In 2019, approximately 200 CEOs from the Business Roundtable made headlines by declaring a shift in corporate priorities. They asserted that companies should not focus solely on maximizing shareholder gains but should also consider the well-being of employees, environmental sustainability, and fair treatment of suppliers. Thus, a natural question arises: does this commitment to social responsibility enhance or destroy a company’s value?
The academic debate on this matter reveals two divergent viewpoints. Some researchers argue that socially responsible actions can improve a company’s financial performance and benefit shareholders. Studies by Lins, Servaes, and Tamayo during the 2008-2009 financial crisis and Naughton, Wang, and Yeung suggest that companies can reap the rewards of social responsibility, particularly when investors value these efforts – for instance, during tough moments.
Conversely, a second body of literature posits that firms may engage in social responsibility initiatives for reasons unrelated to shareholder interests. Authors such as Krüger and Masulis, and Reza suggest that CEOs may pursue these efforts to enhance their personal reputation or gain personal benefits. This perspective is reinforced by the findings of Jiang, Qian, and Yonker, who highlight the potential for CEOs to leverage these activities for status, awards, or networking. For instance, in India, the implementation of a law mandating corporate spending on social responsibility even led to stock price decreases, as shown by Manchiraju and Rajgopal.
Notably, neither viewpoint delves into the impact of CEO characteristics on the perception of social responsibility efforts and their influence on company value. While some evidence suggests that CEO identity traits can influence a company’s social involvement, there is limited research on how CEO characteristics directly shape the link between social responsibility and company value.
Our recent paper investigates how the presence of a CEO from the local area, termed a “home CEO,” influences the value derived from a company’s social responsibility efforts. Home CEOs are defined as those leading companies within 100 miles of their birthplace. Two central questions guide this exploration: Do companies led by home CEOs engage in more social responsibility activities, and do these efforts yield greater value compared to companies led by non-home CEOs? The findings of this study confirm both questions in the affirmative.
The relationship between home CEOs, social responsibility activities, and firm value is complex. Home CEOs may engage in CSR to build or maintain relationships and trust in their hometowns, while outside CEOs may do so to establish connections with their local communities. These dynamics make it plausible that outside CEOs may be more active in CSR activities. The effect of home CEOs’ CSR activities on company value is similarly nuanced. Local stakeholders may inherently trust home CEOs more, fostering strong bonds rooted in shared values and norms. This “ingroup” dynamic often thrives on trust, especially when collaboration and interdependence are integral, which could positively impact a company’s value. However, home CEOs may also engage in CSR activities for personal gain, seeking political roles or financial benefits. The balance between these factors remains a crucial aspect of the study.
Our research draws on data from the Standard & Poor’s Executive Compensation (ExecuComp) database spanning from 1992 to 2018. About a quarter of the examined companies are led by home CEOs. This group of companies typically operates in smaller communities but enjoys higher wealth, employment, and religious activity. Home CEOs demonstrate a stronger commitment to community-focused CSR activities, contributing to a CSR score approximately 6.0% higher than the average firm, equivalent to roughly 10% of the median firm’s net income.
A robust positive relationship exists between home CEOs, CSR activities, and firm value. Firms led by home CEOs show a steady increase in firm value over 1 to 3 years following CSR efforts, marking a substantial impact on the bottom line. These findings are supported by rigorous analyses that address potential endogeneity issues using, for example, innovative instruments like local weather conditions at the firm’s headquarters.
Furthermore, our paper explores the channels through which CSR activities affect firm value. Companies under home CEOs’ leadership report enhanced customer satisfaction, stronger supplier relationships, and higher employee morale. Improved productivity from local employees translates to increased sales and profits. Crucially, during times of low public trust, such as the 2008-09 financial crisis and the 2020 COVID-19 pandemic, only companies led by home CEOs with a robust CSR history yield higher stock returns. This indicates that investors place a premium on CSR efforts in firms led by home CEOs during challenging periods.
In conclusion, this research highlights the influence of CEO-specific factors on the relationship between CSR and firm value. It underscores the impact of a CEO’s place of origin on corporate social responsibility and its effects on value. The findings challenge the notion that CSR harms a firm’s value, particularly when led by home CEOs who enjoy trust and shared values within their communities.
This study expands the existing literature by connecting CEO birthplaces with corporate decisions and outcomes and underlines the significance of CEO traits in shaping the impact of business policies on firm value. In an age where CSR is a subject of increasing importance, this research provides a fresh perspective by emphasizing the individual CEO’s identity, particularly their place of origin, as a factor influencing CSR investment and its impact on company value. In essence, the findings suggest that companies led by home CEOs gain significantly by nurturing their communities and fostering social responsibility.
Zicheng Lei is a Lecturer in Finance (Assistant Professor) at King’s Business School, King’s College London.
Dimitris Petmezas is a Professor of Finance in his second tenure at Durham University Business School.
Raghavendra Rau is a Professor of Finance and the Founder and Academic Director of the Cambridge Centre for Alternative Finance (CCAF).
Chen Yang is a Research Associate in Accounting and Finance at the University of Glasgow.
This post was adapted from their paper, “Local Boy Does Good: The Effect of CSR Activities on Firm Value,” available on SSRN.
