitively to media negativity through PC spending? • Table 3. not significantly! • Other controls: the same as Table 1.

  20. Concern about the PC data • Some of you may be concerned about the nature of the PC data we use: survey data augmented by additional hand collection • Under profit maximization hypothesis, change in PC is a part of firm effort on CSR. • KLD data gives us CSR score for larger number of firms over longer period of time. • Free us from selection bias concern. • Replace PC with the change in CSR score to see if we get consistent results • CSR score excluding governance score • Kang (2013) shows that PC is significantly positively correlated with change in CSR.

  21. Replacing PC with Chg.KLD score ex. Governance (T.4) Other controls: ROA, R&D margin, AD margin, size, 1{chairman=CEO}, tenure, E-index, %DED, %QIX, %TRA, %ind. Directors, E-index, tax rate, leverage, and constant.

  22. Stock market event study • If PC maximizes profit, the price response to the announcements of PC should be positive under the conditions of negative media coverage and better governance. • Search news articles in Factiva over the sample period for the sample firms • Keyword “(charitable or philanthropic) and (donation or contribution)” • Source: all news outlets in Factiva • Restriction: only in the title and the first paragraph • First news announcements for each event

  23. Cleaning the sample if contaminated by major corporate events [-1,1](T.5)

  24. CAR regression(T.6) • Investors welcome the PC spending announcement that was preceded by media negativity & combined with stronger governance

  25. Why opposite result with Masulis and Reza (2013) in event study? Stakeholder value

  26. PC and CEO reputation in director labor market: probit model (T.7) Other controls: 1yr stock perf. ROA, size, idiosyncratic risk, 1{chairman=CEO}, year fixed effects, constant. 4.26% of unconditional probability. One standard deviation increase in PC increases the probability by 2.4%

  27. PC spending in response to media negativity and firm value (Q)(T.10) • Other controls: ln(#articles), 1yr stock perf., ROA, ad margin, R&D margin, leverage, investment, size, %inst.own, idiosyncratic risk, constant, industry FE, year dummies.

  28. Does negativity in CSR news chase away the customers? (T.8)

  29. Conclusion • Corporations spend shareholders money on PC (or CSR, more generally) to maximize stakeholder value • Firms spend more on PC when the tone of the CSR news is more negative with extensive coverage. • PC spending is not a function of governance strength • Rather, firms with high ownership by long-term oriented institutions spend more on PC (as well as R&D). • Insignificant price response to PC spending ann. • CEOs with PC spending (t) face better chance of being appointed as independent directors (t+1). • Negative CSR news tone (t)  market share declines (t+1) • PC spending is effective in reducing the negativity of media and in strengthening Tobin’s Q.

  30. Implication for current issues: Negative shocks to CSR news take place in the media. Contribution to philanthropy is a valid way of coping.

  31. Thank you!

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