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Master Thesis
Corporate Cash Holdings and Corporate Social
Responsibility
Author:
Filip Zahariev
Student ID number: S2744783
Supervisor:
dr. H. Gonenc
Co-assessor:
dr. J. H. von Eije
Date of submission: 15
thJune, 2015
MSc International Financial Management
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Table of Contents
Abstract …...……….………...….. 2
1. Introduction ……….………... 3
2. Theoretical Background ……….….... 6
2.1. Cash holdings and agency costs ……….……...……….….… 7
2.2. Cash holdings and R&D investments ……….……….… 8
2.3. Cash holdings and government regulations ……….……….. 11
3. Hypotheses Development ………...………....… 12
3.1. A positive link between CSR and cash holdings………...… 12
3.2. A negative link between CSR and cash holdings ………...….. 14
3.3. Low- and high-governance countries ……….….. 17
4. Data and Methodology ………...… 18
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Abstract
This paper investigates the relationship between corporate cash holdings and corporate social responsibility (CSR) and in particular what is the influence of CSR on cash reserves. The theoretical investigation is held by reviewing different theories such as the agency theory, the trade-off theory, the financing hierarchy theory, the pecking order theory, the transaction cost motive, the precautionary motive, and the speculative motive for withholding cash. Three hypotheses related to the association between CSR investments and levels of excess cash, are examined with the usage of unbalanced panel data consisting of 22,395 firm-year observations over the period 2002-2013. I find empirical evidence supporting a direct negative association between the CSR and the stock of cash. Taking the agency issues and R&D expenditures as an interacting determinant, an indirect positive relation is revealed between them. Moreover, these results are not valid in high-governance countries, while they hold in low-governance ones. Furthermore, the paper provides evidence which shows that the social performance component of CSR has a greater impact on stockpiled cash than the environmental performance in worldwide sample, whereas the reverse effect is noticeable in poorly governed countries.
3 1. Introduction
Corporate cash holdings have received enormous academic and practitioner interest over the last decades (e.g. Opler, Pinkowitz, Stulz, and Williamson, 1999; Dittmar and Mahrt-Smith, 2007; Harford, Mansi, and Maxwell, 2008; Bates, Kahle, and Stulz, 2009; Dittmar and Duchin, 2012; Nikolov and Whited, 2014) mainly because of the dramatic increase in the amount of cash kept by companies (Yung and Nafar, 2014). The fact that cash and cash equivalents represent a large part of the firm’s balance sheets and the ratio of cash to total assets keeps increasing are other reasons that show why cash management deserves such an interest of investigation (Seifert and Gonenc, 2013). Moreover, Dittmar and Mahrt-Smith (2007) state that firms accumulate considerable and rising amount of excess cash and the value of this surplus of cash accounts for an enormous part of the corporate wealth.
Modigliani and Miller (1958) assert that companies can finance all investment opportunities, which increase the value of the firm, only when the business environment is frictionless. In this particular situation, internal financial assets do not have an impact on investments and therefore, on the growth of the firm. However, when market frictions appear the conditions change completely. More specifically, market imperfections result in an increase in the cost of external financing compared to the created internal resources (Greenwald, Stiglitz, and Weiss, 1984; Myers and Majluf, 1984). Hence, the correct understanding and managing of the internal funds are really important for a stable future of the companies.
Furthermore, there is a cost of holding cash. One incentive for firms to keep more cash and cash equivalents is to meet future emergency situations, but meanwhile the opportunity cost is that they will not invest this cash in profitable projects, which have a positive NPV (Al-Najjar, 2013). Keeping a high level of cash may result in arising an agency problem between shareholders and managers of the company (Jensen, 1986).
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shareholders mixed with ineffective management of cash reserves result in value-decreasing investment actions (Harford, 1999).
Over the past several decades, many other different corporate trends have born the interest among the scholars, as well. One of them is Corporate Social Responsibility (from now on referred as CSR) which was first mentioned in the literature by Bowen (1953) and it has been developed ever since from a narrow belief to a complex theory, taking a central place in corporate decision-making activities nowadays (Cochran, 2007). Even though, many researchers provide a definition of CSR, in the corporate and academic world, there is still uncertainty of how CSR should be defined (Dahlsrud, 2006). However, one short and simple definition is given by Jackson and Hawker (2001). They defined CSR as: “how you treat your employees and all your stakeholders and the environment”. Moreover, the CSR literature distinguishes four characteristics intrinsic for CSR – economic, legal, ethical, and discretionary (philanthropic) (Carroll, 1979; 1991; 1999; Hill, Ainscough, Shank, and Manullang, 2007). More particularly, Carroll (2000) claims that companies should accomplish both responsibilities of being profitable and ethical, but not to focus on only one of them. Essentially, the concept behind CSR is the realization that companies are ethically obligated and there is a necessity to act accordingly to the social pressures (Cochran, 2007).
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Caltion and Payne, 2003; Scherer, Palazzo, and Baumann, 2006). By examining the CSR activities of companies and its effect on cash holdings, this paper can contribute to the issue of explaining the association between CSR and financial performance from a different perspective.
More particularly, this paper has the purpose to approach the development of both cash holdings and CSR literature by examining the relationship between the two determinants. Thus, its main objective is to investigate whether there is any relationship between cash holdings and CSR and if so, what does this relation look like. The interaction will be analyzed through cross-sectional data consisting of 22,935 sample observations, including 3,189 companies worldwide for 12 consecutive years: from 2002 to 2013. The following research question has been constructed for better understanding the aim of the paper:
What is the influence that CSR has over the firm’s policy of holding cash worldwide?
This is a relevant question to managers, because both cash holdings and CSR activities are management decision-making processes. Therefore, understanding the true interaction between them is from a significant importance in order the best executive decisions to be taken.
This paper makes the attempt to contribute to the corporate literature in several distinct ways. First of all, to the extent of my knowledge, there is no other academic literature examined this research question, hence, this is the first research conducted in that perspective by presenting a variety of possible ways through which CSR might have an influence on the stockpiled cash. Furthermore, it provides an empirical evidence of an existing association between the main examined variables. Moreover, the individual effect of two of the components of CSR performance is investigated, in order a greater understanding to be produced. After that the sample is separated into low- and high-governance countries and the empirical analyses are repeated for both subsamples. The findings have managerial implications, as well.
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a larger impact on cash holdings than the environmental activities, whereas the contrary is true in low-governance countries.
The remainder of this paper is organized as follows: Section 2 provides a literature review of the existing literature; Section 3 presents several arguments for the connection between cash holdings and CSR and it develops three hypotheses; Section 4 describes the data collection, the measurement of the variables, and the methodology used; Section 5 interprets the empirical results and finally Section 6 concludes and specifies the limitations of the paper and provides suggestions for future research.
2. Theoretical Background
Since the 20th century Keynes (1936) introduces three motives, which incentivize firms to stockpile cash. According to him, the first one is the transaction cost motive, which implies that in order to raise funds, firms save transaction costs and doing so they circumvent the costs of funding through external financing or asset liquidation. Precautionary motive is the second one and it suggests that if there are not any available sources of raising funds or they are extremely expensive, firms can use their accumulated internal liquid resources to subsidize their investments and activities. In this way companies hedge against the risk of future cash flow volatility and cash shortfalls. Finally, the third benefit is the speculative motive, which indicates that organizations might not prefer investing in stock and bonds due to expected growth in the interest rates.
On the other hand, several disadvantages are identified as a result of keeping high levels of excess cash. For instance, Opler, Pinkowitz, Stulz, and Williamson (1999) indicate that the lower rate of return which the liquid assets bear due to a liquidity premium and tax disadvantages. Moreover, they state that those managers whose real objective is to maximize shareholders’ wealth should build appropriate level of cash reserves where the marginal benefit of the kept cash is equal to its marginal cost.
7 2.1. Cash holdings and agency costs
While the precautionary savings motive is referred as a “bright side”, the agency problem is considered as a “dark side” (Duchin, Ozbas, and Sensoy, 2010) and it has been emphasized in many prior papers (e.g. Harford, 1999; Pinkowitz, Stulz, and Williamson, 2006; Dittmar and Mahrt-Smith, 2007; Kalcheva and Lins, 2007; Harford, Mansi, and Maxwell, 2008).
The agency costs are defined by Jensen and Meckling (1976) but first introduced by Smith (1937). According to Jensen (1986) the agency conflicts are more serious in companies with substantial free cash flows. More specifically, when firms hoard cash flows above the level of which is needed for financing all investment projects with positive net present values discounted with an appropriate cost of capital. The problem occurs when deciding how to motivate managers not to waste the cash in inefficient investing such as acquisitions. These wasteful projects reduce the personal undiversified risk of managers or induce greater authority which are considered as managerial desires. Accomplishment of those desires is at the expense of shareholders, because they have value decreasing results (Jensen, 1986). Therefore, agency theory can be explained as contrary views of managers and shareholders in terms of the costs and the benefits of holding large pools of internal funds (Opler, Pinkowitz, Stulz, and Williamson, 1999).
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Furthermore, Harford, Mansi, and Maxwell (2008) test three hypotheses connected with the relation of agency issues with managing the stock of cash. The flexibility hypothesis suggests that self-interested managers prefer more future flexibility than current overinvestment. Therefore, those executives do not invest all generated cash reserves, but they have a preference in stockpiling it. The spending hypothesis assumes that self-interested managers have the objective to expand the firm, hence, those managers will reinvest the cash immediately after its generation. Thus, it can be concluded that the flexibility and the spending hypotheses have contrary views related to agency conflicts and excess cash. In particular, the former predicts that firms with higher agency problems will accumulate higher cash resources, whereas the latter forecasts negative association between them. The last but not least, the shareholder power hypothesis anticipates that stockholders with more effective control over managers will permit building higher levels of cash reserves in order to reduce underinvestment. Therefore, similar to the spending hypothesis, the shareholder power hypothesis predicts that the existence of higher agency problems, less cash will be accumulated (Harford, Mansi, and Maxwell, 2008).
2.2. Cash holdings and R&D investments
Continuing with the association between R&D spending and cash holdings, first I consider game theory based models (e.g. Myers and Majluf, 1984) which lead to a pecking order of financing revealing that the necessity of accumulating cash reserves, especially for firms with information asymmetries in terms of R&D expenses, is due to the ability to finance growth opportunities, which is close to the precautionary motive (Cossin and Hricko, 2004). More recently, the trade-off theory states that through trading off the costs and benefits of hoarding cash, firms can determine the most rational level of cash reserves (Dittmar, Mahrt-Smith, and Servaes, 2003), Opler, Pinkowitz, Stulz, and Williamson (1999) express the transaction cost motive, described earlier, and involve the conception of asymmetric information and agency cost of extrinsic finance on the demand of excess cash. In addition, the trade-off theory concludes an existence of a positive relationship between investments in R&D and cash holdings (Dittmar, Mahrt-Smith, and Servaes, 2003).
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possible serious information issues, financial conflicts are from a significant importance for R&D. Second, many companies finance their R&D activities thought insecure sources of finance, such as cash flow and stock issues. Third, most R&D is salary payments to extremely well taught technology employees, hence R&D practices are connected with great proportions of adjustment costs. More specifically, discharged R&D workers increase firms’ hiring and training costs and result in undesirable diffusion on propriety information of innovation efforts, which make adjusting the flow of R&D investments very costly (Brown and Peterson, 2011). Therefore, firms should have strong incentives to build and govern higher level of cash reserves in order to provide a comparably smooth path of R&D expenditures. Brown and Peterson (2011) manage to show evidence and come to the conclusion of such positive relationship where the increase in R&D is a fundamental determinant behind the rise of cash levels.
Similarly, Baum, Caglayan, and Talavera (2013) assume that expected growth in future R&D investments will result in an increase in firms’ cash reserves, because R&D expenditures add value to the intangible assets and cannot be equalized to a guarantee. Hence, these firms which are engaged in great R&D activities have less financial flexibility than those investing mainly in physical capital. As long as the human capital represents the R&D outlays, it will be complicated to reduce R&D without this having an impact on the human capital. Therefore, those companies are with larger chances of having greater bumps of externally raising funds than firms that have many investments in financial or physical resources. In the existence of such barriers, firms will be required to build greater levels of cash reserves in order to be able to subsidize their future R&D investments. A further reason is the fact that R&D activities have extremely insecure returns. In particular, a firm with a large expansion of R&D may not receive any advantages in near future and may not receive any returns at all. According to Hall (2002), this uncertainty results in more asymmetric information and bigger issues of moral hazard. Several earlier papers, including Opler and Titman (1994), Bates, Kahle, and Stulz (2009), and Hall and Lerner (2010) provide similar explanations. That is why it is widely acknowledged by the literature that financial frictions force management to keep cash because of precautionary motives of continuing funding future investment projects (Baum, Caglayan, and Talavera 2013).
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resources is always higher than $1.00 for those firms. A further research of Pinkowitz, Stulz, and Williamson (2012) shows that from 1998 to 2010 the US multinational corporations have expanded their cash reserves by 433% while their assets surged only by 205%. In their attempt of explaining this astonishing trend, they examine the firm characteristics and register that multinationals which are more involved in R&D investments accumulate higher cash holdings. A year later, consistent with the trade-off theory, Pinkowitz, Stulz, and Williamson (2013) argue that precautionary motive is stronger for companies with high R&D investments, because it is more complicated to acquire resources to fund R&D expenses than to finance capital expenditures. Therefore, their empirical analyses prove that cash holdings increase with R&D spending.
Furthermore, the growth of R&D investments increases not only the systematic risk (Berk, Green, and Naik, 2004) but also idiosyncratic risk, thus total risk and beta (Suurmeijer, Smid, and Von Eije, 2013). Moreover, Bates, Kahle, and Stulz (2009) argue that cash holdings are positively associated with risk, hence the increase in risk has a massive influence on cash pooling. They come to the conclusion that one of the main reasons for the surge of the level of hoarded cash is the boost of the R&D expenditures. A reliable explanation is again because of lower asset tangibility, the opportunities for innovations are more expensive for financing, hence compared to capital expenses, larger R&D concentration will cause companies to hold a bigger cash buffer against future cash flow shocks (Bates, Kahle, and Stulz, 2009).
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these high cash holdings are partially tax incentivized, because of it is easier for R&D intensive firms to transfer profits to low tax countries. In their paper, Duchin, Gilbert, Harford, and Hrdlicka (2014) use R&D expenses as a variable by assuming that precautionary savings of firms are larger when they are engaged with greater R&D, have more growth opportunities and higher costs of financial distress. Additionally, while re-examining the reasons caused the impressive increase in the average cash-to-asset ratio of U.S. firms since 1980, He (2013) finds that this growth is mainly because of the increase in cash-to-asset ratio of firms sizably involved in R&D activities. Moreover, according to Lin (2014), a good example of organizations with strong precautionary saving motives is exactly R&D intensive firms which withhold cash because of the many development opportunities, high information asymmetries and uncertain cash flows.
2.3. Cash holdings and government regulations
Turning to the third determinant, Chen, Li, Xiao, and Zou (2014) propose three ways, through which governmental policies can affect corporate cash holdings. For the purposes of this research, I concentrate only on one of their explanations. They suggest that good government can provide assistance to financially constraint firms, therefore, those firms will have fewer incentives to keep excess cash for precautionary reasons, which is known in the literature as the financial constraint mitigation argument. Chen, Li, Xiao, and Zou (2014) find an empirical support for this argument and conclude that companies hoard less cash if there is a higher government quality. Moreover, a good government will defend contracts during business disagreements, which strengthen the access to credit financing by firms. Thus, this will result in a fall of the marginal value of liquid assets which means lower precautionary cash (Faulkender and Wang, 2006). Similarly, a good government provide better security of property rights through implementing business contracts, which increase banks’ lending opportunities (Ayyagari, Demirgüç-Kunt, and Maksimovic, 2010; Xu, 2011), hence, cash reserves decrease. This negative association between government quality accumulated cash is in consistence with Stulz’s (2005) theory of the interplay between the twin agency issues.
12 3. Hypotheses development
A recent research by Arouri and Pijourlet (2015) examines the relation between CSR and the market value of cash holdings. More specifically, their findings indicate that high CSR engagement influences the value of excess cash due to the maximization of shareholder value. In this way, for the first time, they present evidence that there is an association between CSR and cash value. Moreover, they conclude that the value of cash reserves is essentially higher for those firms, which are CSR intensive (Arouri and Pijourlet, 2015). Therefore, their results make me confident in assuming that there should be a relation between CSR and cash holdings in general, as well. Based on that I construct the first hypothesis:
H1: There is a significant relationship between CSR and corporate cash holdings. 3.1. A positive link between CSR and cash holdings
In this subsection I present several theoretical arguments for the support of the view that cash holdings are positively associated with CSR investments. This is managed by connecting the existing literature of CSR and cash holdings with interaction determinants such as, agency issues, R&D expenditures and government regulations.
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overlap. Nevertheless, I believe that the effect of agency costs on cash reserves is worthwhile to be taken into consideration while examining the influence that CSR have on excess cash.
On the other hand, Jo and Harjoto (2011) find evidence for the conflict-resolution hypothesis of CSR literature and prove that firms engage in more CSR activities in order to reduce problems between investing and non-investing stakeholders, which itself will lead to a mitigation of agency issues. This hypothesis is supported by two of their further research papers, as well (Harjoto and Jo, 2011; Jo and Harjoto, 2012). Furthermore, considering the negative relation between agency problems and cash holdings, predicted by the spending and the shareholder power hypotheses (Harford, Mansi, and Maxwell, 2008), I can derive the conclusion that CSR investments will cause a higher level of cash reserves due to the reduced agency conflicts.
Secondly, since the last century, environmental CSR has been related to superior R&D performance and, therefore, improved innovation (Porter and Van Der Linde, 1995a, 1995b). Moreover, based on the argument that dealing with environmental issues involve improvement or adoption of new technologies, Lioui and Sharma (2012) use 17,000 firms during the period of 1993-2007 in order to examine what is the influence of environmental CSR on corporate financial performance (CFP) threatening R&D investments as a possible variable through which there is an indirect link between them. For better constructing a quantifiable measure, Lioui and Sharma (2012) distinguish between CSR strength and CSR concern. They consider Beneficial Products and Services, Pollution Prevention, Recycling, Clean Energy and Others as CSR strengths, while Hazardous Waste, Regulatory Problems, Ozone Depletion, Substantial Emissions, Agricultural Chemicals, Climate Change and Others are included as CSR concerns. After conducting the empirical analyses, they provide evidence that environmental CSR strengths and concerns have a positive and significant influence on firms’ R&D investment policy, because firms’ involving in higher levels of environmental CSR investments results on supplementary benefit of their innovation activities (Lioui and Sharma, 2012).
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be a positive correlation between CSR investments and levels of cash holdings when R&D expenditures is taken into consideration as an interaction term.
Lastly, in order to explain how CSR pays off, Burke and Logsdon (1996) attempt to find a link between CSR and the economic benefits of the firms. They argue that without an existence of obvious strategic interest for the organization and advantages of CSR investing, executive managers will be less likely to commit to such kind of social investments. Nevertheless, an argument of business and society literature, which state that investments in CSR cause short-term costs, but on the other hand, they have a positive impact in the long run (Davis, 1973; Steiner, 1980) might be an enough incentive for managers to involve the company in socially responsible future investments. According to these researchers, apart from the higher legitimacy, the firms will benefit in long-terms with less government regulations. Furthermore, considering the lower precautionary cash due to the decrease of the marginal value of the liquid assets (Faulkender and Wang, 2006), less cash reserves because of the increased bank opportunities for providing loans (Ayyagari, Demirgüç-Kunt, and Maksimovic, 2010; Xu, 2011) both as a result of the good government and the financial constraint mitigation argument supported by Chen, Li, Xiao, and Zou (2014), the opposite conclusion can be derived about the less government regulations – that they will cause a boost in levels of stockpiled cash. To sum up, CSR spending results in less government regulations in the long run, which itself has a positive effect on cash holdings.
Considering all of the above arguments about the positive influence of CSR investments on agency issues or on R&D expenses and its negative impact on agency issues or on government regulations, all of which influence positively cash holdings, I construct the first part of the second hypothesis, which state:
H2a: Companies with high CSR investments are more likely to accumulate high levels of cash holdings.
3.2. A negative link between CSR and cash holdings
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Starting from Friedman’s view (1970), as previously discussed, which asserts that involvement in CSR investments increases the agency conflicts between the executive managers and stockholders. Jensen (1986) and Stulz (1990) construct the free cash flow hypothesis which make the prediction that in order to mitigate any agency disagreements, shareholders will reduce managers’ admission to free cash flow. Both papers argue that the best strategy is an optimal provision of internal capital to managers for effectively financing the profitable projects, but not providing extra internal resources for funding projects, acquisitions, consumptions in terms of perquisites which are beneficial for managers but costly for shareholders. As a result of this strategy, the cash holdings will decrease. Alternatively, an explanation of why companies with more agency problems would hold low levels of cash is provided by Harford, Mansi, and Maxwell (2008). They argue that a relevant reason is that those firms allocate higher dividend payments to shareholders, which itself decreases cash levels. Moreover, Denis and Sibilkov (2010) state that the existence of agency problems can result in less cash holdings and present a similar explanation which implies that inefficient investments by managers will force the boards of directors to restrict their access to cash reserves. What is more, the occasionally wasting money for ineffective investments, would leave the firm with insufficient cash holdings (Denis and Sibilkov, 2010).
Furthermore, taking into consideration again the conflict-resolution hypothesis which proves that higher CSR engagement leads to lower agency problems due to the resolved conflicts among stakeholders (Harjoto and Jo, 2011; Jo and Harjoto, 2011; 2012) and its positive association with cash holdings, assumed by the flexibility hypothesis (Harford, Mansi, and Maxwell, 2008) the negative association between CSR and excess cash can be concluded.
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relatively expensive equity. Debt is sold when firms do not possess enough resources. If they have suitable resources to fund convenient cost-effective projects, they pay back debt which is due. Alternatively, they accumulate a surplus of liquid assets. Therefore, liquid assets fluctuate with firm’s wealth. Furthermore, shareholders would not have any objections to the high level of kept cash at certain times if there are no costs for holding this cash (Opler, Pinkowitz, Stulz, and Williamson, 1999; Dittmar, Mahrt-Smith, and Servaes, 2003).
The differentiation between the trade-off theory and the financing hierarchy theory can be really difficult. The main distinctness is while the former predicts that firms with a larger proportion of capital expenditures or R&D investments accumulate more cash as discussed in subsection 2.2, the latter concludes the ceteris paribus, that organizations with more investments should maintain fewer internal funds and thus less excess cash (Opler, Pinkowitz, Stulz, and Williamson, 1999; Dittmar, Mahrt-Smith, and Servaes, 2003). In addition, the financing hierarchy model look at debt and cash as opposite sides of a coin (Dittmar, Mahrt-Smith, and Servaes, 2003). Consequently, the above argument suggests a possible negative relation between CSR and cash holdings. More specifically, the cash levels decrease with the growth of CSR investments.
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In summary, the literature review indicates at least three reasons which lead to a decrease in cash holdings with an increase in CSR activities. First of all, the engagement in more CSR practices increases agency conflicts, according to the agency theory, and furthermore some researchers argue that this will decrease the cash holdings as a result of reduced managers’ access to free cash flow. On the other hand, some of the literature suggests that CSR decreases agency conflicts which itself will cause the cash reserves to fall. Secondly, environmental CSR increases R&D spending, which, according to the financing hierarchy theory will cause a fall in the surplus of held cash. Lastly, the higher the level of CSR, the lower is the agency cost of debt financing. Therefore, the fraction of debt increases at the expense of cash holdings. As a consequence of all these, the second part of the second hypothesis is developed as an opposite of the first part:
H2b: Companies with high CSR investments are more likely to accumulate low levels of cash holdings.
3.3. Low- and high-governance countries
Prior literature of cash holdings shows that most of the relationships of different determinants with excess cash change significantly when it comes to separating the companies by their location in well and poorly governed countries (Dittmar, Mahrt-Smith, and Servaes, 2003; Seifert, Faleye, and Gonenc, 2012; Chen, Li, Xiao, and Zou, 2014). In particular, Seifert and Gonenc (2011) argue that the level of country governance has an effect on the possibility of appearance of agency conflicts in the companies. Therefore, as argued earlier, these agency issues will influence the cash holdings as a consequence. Moreover, Kalcheva and Lins (2007) provide evidence that keeping large pools of internal funds by firms in poorly country-level governance countries lead to the existence of agency problems. Furthermore, Seifert, Faleye, and Gonenc (2012) find empirical evidence in consistence with the case that high-governance countries mitigate possible agency issues, which suggests that in these countries the relationship between CSR and cash holdings is like to be not as strong as in poorly governed countries. Hence, taking into consideration the possibility of higher agency conflicts in low-governance countries, I construct the third hypothesis:
18 4. Data and Methodology
4.1 Data Sample
The data for this research paper is collected from several different sources. Those databases are external secondary data sources which means that the used information was obtained by others, but was not collected first hand by me. An advantage of the usage of secondary data is that it would have not been feasible to obtain this data due to the large sample needed for this research. On the other hand, a disadvantage of such kind of data is that there is no guarantee that the original data have been accurately collected. For the purposes of this paper, only transparent and reliable databases are used in order its findings to be as much valid as possible.
I obtain the financial data from Thomson Reuters Worldscope Datastream and the CSR information from Thomson Reuters ASSET4. In particular, the Thomson Reuters Worldscope Datastream is widely used by professionals and scholars and it is considered as one of the most reliable and in-depth sources of financial information. It has 99% of global market capitalization coverage and it contains “primary financial statements, footnote items, segment data, industry-specific operating metrics, financial ratios and much more”. Almost 80,000 companies in over 120 countries are included in this database, two thirds of which are active (Thomson Reuters, 2013).
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from publicly available sources such as annual reports, companies’ websites, CSR reports, etc. by over 120 analysts (Thomson Reuters, 2012).
In order the empirical analyses to be conducted, I construct a cross-sectional sample of companies for the period between 2002 and 2013. I begin my sample in 2002 due to the reason that Thomson Reuters ASSET4 database has available information since 2002. Consistent with the prior literature, I apply some data restriction with the objective of achieving higher accuracy in the empirical results. More specifically, companies in the industry of financial services (Standard Industrial Classification (SIC) codes between 6000 and 6999) are excluded from the sample because such firms own inventories and marketable securities which are added in cash (Opler, Pinkowitz, Stulz, and Williamson, 1999). Furthermore, I eliminate companies which are considered governmental or quasi-governmental (SIC codes between 9000 and 9999) (Dittmar, Mahrt-Smith, and Servaes, 2003). Companies whose financial or socially responsible information is missing are removed from the sample, as well. Another procedure related to the data collection is that the companies can leave and enter freely in the dataset during the examined period in order the survival bias to be reduced. Hence, there will be more observations for some companies, which will make the dataset unbalanced. Therefore, after taking into account all these restrictions, my final sample consists of 3,189 firms from 51 countries around the world, which makes 22,935 firm-year observations.
4.2. Measurement of variables 4.2.1 Dependent Variable
For the purposes of this research, cash and cash equivalents are used as a proxy of the dependent variable of cash holdings (Cash). I measure it with the usage of the cash ratio, which is calculated with the following formula:
𝐶𝑎𝑠ℎ 𝑅𝑎𝑡𝑖𝑜 = 𝐶𝑎𝑠ℎ 𝑎𝑛𝑑 𝑠ℎ𝑜𝑟𝑡 − 𝑡𝑒𝑟𝑚 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
4.2.2 Independent Variables
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weighted all performance components of CSR (Manner, 2010; Cai, Jo, and Pan, 2011; Mishra and Modi, 2013; Cheng, Ioannou, and Serafeim, 2014). Thus, in this research paper I follow similar measurement of ethical behavior, calculated by the weighted-average of two of the pillars of CSR: environmental and social score.
Overall CSR score (CSR): This variable speaks for the overall evaluation of the corporate social responsibility performance of a company. It is calculated for each company for every year and a score between 0 and 100 is obtained by determining the mean value of two CSR elements: environmental and social:
𝑂𝑣𝑒𝑟𝑎𝑙𝑙 𝑆𝐶𝑅 𝑠𝑐𝑜𝑟𝑒 =𝐸𝑛𝑣𝑖𝑟𝑜𝑛𝑚𝑒𝑛𝑡𝑎𝑙 𝑆𝑐𝑜𝑟𝑒 + 𝑆𝑜𝑐𝑖𝑎𝑙 𝑆𝑐𝑜𝑟𝑒 2
Corporate governance score (GovSc): This variable estimates a company’s performance in areas such as board structure, compensation policy, board functions, shareholder rights, and vision and strategy. It attributes a score between 0 and 100 to each company.
R&D: The R&D variable (R&D) is calculated by dividing the R&D figures by the book value of total assets. Companies which do not provide information about R&D expenditures are considered as companies without R&D expenses. In some of the empirical models where R&D does not play the role of independent variable, it is used as a control variable with the purpose of conducting higher significance of the estimated results.
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Interactions: After that interaction variables between each of the last three independent variables and the overall CSR score are estimated. More specifically, the interaction between CSR and corporate governance score (INTCSRGOVSC) is calculated by multiplying both variables. Similarly, the interaction between CSR and R&D (INTCSRR&D) is estimated by multiplying both variables. Lastly, the interaction between CSR and Antidirector Index (INTCSRADI) is computed by multiplying both variables.
Furthermore, in order to better understand which element of CSR performance has the biggest influence, I investigate the individual effect of the environmental and social score, as well.
Environmental score (EnvSc): This variable measures a company’s resource reduction, emission reduction, and product innovation by attributing to it a score between 0 and 100.
Social score (SocSc): Similarly, this variable provides a measurement for a firm’s performance in areas such as employment quality, health and safety, training and development, diversity, human rights, community, and product responsibility. A score between 0 and 100 is assigned to each company.
4.2.3 Control Variables
The rest of the variables are considered as control variables, some of which are motivated by Opler, Pinkowitz, Stulz, and Williamson (1999). These variables are Tobin’s Q, firm size, net working capital, cash flow, leverage, capital expenditures, a dividend dummy, acquisitions, tangibility, R&D, year and country dummies.
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managers have the intention to expand the size of the company. In order the influence of companies’ dividend payments to be distinguished, a dividend dummy (DivD) is defined, which takes a value of 1 if a firm makes a dividend payment and 0 in the opposite case. Acquisitions (Acq) are calculated by dividing the net assets from acquisitions by the book value of total assets and it has a similar purpose as the capital expenditures variable to show whether an increase in the size of a company is planned. Moreover, tangibility (Tang) is defined as a ratio between plant, property, and equipment and the book value of total assets. The R&D variable (R&D) is defined in the subsection of independent variables (see 4.2.2). Finally, year and country dummies are included, as well.
4.3 Methodology
In order the above hypotheses to be tested empirically, several regression models are estimated. The first pair has the aim to examine the overall effect that CSR investments have on cash holdings through the first discussed determinant in the theoretical section: agency problems. For this purpose in the first equation I regress cash holdings (Cash) separately on the overall CSR score (CSR) and corporate governance score (GovSc), together with the control variables and in the second one the interaction between CSR and corporate governance score is added to the model. Hence, the two regression equations look as follows:
𝐶𝑎𝑠ℎ𝑖,𝑡 = 𝛽𝑜+ 𝛽1𝐶𝑆𝑅𝑖,𝑡+ 𝛽2𝐺𝑜𝑣𝑆𝑐𝑖,𝑡+ 𝛽3𝑇𝑄𝑖,𝑡+ 𝛽4𝑆𝑖𝑧𝑒𝑖,𝑡+ 𝛽5𝑁𝑊𝐶𝑖,𝑡 + 𝛽6𝐶𝐹𝑖,𝑡+ 𝛽7𝐿𝑒𝑣𝑖,𝑡 + 𝛽8𝐶𝑎𝑝𝑒𝑥𝑖,𝑡+ 𝛽9𝐷𝑖𝑣𝐷𝑖,𝑡+ 𝛽10𝐴𝑐𝑞𝑖,𝑡+ 𝛽11𝑇𝑎𝑛𝑔𝑖,𝑡+ 𝛽12𝑅&𝐷𝑖,𝑡+ 𝛽13𝑌𝑒𝑎𝑟𝐷𝑖 + 𝛽14𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐷𝑖 + 𝜀𝑖,𝑡 (1a) 𝐶𝑎𝑠ℎ𝑖,𝑡 = 𝛽𝑜+ 𝛽1𝐶𝑆𝑅𝑖,𝑡+ 𝛽2𝐺𝑜𝑣𝑆𝑐𝑖,𝑡+ 𝛽3𝐼𝑁𝑇𝐶𝑆𝑅𝐺𝑂𝑉𝑆𝐶𝑖,𝑡+𝛽4𝑇𝑄𝑖,𝑡+ 𝛽5𝑆𝑖𝑧𝑒𝑖,𝑡+ 𝛽6𝑁𝑊𝐶𝑖,𝑡 + 𝛽7𝐶𝐹𝑖,𝑡 + 𝛽8𝐿𝑒𝑣𝑖,𝑡+ 𝛽9𝐶𝑎𝑝𝑒𝑥𝑖,𝑡 + 𝛽10𝐷𝑖𝑣𝐷𝑖,𝑡 + 𝛽11𝐴𝑐𝑞𝑖,𝑡+ 𝛽12𝑇𝑎𝑛𝑔𝑖,𝑡 + 𝛽13𝑅&𝐷𝑖,𝑡+ 𝛽14𝑌𝑒𝑎𝑟𝐷𝑖 + 𝛽15𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐷𝑖 + 𝜀𝑖,𝑡 (1b)
Where Cashi,t represents the cash holdings of a firm i at time t, CSRi,t speaks for the overall CSR
score of a firm i at time t, GovSci,t is the corporate governance score of a firm i at time t,
INTCSRGOVSCi,t represents the interaction between them of a firm i at time t, TQi,t is the individual
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of a firm i at time t, CFi,t serves as the cash flows of a firm i at time t. Furthermore, Levi,t shows the
leverage of a firm i at time t, Capexi,t is the capital expenditures of a firm i at time t, DivDi,t
symbolizes the dividend dummy of a firm i at time t, Acqi,t represents the acquisitions of a firm i at
time t, Tangi,t speaks for the tangibility of a firm i at time t, R&Di,t represents the R&D expenditures
of a firm i at time t. The measurement of all these variables was discussed in the previous subsection. Finally, YearDi and CountryDi are the year dummies and the country dummies of a
firm i, respectively, and ᶓi,t is the error term.
Similar models are constructed for the second determinant: R&D. First, I regress cash holdings (Cash) separately on the overall CSR score (CSR) and R&D expenditures (R&D) with the rest of the control variables and year and country dummies, all of which are discussed above. Second, I include the interaction between CSR and R&D (INTCSRR&D) to the model. Therefore, the second pair of regression equations are:
𝐶𝑎𝑠ℎ𝑖,𝑡 = 𝛽𝑜+ 𝛽1𝐶𝑆𝑅𝑖,𝑡 + 𝛽2𝑅&𝐷𝑖,𝑡+ 𝛽3𝑇𝑄𝑖,𝑡+ 𝛽4𝑆𝑖𝑧𝑒𝑖,𝑡 + 𝛽5𝑁𝑊𝐶𝑖,𝑡+ 𝛽6𝐶𝐹𝑖,𝑡 + 𝛽7𝐿𝑒𝑣𝑖,𝑡 + 𝛽8𝐶𝑎𝑝𝑒𝑥𝑖,𝑡+ 𝛽9𝐷𝑖𝑣𝐷𝑖,𝑡+ 𝛽10𝐴𝑐𝑞𝑖,𝑡+ 𝛽11𝑇𝑎𝑛𝑔𝑖,𝑡+ 𝛽12𝑌𝑒𝑎𝑟𝐷𝑖 + 𝛽13𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐷𝑖 + 𝜀𝑖,𝑡 (2a) 𝐶𝑎𝑠ℎ𝑖,𝑡 = 𝛽𝑜+ 𝛽1𝐶𝑆𝑅𝑖,𝑡+ 𝛽2𝑅&𝐷𝑖,𝑡+ 𝛽3𝐼𝑁𝑇𝐶𝑆𝑅𝑅&𝐷𝑖,𝑡+𝛽4𝑇𝑄𝑖,𝑡+ 𝛽5𝑆𝑖𝑧𝑒𝑖,𝑡+ 𝛽6𝑁𝑊𝐶𝑖,𝑡 + 𝛽7𝐶𝐹𝑖,𝑡+ 𝛽8𝐿𝑒𝑣𝑖,𝑡+ 𝛽9𝐶𝑎𝑝𝑒𝑥𝑖,𝑡+ 𝛽10𝐷𝑖𝑣𝐷𝑖,𝑡+ 𝛽11𝐴𝑐𝑞𝑖,𝑡+ 𝛽12𝑇𝑎𝑛𝑔𝑖,𝑡 + 𝛽13𝑌𝑒𝑎𝑟𝐷𝑖 + 𝛽14𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐷𝑖 + 𝜀𝑖,𝑡 (2b)
24 𝐶𝑎𝑠ℎ𝑖,𝑡 = 𝛽𝑜+ 𝛽1𝐶𝑆𝑅𝑖,𝑡+ 𝛽2𝐴𝐷𝐼𝑖+ 𝛽3𝑇𝑄𝑖,𝑡+ 𝛽4𝑆𝑖𝑧𝑒𝑖,𝑡+ 𝛽5𝑁𝑊𝐶𝑖,𝑡+ 𝛽6𝐶𝐹𝑖,𝑡+ 𝛽7𝐿𝑒𝑣𝑖,𝑡 + 𝛽8𝐶𝑎𝑝𝑒𝑥𝑖,𝑡+ 𝛽9𝐷𝑖𝑣𝐷𝑖,𝑡+ 𝛽10𝐴𝑐𝑞𝑖,𝑡+ 𝛽11𝑇𝑎𝑛𝑔𝑖,𝑡+ 𝛽12𝑌𝑒𝑎𝑟𝐷𝑖 + 𝜀𝑖,𝑡 (3a) 𝐶𝑎𝑠ℎ𝑖,𝑡 = 𝛽𝑜+ 𝛽1𝐶𝑆𝑅𝑖,𝑡+ 𝛽2𝐴𝐷𝐼𝑖,𝑡+ 𝛽3𝐼𝑁𝑇𝐶𝑆𝑅𝐴𝐷𝐼𝑖,𝑡+𝛽4𝑇𝑄𝑖,𝑡+ 𝛽5𝑆𝑖𝑧𝑒𝑖,𝑡+ 𝛽6𝑁𝑊𝐶𝑖,𝑡 + 𝛽7𝐶𝐹𝑖,𝑡+ 𝛽8𝐿𝑒𝑣𝑖,𝑡+ 𝛽9𝐶𝑎𝑝𝑒𝑥𝑖,𝑡+ 𝛽10𝐷𝑖𝑣𝐷𝑖,𝑡 + 𝛽11𝐴𝑐𝑞𝑖,𝑡+ 𝛽12𝑇𝑎𝑛𝑔𝑖,𝑡 + 𝛽13𝑅&𝐷𝑖,𝑡+ 𝛽14𝑌𝑒𝑎𝑟𝐷𝑖 + 𝜀𝑖,𝑡 (3b)
After that four separate models are constructed, each of which regress cash holdings (Cash) on all possible pairs between the three interaction variables. Control variables, year dummies are included in all four equations, whereas country dummies are included only in the model which does not include an interaction with Antidirector Index. The forth equation presents a regression with all three interactions: INTCSRGOVSC, INTCSRR&D, and INTCSRADI.
25 𝐶𝑎𝑠ℎ𝑖,𝑡 = 𝛽𝑜+ 𝛽1𝐶𝑆𝑅𝑖,𝑡+ 𝛽2𝐺𝑜𝑣𝑆𝑐𝑖,𝑡+ 𝛽3𝑅&𝐷𝑖,𝑡+ 𝛽4𝐴𝐷𝐼𝑖,𝑡 + 𝛽5𝐼𝑁𝑇𝐶𝑆𝑅𝐺𝑂𝑉𝑆𝐶𝑖,𝑡+ 𝛽6𝐼𝑁𝑇𝐶𝑆𝑅𝑅&𝐷𝑖,𝑡+ 𝛽7𝐼𝑁𝑇𝐶𝑆𝑅𝐴𝐷𝐼𝑖,𝑡 + 𝛽8𝑇𝑄𝑖,𝑡 + 𝛽9𝑆𝑖𝑧𝑒𝑖,𝑡+ 𝛽10𝑁𝑊𝐶𝑖,𝑡+ 𝛽11𝐶𝐹𝑖,𝑡+ 𝛽12𝐿𝑒𝑣𝑖,𝑡+ 𝛽13𝐶𝑎𝑝𝑒𝑥𝑖,𝑡+ 𝛽14𝐷𝑖𝑣𝐷𝑖,𝑡 + 𝛽15𝐴𝑐𝑞𝑖,𝑡+ 𝛽16𝑇𝑎𝑛𝑔𝑖,𝑡+ 𝛽17𝑌𝑒𝑎𝑟𝐷𝑖+ 𝜀𝑖,𝑡 (7)
Furthermore, going into more detailed analyses, I examine which of the CSR elements has a bigger impact on corporate cash holdings. For the purpose, next two models intend to investigate exactly this question by separately regressing cash holdings (Cash) on the environmental score (EnvSc) and the social score (SocSc), together with the control variables, year and country dummies. Therefore, the regression equations look like:
𝐶𝑎𝑠ℎ𝑖,𝑡 = 𝛽𝑜+ 𝛽1𝐸𝑛𝑣𝑆𝑐𝑖,𝑡+ 𝛽2𝑇𝑄𝑖,𝑡+ 𝛽3𝑆𝑖𝑧𝑒𝑖,𝑡+ 𝛽4𝑁𝑊𝐶𝑖,𝑡+ 𝛽5𝐶𝐹𝑖,𝑡+ 𝛽6𝐿𝑒𝑣𝑖,𝑡 + 𝛽7𝐶𝑎𝑝𝑒𝑥𝑖,𝑡+ 𝛽8𝐷𝑖𝑣𝐷𝑖,𝑡+ 𝛽9𝐴𝑐𝑞𝑖,𝑡+ 𝛽10𝑇𝑎𝑛𝑔𝑖,𝑡+ 𝛽11𝑅&𝐷𝑖,𝑡+ 𝛽12𝑌𝑒𝑎𝑟𝐷𝑖 + 𝛽13𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐷𝑖+ 𝜀𝑖,𝑡 (8a) 𝐶𝑎𝑠ℎ𝑖,𝑡 = 𝛽𝑜+ 𝛽1𝑆𝑜𝑐𝑆𝑐𝑖,𝑡+ 𝛽2𝑇𝑄𝑖,𝑡+ 𝛽3𝑆𝑖𝑧𝑒𝑖,𝑡+ 𝛽4𝑁𝑊𝐶𝑖,𝑡+ 𝛽5𝐶𝐹𝑖,𝑡+ 𝛽6𝐿𝑒𝑣𝑖,𝑡+ 𝛽7𝐶𝑎𝑝𝑒𝑥𝑖,𝑡 + 𝛽8𝐷𝑖𝑣𝐷𝑖,𝑡+ 𝛽9𝐴𝑐𝑞𝑖,𝑡+ 𝛽10𝑇𝑎𝑛𝑔𝑖,𝑡+ 𝛽11𝑅&𝐷𝑖,𝑡+ 𝛽12𝑌𝑒𝑎𝑟𝐷𝑖 + 𝛽13𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐷𝑖+ 𝜀𝑖,𝑡 (8b)
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subsamples in order to be examined whether there are significant differences compared to the worldwide data. The following section presents the discussion of the empirical results, derived from the above regression equations.
5. Empirical Results
In this section I show the results of the tests carried out to examine the hypotheses of the paper. Table 1 displays the descriptive statistics of the 3,189 companies included in the sample over the period 2002-2013. As it can be seen from Table 1 the dependent variable in the analyses, cash holdings (Cash), has a mean of 13% and a median of 9%. Furthermore, the mean of the overall CSR score (CSR) is 51.986 and its median has the figure of 51.640. In terms of governance score, the mean value is 52.332 and the median is 60.610. Environmental score has an average value of 52.101, while the median value is 51.860. Similarly, the social score has 51.949 average score and a 52.970 median score. Furthermore, R&D and Antidirector Index have a mean of 0.019 and 4.090, respectively, while their median values are 0.0001 and 5.000, respectively.
Table 1. Descriptive statistics of variables.
Variables Observations Min Max Mean Median St. Deviation
Cash 22.935 0.000 0.990 0.139 0.099 0.132 CSR 22,935 4.125 97.970 51.986 51.640 29.531 Governance Score 22,935 1.160 98.750 52.332 60.610 30.801 R&D 22,935 -0.005 1.469 0.019 0.0001 0.042 Antidirector Index 22,358 0.000 5.000 4.090 5.000 1.217 Environmental Score 22,935 4.000 97.400 52.101 51.860 32.000 Social Score 22,935 3.430 98.880 51.949 52.970 30.861 Tobin’s Q 22,935 0.082 84.497 1.870 1.460 1.731 Size 22,931 0.693 20.497 15.390 15.324 1.398
Net Working Capital 22,935 -4.277 0.845 0.004 0.001 0.151
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This table displays the descriptive statistics for the sample. It reports the number of observations, the minimum, the maximum, the mean, the median, and the standard deviation of the variables. The dataset comprises 22,935 firm-year observations from 3,189 companies during the period from 2002 to 2013.
The correlation matrix is reported in Table 2. These correlation coefficients are performed to make sure the prevention of multicollinearity at further stages. From the figures, I can conclude that there is not a multicollinearity problem. This statement is based on the fact that all values are much lower than 0.9, which is accepted as a maximum level where a significant correlation between the variables used is not present (Saundres, Lewis, and Тhornhill, 2011).
Furthermore, Table 3 consists the empirical results from the first three pairs of regression models estimated in this research paper based on the whole sample of 22,935 firm-year observations from 3,189 companies from 2002 to 2013. First of all, it is noticeable that in all models the coefficient of CSR is statistically significant at 99% confidence level. Therefore, these results provide empirical evidence that there is a significant direct association between CSR and cash holdings, which supports the first hypothesis (H1).
28 Table 2. Correlation Matrix.
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Turning to the second pair of models (Model 2a, 2b), CSR coefficients remain negative. Therefore, these results give additional support for Hypothesis 2b (H2b), which suggests a negative relationship between CSR investments and the stock of cash. Further, the R&D coefficients show a positive association with cash reserves. Even though this result is in consistence with the trade-off theory, it cannot support the theoretical explanation that CSR spending decreases cash holdings through R&D investments, suggested by the financing hierarchy theory, because obviously the R&D expenditures increase the surplus of cash. Including their interaction variable does not add value to the model due to its statistically insignificant coefficient. However, this pair of regression equation still can be considered as adding support for Hypothesis 2b (H2b).
Models 3a and 3b also provide proof for the negative association between the CSR and the excess cash because of the negative coefficients of CSR. Hence, there is further support for Hypothesis 2b (H2b). The proxy for government regulations, the Antidirector Index coefficient is statistically significant and negative in Model 3a which is in consistence with the financial constraint mitigation argument. Moreover, it can be interpreted that the negative influence of CSR on cash holdings can be due to the negative relationship between government regulations and cash. However, the contrary relationship is suggested by the existing literature. After including their interaction variable in Model 3b, the Antidirector Index coefficient becomes positive but statistically insignificant as the coefficient of the combined effect.
30 Table 3. OLS Regressions for the worldwide sample.
Variables Dependent variable: Cash
31
Adj. R2 0.392 0.393 0.392 0.392 0.313 0.361
This table reports the coefficients of the conducted regression models based on 22,935 firm-year observations from 3,189 companies during the period from 2002 to 2013. In the brackets their corresponding p-values are presented. In all models cash holdings (Cash) is the dependent variable. INTCSRGOVSC serves as an interaction variable between CSR and corporate governance score. While, INTCSRR&D speaks for an interaction variable between CSR and R&D expenditures. Finally, INTCSRADI is an interaction variable between CSR and Antidirector Index. Superscripts *, **, *** indicates significance at the 1%, 5%, and 10% levels, respectively.
Furthermore, Table 4 presents the rest of the estimated regression models based on the whole sample of 3,189 companies. Models 4, 5, 6, and 7 show the results of regressing cash holdings on different possible pairs between the interaction variables. The estimated coefficients do not provide many differences in the results compared to before. For instance, the CSR coefficients remain significant and negative in two of the four models, therefore it is a further proof of its direct negative relation to the excess cash. No change is reported in the coefficients of governance score and R&D expenses, as well. On the other hand, the Antidirector Index becomes positive. In addition, the coefficients of the combined effect of CSR and governance score (INTCSRGOVSC) in each model remain statistically significant and positive, which is also the case in Model 1b. In these models the significant effect of the coefficients of the combined effect of CSR and R&D expenditures (INTCSRR&D) and the one between CSR and Antiderctor Index (INTCSRADI) is revealed. The former show positive and statistically significant association, which mean that CSR has an indirect positive influence on cash holdings when R&D expenses are considered as interacting determinant, which provide further partial support for Hypothesis 2a (H2a). Finally, the combined effect of CSR and the government regulations have two out of three significant and negative coefficients, which suggests that taking into consideration the government regulations, CSR has a negative indirect effect on cash reserves. As before, all of the control variables are statistically significant and they do not show any large changes in their direction of influence.
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derived. Turning to the control variables any drastic changes are not visible compared to the previous models, hence, all control variables identify the same significant direction of correlation with cash holdings as before.
Table 4. OLS Regressions for the worldwide sample.
Variables Dependent variable: Cash
Model 4 Model 5 Model 6 Model 7 Model 8a Model 8b
33 R&D Year dummies Country dummies N R2 Adj. R2 (0.00) YES YES 22,931 0.395 0.393 (0.00) YES NO 22,354 0.362 0.362 (0.00) 0.752* (0.00) YES NO 22,354 0.369 0.368 (0.00) YES NO 22,354 0.369 0.368 (0.00) 0.692* (0.00) YES YES 22,931 0.394 0.392 (0.00) 0.692* (0.00) YES YES 22,931 0.394 0.392 This table reports the coefficients of the conducted regression models based on 22,935 firm-year observations from 3,189 companies during the period from 2002 to 2013. In the brackets their corresponding p-values are presented. In all models cash holdings (Cash) is the dependent variable. INTCSRGOVSC serves as an interaction variable between CSR and corporate governance score. While, INTCSRR&D speaks for an interaction variable between CSR and R&D expenditures. Finally, INTCSRADI is an interaction variable between CSR and Antidirector Index. Superscripts *, **, *** indicates significance at the 1%, 5%, and 10% levels, respectively.
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element of the CSR has a bigger impact on cash reserves than the social element. However, most of the results for low-governance countries are similar to the worldwide ones, hence the same associations hold for them, as well.
Turning to Appendix B, the same conclusions cannot be derived for well governed countries. The reason for this is that only one out of six CSR coefficient is significant and negative, whereas the others show insignificant meaning or a positive influence in the first six equations. A further reason is that many of the other coefficients of the independent variables are also statistically insignificant, including the environmental and social score. Therefore, there are major differences in the result between the high-governance countries and the worldwide sample. All these provide support for the third hypothesis (H3) that the relationship between CSR and cash holdings is more pronounced in low-governance countries.
Overall, I find an empirical support for the first hypothesis (H1) that there is a significant association between CSR and cash holdings. Moreover, hypothesis 2b (H2b) is also supported by concluding that this relationship is negative, while there is only a partial support for hypothesis 2a (H2a) that due to the agency conflicts and R&D expenses, CSR has an indirect positive impact on excess cash. Furthermore, the empirical analyses show that the results hold for low-governance countries, whereas not a lot statistically significant meanings are found in high-governance countries. Thus, the third hypothesis (H3) is supported, as well. Lastly, looking into the worldwide sample, it can be concluded that engaging in social activities has a bigger influence on the excess cash than the environmental engagement. The contrary is the situation in poorly governed countries.
6. Conclusions
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Furthermore, this paper contributes both cash holdings and CSR literature by connecting the findings of existing articles and it presents several possible alternatives on how CSR might influence the firms’ policy of accumulating cash. All these are managed through reviewing different theories, such as the agency theory, the trade-off theory, the financing hierarchy theory, the pecking order theory, the transaction cost motive, the precautionary motive, and the speculative motive. More specifically, the literature suggests that CSR has an impact on stockpiled cash through different determinants like agency costs, R&D expenditures, and government regulations. Moreover, after conducting the empirical analyses, I find that CSR intensive firms will withhold less cash than their counterparts which do not invest much in an ethical behaviour. A positive influence of CSR and cash holdings can be seen when the agency conflicts and R&D expenditures are taken into consideration. Additionally, the conclusion that these associations are more pronounced in poorly governed countries than in well governed ones has been made. This research paper provides also further in-depth analyses connected with different components of CSR activities: environmental and social performance. I find that the social performance has a relatively bigger impact on cash holdings than the environmental performance in the worldwide perspective, whereas the reverse effect is valid in low-governance countries.
The findings of this thesis are from a significant importance to the executive managers, because they have managerial implications. Taking into account that both cash holding decisions and CSR investment decisions are taken mainly by the managers of the companies and by displaying the relation between them, the empirical results contribute to more efficient management decision-making process. More particularly, managers who intend to increase their investments in CSR should expect a fall in their cash reserves. Therefore, they will be more informed and will be able to take action if needed about the possible future changes in their internally generated funds.
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though the Antidirector Index is used as a proxy for the government regulations, it does not represent all aspects of the legal rules. According to La Porta, López-de-Silanes, Shleifer, and Vishny (1998) there are other important set of government regulations such as merger and takeover rules, disclosure rules, regulations by security exchanges, and banking and financial institution regulations, which also might have a further impact on cash holdings.
A suggestion for a future research can be a deeper analysis of the components of the CSR performance and their individual effect on cash holdings. Moreover, an interesting topic that is worth investigating is about the influence of CSR on cash reserves in different countries and a comparison between them. Furthermore, comparison of the relationship between CSR and excess cash in the years before and after the crisis is also a potential future question.
Acknowledgments:
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