CEO Power, Corporate Social Responsibility, and Firm Value : A Test of Agency Theory

This study explores whether firms with powerful CEOs tend to invest (more) in corporate social responsibility (CSR) activities as the over-investment hypothesis based on classical agency theory predicts. In addition, this paper tests an alternative hypothesis that if CSR investment is indeed an agency cost like the over-investment hypothesis suggests, then those activities may destroy firm value. Using CEO pay slice (Bebchuck, Cremers, and Peyer, 2011), CEO tenure, and CEO duality to measure CEO power, we show that CEO power is negatively correlated with firm's choice to engage in CSR and with the level of CSR activities in the firm. Furthermore, our results suggest that CSR activities are in fact value-enhancing in that as firms engage in more CSR activities their value increases