Corporate Social Responsibility and Future Earnings

Abstract

Corporate social responsibility (CSR) initiatives can be studied as an investment, a signaling device, and/or an agency problem. In this paper, we focus on the investment and signaling hypotheses, and thus examine the association between CSR and future realized earnings and cash flow from operations (CFO). We find that CSR has negative long-term relation to both earnings and CFO, but there is no short-term evidence. These findings could be linked to the agency costs of CSR, a lower cost of equity of responsible firms, or both. Furthermore, the volatility of earnings negatively moderates the CSR effect on future earnings, i.e. it is different for stable and volatile firms. After raising social responsibility, stable firms experience no escalation in volatility, while having smaller losses in the long-run compared to volatile firms. On the contrary, volatile firms that engage in CSR tend to post a short-term reduction in volatility, followed by a sharp fall in the long-term earnings. Admittedly, when we account for the unobserved year effects, the only robust results are that CSR leads to a decline in the cash flow from operations, and a lower earnings volatility at volatile companies. Hence, while our results cast doubt whether CSR signals higher earnings or profitability, CSR could signal a lower volatility of earnings.