CSR, agency costs and investment-cash flow sensitivity: a mediated moderation analysis

Purpose The purpose of this paper is to document the relation between investment-cash flow sensitivity and a firm’s engagement in corporate social responsibility (CSR) activities in European context. Specifically, this paper aims to empirically examine how CSR moderates the sensitivity between investment spending and firm internal funds. Design/methodology/approach The Euler equation technique approach is applied to test the sensitivity of investment to internally generated funds for a panel data set of 398 European companies listed in the STOXX Europe 600 during 2009-2014. Furthermore, a mediated moderation model is developed in order to examine the moderating role of CSR in the investment-cash flow sensitivity, as well as the mediating role of agency costs on the moderation effect of CSR. Findings The results show that CSR performance weakens the sensitivity of investment to internal funds; agency costs of free cash flow mediate the negative moderating effect of CSR on investment-cash flow sensitivity. Thus, this study demonstrates empirically that firms with socially responsible practices are better positioned to obtain financing in the capital markets through reducing market frictions as well as agency costs. Practical implications Firms are invited to engage more in CSR activities that reduce agency conflicts between management and shareholders. Originality/value The originality of this paper consists in proposing the establishment of both direct and indirect link between CSR and investment-cash flow sensitivity.