How do independent directors view corporate social responsibility (CSR) during a stressful time? Evidence from the financial crisis

Pandej Chintrakarn, Pornsit Jiraporn, Sirimon Treepongkaruna

Research output: Contribution to journalArticlepeer-review

Abstract

We explore the effect of board independence on CSR investments during a stressful time, i.e. during the Great Recession. Our results show that independent directors exhibit an unfavorable view of CSR investments during the crisis. Stronger board independence leads to a significant reduction in CSR. In particular, a rise in board independence by one standard deviation reduces CSR investments by about 8.22%. Further analysis shows that managers raised CSR investments during the crisis, consistent with the risk-mitigation view, where managers invest in CSR to reduce their risk exposure. However, managers appear to over-invest in CSR during the crisis as they are forced to cut back in the presence of a strong board, implying that part of the CSR investments during the crisis is motivated by managers’ own risk preference. Additional robustness checks corroborate the results, including fixed- and random-effects regressions, propensity score matching, and instrumental-variable analysis. Our study is the first to shed light on how independent directors view CSR during a stressful time. Finally, we show that CSR reduces firm risk substantially during the crisis, strongly confirming the risk-mitigation hypothesis.

Original languageEnglish (US)
Pages (from-to)143-160
Number of pages18
JournalInternational Review of Economics and Finance
Volume71
DOIs
StatePublished - Jan 2021

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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