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Case Presentation.pptx

  1. 1. CASES STUDY IN CORPORATE FINANCE Submitted to: Dr. Wasif Present by: Mr. Adnan Khan Program: MS Management Sciences Session: 2022-24 Riphah International University, QIE, Lahore
  2. 2. TOPIC: Journal of Economics and Business • Corporate social responsibility and CEO compensation revisited: Do disaggregation, market stress, gender matter?
  3. 3. A B S T R A C T • In this paper we examine the relation between corporate social responsibility (CSR) and CEO compensation. Both CSR and CEO compensation are disaggregated into various sub-components. We also consider impact of the market crisis and the relevance of gender. Our results show that there is a negative relation between total compensation and socially responsible firms. However, disaggregation of CSR into its components matters. Dimensions of CSR that are relevant are employee relations, environment and diversity. Our results also show that the financial crisis and gender matter: once they are accounted for interactively in the model, the general relation between CSR and compensation weakens.
  4. 4. Definition of CSR and CEO Compensation What Is Corporate Social Responsibility (CSR)? • Corporate social responsibility (CSR) is a self-regulating business model that helps a company be socially accountable to itself, its stakeholders, and the public. By practicing corporate social responsibility, also called corporate citizenship, companies can be conscious of the kind of impact they are having on all aspects of society, including economic, social, and environmental. • To engage in CSR means that, in the ordinary course of business, a company is operating in ways that enhance society and the environment instead of contributing negatively to them. What Is CEO Compensation? • It's hard to read the business news without coming across reports about the salaries, bonuses, and stock option packages awarded to chief executives of publicly traded companies. Making sense of the numbers to assess how companies are paying their top brass is not easy. Investors must ensure that executive compensation is working in their favor.
  5. 5. Introduction • In this paper we examine the link between corporate social responsibility (CSR) and CEO compensation. CSR is measured using the rating system from Kinder, Lindenberg, and Domini (KLD) Research and Analytics database. It looks at whether firms are rated based on their environmental activities, community involvement, product qualities, employee relations and diversity policies. CEO compensation is divided into various components: • Salary, Bonus Cash and long-term compensation. The relation between CSR and CEO compensation has been examined in the prior literature (see for example Cai, Jo, & Pan, 2011). The main contribution lies in the consideration of the impact of the recent financial crisis. Such a decomposition of the key variables allows a more in-depth analysis of the identified relations.
  6. 6. Introduction (Cont.) • CSR is associated with investments in negative net present value projects that destroy shareholders' value. Under the second view, managers may over-invest in CSR that transfer wealth from shareholders to other stakeholders (such as community, regulators and employees) This is because managers have incentives to use CSR investment to build their personal reputations. • But these investments may reduce shareholders’ value in at least three ways. First, managers’ career concerns might make them focus excessively on short-term profit and distort their investment decisions, such as myopic CSR investment (Narayanan, 1985) and overinvestment (Holmstrom and Costa, 1986). For example, managers often overinvest in CSR for private rent-seeking benefits to secure their personal reputations in the community, enhance their personal status with stakeholders,
  7. 7. Introduction (Cont.) • It is important to distinguish normal CSR and abnormal CSR for at least two reasons. First, Larcker (2003) argues that although firms continuously strive to optimize their corporate financial policies, it is plausible that firm policies and managerial decisions deviate from the optimal levels
  8. 8. 2. Data and research design  Sample formation: • We obtain CSR data from the Kinder, Lydenberg and Domini (KLD) Database. We drop the following observations in the screening procedures to obtain our sample:(1) observations with CEO turnover during the year; (2) observations in which the current CEO has served the company for strictly less than two consecutive years; (3) firms in the regulated industries (SIC code 4900–4999) or in the financial industry (SIC code 6000–6999); and (4) observations with zero CEO compensation in the year. Table 1 describes the sample distribution over years.
  9. 9. 3. Results • 3.1. Descriptive statistics • presents the descriptive statistics. Mean(median) CEO total compensations $5.552($3.329) million. Mean CSR is 0.280. On average, the sample firms are profitable with a mean return on assets (ROA) of 0. 106. Mean board independence (BDINDEP) is 68%. Mean percentage of common stock owned by the board of directors (BDOWN) is 4%. • Mean percentage of common stock owned by the institutional shareholders is 63%
  10. 10. 3.3. Determinants of CSR Table 5 presents the regression results of the determinants of CSR based on Eq. We conduct a number of robustness checks on the model. Results are qualitatively consistent with prior studies. CSR is positively associated with operating cash flow, firm size and research and development divided by sales. It is negatively associated with corporate governance strength. In column (1) we include all firm characteristics in addition to industry and year fixed effects. In column (2), we include all firm characteristics, the corporate governance measures as well as industry and year fixed effects. On the other hand, CSR is negatively associated with corporate governance strength. In our next set of tests, we use the fitted values of CSR based on estimated coefficients in Table 5 column (1) to compute the normal CSR (optimal level of CSR based on firm characteristics).
  11. 11. 3.4. Regressions of CEO compensation on normal CSR and abnormal CSR • In Table 6, we examine whether there are systematic differences between normal CSR and abnormal CSR in affecting CEO compensation. In all specifications we find similar results. However, CEO compensation is punished for excessive CSR investments when CSR investment deviates from its optimal level. This result suggests that CEO is rewarded for investing in optimal level of CSR. • First, we find CEO compensation level is positively associated with normal CSR at the 1% significance level. To the extent that normal CSR reflects the optimal level of CSR investment, this result suggests that CEO is rewarded for investing in optimal level of CSR. Second, we find CEO compensation level is negatively associated with abnormal CSR at the 1% significance level.
  12. 12. 3.5. Does corporate governance affect the association between CEO compensation and CSR? • In Table 7, we examine the effect of corporate governance on the association between CEO compensation and CSR investment. In firms with strong corporate governance, we find that CEO compensation is negatively associated with CSR. However, in firms with weak corporate governance (column (2) and (3) we find no such association. The Chi-square to test the difference in coefficient on CSR between strongly-governed firms and weakly governmentally firms is 6.85, significant at 1% level. This result suggests that CEOs' pay is lower when total CSR is higher. • Higher scores of GOVSTRENGTH denote higher corporate governance strength. In firms with strong corporate governance (column (1)), we find that CEO compensation is negatively associated with CSR. However, in firms with weak corporate governance (column (2)), we find that CEO compensation is not associated with CSR.
  13. 13. 3.6. Robustness tests • 3. 6. 1. Alternative measures of CSR: • In a sensitivity test, as in McWilliams and Siegel (2000), we also use an alternative measure of CSR, CSR DSI400, an indicator variable that takes a value of 1 if the firm is included in the DSI400 in a given year (for having passed the “social screen”), and 0 otherwise. • In order to be eligible for the DSI 400, a firm must derive less than 2% of its gross revenue from the production of military weapons, have no involvement in nuclear power, gambling, tobacco, and alcohol, and have a positive record in each of the remaining six categories. Our results are qualitatively similar
  14. 14. 3.6. Robustness tests (Cont.) 3.6.2. Financial constraints: • Our main results on the association between CEO compensation and CSR are robust across alternative measures of “financial constraints. ” In addition, the results are qualitatively similar based on a balanced panel of firms for the sample period.
  15. 15. 3.6. Robustness tests (Cont.) 3.6.3. Endogeneity: • To address the potential endogeneity problem, we perform two- stage-least-squares (2SLS) regression analysis using religion rank and a blue state dummy as instrumental variables for the CSR investment (Deng et al. , 2013). This finding suggests that the religion rank variable is likely to be positively correlated with a firm`s CSR, thus satisfying the relevance requirement of instrumental variables. However, to the extent that the construction of the religion rank variable is based on the state in which a firm is located, it is unlikely that this variable has a significant effect on the CEO compensation, satisfying the exclusion condition of instrumental variables.
  16. 16. 4. Conclusions • We examine whether CEO compensation is associated with corporate social responsibility (CSR) investment. The value creation (value destruction) hypothesis predicts a positive (negative) association between CEO compensation and CSR. Consistent with the value destruction hypothesis, we find that CEO total compensation level is negatively associated with CSR investment. Strong corporate governance is more pronounced than weak corporate governance in this study.
  17. 17. 4. Conclusions (Cont.) • Decomposing total CSR investment into a normal component and abnormal component generates two interesting insights. We find CEO compensation is positively associated with normal corporate social responsibility. Strong corporate governance structure penalizes CEO more by reducing CEO compensation if CEOs over-invest in CSR. This result suggests that CEOs receive lower compensation for excessive CSR investments.
  18. 18. Thank You :)

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