A theory of firm opacity and corporate social responsibility

Linqing You and Zhuoqiong Chen

Journal of Banking & Finance, 2022, vol. 145, issue C

Abstract: We investigate theoretically the effect of firm opacity, the degree of information asymmetry between firms and outside investors, on whether Corporate Social Responsibility (CSR) activities signal firm value. In our model, a profit-maximizing firm chooses whether to conduct costly CSR activities observable to potential investors and whether to undertake internal corporate and managerial actions that improve its value, which is unobservable to potential investors. We show that the firm is more likely to perform CSR when it undertakes the value-enhancing internal actions in equilibrium, and hence, CSR signals the firm’s value and increases investors’ expected valuation of the shares, only when the firm is moderately opaque. Empirical implications regarding the effect of firm opacity on the correlation between CSR and firm value are discussed.

Keywords: Adverse selection; Signaling game; Firm opacity; Rotation order; CSR (search for similar items in EconPapers)
JEL-codes: D43 D79 D82 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426622002205
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:145:y:2022:i:c:s0378426622002205

DOI: 10.1016/j.jbankfin.2022.106640

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().