Legal vs. Normative CSR: Differential Impact On Analyst Dispersion, Stock Return Volatility, Cost of Capital, and Firm Value

J Bus Ethics (2015) 128:120
DOI 10.1007/s10551-014-2082-2
Legal vs. Normative CSR: Differential Impact on Analyst

Dispersion, Stock Return Volatility, Cost of Capital,
and Firm Value
Maretno A. Harjoto Hoje Jo
Received: 23 April 2013 / Accepted: 25 January 2014 / Published online: 9 February 2014
Springer Science+Business Media Dordrecht 2014
Abstract This study examines how the sell-side analysts

interpret firms corporate social responsibility (CSR) activities. Specifically, we examine the differential impact of
overall, legal, and normative CSR on the analysts earnings
forecast dispersion, stock return volatility, cost of equity
capital, and firm value. Employing a sample of U.S. public
firms during 19932009, we find that overall CSR intensities
reduce analyst dispersion of earnings forecast, volatility of
stock return and cost of capital (COC), and increase firm
value. However, its impact is reduced for firms with better
accounting and disclosure quality. When we disaggregate
CSR into legal and normative CSR, we find that legal (normative) CSR decreases (increases) analysts dispersion,
stock return volatility, and COC, while legal (normative)
CSR increases (decreases) firm value. The sell-side analysts
tend to have less (greater) information asymmetry regarding
the net benefits of pursuing CSR that is (not) required by
laws. We find, however, that the benefit of having normative
CSR realized in 1 year lag such that analyst dispersion, stock
return volatility, COC decrease, respectively, and firm value
increases. Furthermore, we find that the benefit of normative
CSR is offset for firms with higher accounting and disclosure
quality.
Keywords Corporate social responsibility Legal CSR
Normative CSR Analyst dispersion Cost of capital Firm
value
M. A. Harjoto
Graziadio School of Business and Management, Pepperdine
University, Malibu, CA, USA
H. Jo (&)
Santa Clara University, Santa Clara, CA, USA
e-mail: hjo@scu.edu
Introduction
In the recent decade, corporations across the globe have
made significant commitments to become more socially
responsible. Yet most corporations still view their CSR
activities as the right thing to do rather than bringing
higher net profit and shareholder value (Karnani 2010). For
instance, Johnson and Johnson recently announced to phase
out preservative which releases formaldehyde, a known
carcinogen, and triclosan, an antibacterial that may harm
the human immune system as a voluntary action that is not
required by law. Johnson and Johnson claimed its initiative
as moving beyond the required product safety but
declined to state how much it costs (Thomas 2012).
The main purpose of this study is to contrast the difference between corporate social responsibility (CSR)
actions that are required by laws (hereafter, legal CSR, or
compliant CSR) and voluntary (discretionary) CSR (hereafter, normative CSR).1 Following McWilliams and Siegel
(2001), we define normative CSR as a firms voluntary
implementation of CSR that goes beyond compliance and
engages in CSR activities that appear to further certain
social good, beyond the interests of the firm, and that which
is required by law. Specifically, we empirically examine
the impact of legal CSR versus normative CSR on the
dispersion of analysts earnings forecasts, volatility of
stock return, cost of equity capital, and firm value. While
the most existing studies focus on the economic and legal
aspects of CSR, none of the previous empirical studies
1
We contrast the analysts reactions toward CSR activities that are

required by laws (legal CSR), such as labor rights, antitrust, and
product safety violations; and CSR activities that follow the norms,
ethics, and discretionary social responsibility (normative CSR), such
as charitable giving, work life benefits, and employment of the
disabled.
123
contrast the impact of legal and normative CSR on the sellside analysts earnings forecasts, stock return volatility,
cost of equity capital, and firm value. To the best of our
knowledge, this study is the first to empirically examine the
unexplored area of the differential impact of legal versus
normative CSR.
During the last three decades, there have been growing
interests on quantifying the costs and benefits of CSR
among corporations. Springkle and Maines (2010) provide
recent anecdotal evidence that the costs of CSR include
immediate cash outflows and opportunity cost of spending
on CSR, whereas the benefits of CSR include tax deductions, public image, a means of attracting, motivating and
retaining talented employees, and more importantly
reducing firm risk.2
Researchers also have examined various benefits of CSR
engagement using direct financial measures of corporate
financial performance (CFP) and have found evidence that
CSR is generally beneficial to the firms, such as lower cost
of equity (Dhaliwal et al. 2011), lower borrowing cost
(Goss and Roberts 2011), higher analyst following (Hong
and Kacperczyk 2009), more favorable analysts recommendation (Ioannou and Serafeim 2010), higher analyst
forecast accuracy (Dhaliwal et al. 2012), increased financial communications to shareholders (Fieseler 2011), more
effective corporate governance, and higher firm value
(Waddock and Graves 1997; Blazovich and Smith 2011; Jo
and Harjoto 2011, 2012). Margolis and Walsh (2003)
conduct a meta-analysis study and found approximately
half of existing empirical studies find a positive effect of
CSR on CFP.
Dische (2002) suggests that no existence of analyst
dispersion implies an absence of asymmetric information
between firms managers and sell-side analysts. Accordingly, we first measure the analysts reactions to firms
CSR activities based on the dispersion of analysts quarterly earnings forecasts consistent with Diether et al.
(2002). We then measure the firm risk using the standard
measure of stock return volatility (French et al. 1987). We
measure the cost of equity capital based on the implicit cost
of capital (COC) derived from various different methods of
estimating implicit cost of equity capital: Claus and Thomas (2001), Gebhardt et al. (2001), Easton (2004), and
Ohlson and Juettner-Nauroth (2005). We measure firm
value based on the industry-adjusted Tobin Q ratio
(Campbell 1996). All these four methods are consistent
with a few recent empirical studies (Dhaliwal et al. 2011;
El Ghoul et al. 2011).
2
A few corporations are able to provide more tangible evidence of

doing well while doing good, such as Whole Foods (Whole Foods
Markets Annual Report 2010) and Patagonia (Casadesus-Masanell
et al. 2009). Others struggle to achieve both firm profits and social
responsibilities (i.e., British Petroleum and Pfizer).
123
M. A. Harjoto, H. Jo
We postulate that under asymmetric information, the

sell-side analysts are not able to immediately evaluate the
costs and benefits of firms decision to engage in CSR. As a
result, analysts consider investments in CSR firms stocks
as risky investments. In equilibrium, disagreement among
analysts about the value and return on CSR firms stock
will depend on the proportion of informed analysts. Furthermore, analysts are more likely to experience higher
information asymmetry about the costs and benefits of
CSR, when firms engage in normative CSR as opposed to
legal CSR, although normative CSR actions might actually
be valuable signals of the firms long-term future quality.3
When firms pursue CSR to fulfill regulatory requirements
(legal CSR), the firms managers and media news are more
likely to disclose the costs and benefits from legal CSR
activities to the public. Therefore, analysts are more likely
to have lower search cost for information and are able to
evaluate the costs and benefits of legal CSR to follow the
regulatory requirements. However, when firms engage in
CSR activities that are not required by laws and regulations
(normative CSR), managers are less likely to disclose the
costs and benefits of normative CSR to the public. Therefore, analysts are facing relatively higher search cost and
suffer greater information asymmetry when firms engage in
normative CSR compared to legal CSR.4 We suspect that
greater information asymmetry will be reflected in greater
dispersion among analyst forecasts, higher volatility of
stock return, higher COC, and lower firm value.
Employing a sample of U.S. public firms from the
Kinder, Lydenberg, and Domini (KLD) database during
19932009, we find that overall CSR activities reduce
analyst dispersion, volatility of stock return, and implicit
cost of equity capital while overall CSR increases firm
value. However, we find the impact of CSR is offset for
firms that are consistently in the bottom quartile of
3
Our hypotheses are based on a theoretical model of asymmetric

information between managers and external market participants,
namely shareholders and analysts (Leland and Pyle 1977; Grossman
and Stiglitz 1980; Myers and Majluf 1984). Gennotte and Leland
(1990) present a theoretical model based on Grossman and Stiglitz
(1980) where asymmetric information plays a key role in generating
price volatility and market crashes, when market participants are not
completely informed about the existence of hedging activities.
Attanasio (1990) argues that in the presence of asymmetric information, asset prices tend to be more volatile than in the financial markets
with full information.
4
For instance, Johnson and Johnsons McNeil Consumer Healthcare
division product recall during 2011 for consumer (product) safety that
is required by the Food and Drug Administration (FDA) indicated that
both the company and the media news continuously disclosed the net
impact of product recall was expected to reduce its net sales by 12 %
(Loftus 2011). In contrast, Johnson and Johnson was unable to
disclose the impact of its recent initiative on its cost and profit to
phase out formaldehyde from its cosmetic products to fulfill
consumers and society pressures beyond what is required by law
(Thomas 2012).
contrast the impact of legal and normative CSR on the sellside analysts earnings forecasts, stock return volatility,
cost of equity capital, and firm value. To the best of our
knowledge, this study is the first to empirically examine the
unexplored area of the differential impact of legal versus
normative CSR.
During the last three decades, there have been growing
interests on quantifying the costs and benefits of CSR
among corporations. Springkle and Maines (2010) provide
recent anecdotal evidence that the costs of CSR include
immediate cash outflows and opportunity cost of spending
on CSR, whereas the benefits of CSR include tax deductions, public image, a means of attracting, motivating and
retaining talented employees, and more importantly
reducing firm risk.2
Researchers also have examined various benefits of CSR
engagement using direct financial measures of corporate
financial performance (CFP) and have found evidence that
CSR is generally beneficial to the firms, such as lower cost
of equity (Dhaliwal et al. 2011), lower borrowing cost
(Goss and Roberts 2011), higher analyst following (Hong
and Kacperczyk 2009), more favorable analysts recommendation (Ioannou and Serafeim 2010), higher analyst
forecast accuracy (Dhaliwal et al. 2012), increased financial communications to shareholders (Fieseler 2011), more
effective corporate governance, and higher firm value
(Waddock and Graves 1997; Blazovich and Smith 2011; Jo
and Harjoto 2011, 2012). Margolis and Walsh (2003)
conduct a meta-analysis study and found approximately
half of existing empirical studies find a positive effect of
CSR on CFP.
Dische (2002) suggests that no existence of analyst
dispersion implies an absence of asymmetric information
between firms managers and sell-side analysts. Accordingly, we first measure the analysts reactions to firms
CSR activities based on the dispersion of analysts quarterly earnings forecasts consistent with Diether et al.
(2002). We then measure the firm risk using the standard
measure of stock return volatility (French et al. 1987). We
measure the cost of equity capital based on the implicit cost
of capital (COC) derived from various different methods of
estimating implicit cost of equity capital: Claus and Thomas (2001), Gebhardt et al. (2001), Easton (2004), and
Ohlson and Juettner-Nauroth (2005). We measure firm
value based on the industry-adjusted Tobin Q ratio
(Campbell 1996). All these four methods are consistent
with a few recent empirical studies (Dhaliwal et al. 2011;
El Ghoul et al. 2011).
2
A few corporations are able to provide more tangible evidence of

doing well while doing good, such as Whole Foods (Whole Foods
Markets Annual Report 2010) and Patagonia (Casadesus-Masanell
et al. 2009). Others struggle to achieve both firm profits and social
responsibilities (i.e., British Petroleum and Pfizer).
123
We postulate that under asymmetric information, the

sell-side analysts are not able to immediately evaluate the
costs and benefits of firms decision to engage in CSR. As a
result, analysts consider investments in CSR firms stocks
as risky investments. In equilibrium, disagreement among
analysts about the value and return on CSR firms stock
will depend on the proportion of informed analysts. Furthermore, analysts are more likely to experience higher
information asymmetry about the costs and benefits of
CSR, when firms engage in normative CSR as opposed to
legal CSR, although normative CSR actions might actually
be valuable signals of the firms long-term future quality.3
When firms pursue CSR to fulfill regulatory requirements
(legal CSR), the firms managers and media news are more
likely to disclose the costs and benefits from legal CSR
activities to the public. Therefore, analysts are more likely
to have lower search cost for information and are able to
evaluate the costs and benefits of legal CSR to follow the
regulatory requirements. However, when firms engage in
CSR activities that are not required by laws and regulations
(normative CSR), managers are less likely to disclose the
costs and benefits of normative CSR to the public. Therefore, analysts are facing relatively higher search cost and
suffer greater information asymmetry when firms engage in
normative CSR compared to legal CSR.4 We suspect that
greater information asymmetry will be reflected in greater
dispersion among analyst forecasts, higher volatility of
stock return, higher COC, and lower firm value.
Employing a sample of U.S. public firms from the
Kinder, Lydenberg, and Domini (KLD) database during
19932009, we find that overall CSR activities reduce
analyst dispersion, volatility of stock return, and implicit
cost of equity capital while overall CSR increases firm
value. However, we find the impact of CSR is offset for
firms that are consistently in the bottom quartile of
3
Our hypotheses are based on a theoretical model of asymmetric

information between managers and external market participants,
namely shareholders and analysts (Leland and Pyle 1977; Grossman
and Stiglitz 1980; Myers and Majluf 1984). Gennotte and Leland
(1990) present a theoretical model based on Grossman and Stiglitz
(1980) where asymmetric information plays a key role in generating
price volatility and market crashes, when market participants are not
completely informed about the existence of hedging activities.
Attanasio (1990) argues that in the presence of asymmetric information, asset prices tend to be more volatile than in the financial markets
with full information.
4
For instance, Johnson and Johnsons McNeil Consumer Healthcare
division product recall during 2011 for consumer (product) safety that
is required by the Food and Drug Administration (FDA) indicated that
both the company and the media news continuously disclosed the net
impact of product recall was expected to reduce its net sales by 12 %
(Loftus 2011). In contrast, Johnson and Johnson was unable to
disclose the impact of its recent initiative on its cost and profit to
phase out formaldehyde from its cosmetic products to fulfill
consumers and society pressures beyond what is required by law
(Thomas 2012).
Legal vs. Normative CSR
performance-adjusted discretionary accrual (Kothari et al.

2005). This implies that the benefit of CSR is reduced for
firms with better accounting and disclosure quality.
There are two main implications of our findings. First,
the sell-side analysts tend to experience greater information
asymmetry when managers conduct normative CSR that
are above and beyond what is required by law. However,
eventually normative CSR reduces disagreement among
analysts over time. Thus, normative CSR acts as reputation
building. This study suggests that managers should provide
greater disclosures to the analysts, especially about the net
impact of normative CSR on firms financial performance,
to reduce disagreement among analysts, stock returns
volatility, and firms COC, and therefore, increases shareholder value and to establish firms long-term reputation. In
addition, the benefit of CSR, especially normative CSR is
lessened when firms already have high quality of
accounting disclosure. Second, we find empirical evidence
that firms overall CSR reduces analyst dispersion and
volatility stock returns (Lee and Faff 2009; Salama et al.
2011; Oikonomou et al. 2012), it decreases cost of equity
capital (Dhaliwal et al. 2011; El Ghoul et al. 2011), and it
increases firm value (Waddock and Graves 1997; Blazovich and Smith 2011; Jo and Harjoto 2011, 2012).
The rest of the paper is organized as follows. In the next
section, we briefly review the related literature and discuss
our hypotheses. We then discuss the data and measures of
legal and normative CSR, as well as our empirical model in
the following section. The subsequent section presents the
empirical results. The final sections summarize our discussion and conclusions.
Literature Review and Hypotheses

The debates about CSR continue to grow without a clear
consensus on its meaning or value. The United States
Social Investment Forum (SIF) defines the social responsibility investment as investment practices that consider
environmental, social and corporate governance criteria to
generate long-term competitive financial returns and positive societal impact. The European Commission (2010)
defines corporate social responsibility as a concept
whereby companies integrate social and environmental
concerns in their business operations and in their interaction with their stakeholders on a voluntary basis. The
World Bank defines CSR as the commitment of business to
manage and improve the economic, environmental, and
social implications of its activities at the firm, local,
regional, and global levels.
Heal (2005) explains that CSR is internalizing any
externalities, in terms of social costs, that are generated by
the firm. Heal argues that CSR acts as an invisible hand to
reallocate resources among stakeholders, when the market

fails to address social costs generated by corporations and
when disagreements between shareholders and stakeholders are strong. Bagnoli and Watts (2003) show that CSR
can be viewed as a private provision for public goods.
Analyst coverage has been considered an important
aspect of external monitoring devices that disciplines corporate managers. Chung and Jo (1996), Knyazeva (2007)
and Yu (2008) indicate the role of analysts is an essential
part of an external monitoring mechanism. They find that
analyst coverage imposes discipline on misbehaving managers and helps align managers with shareholders, thus
improving managerial incentives to undertake more optimal policies. Jo and Harjoto (2011) show that security
analysts provide effective external monitoring regarding
the information transparency of CSR engagement, and the
CSR activities have positive effect on firm value.
Analysts also act as information intermediaries who help
expand the breadth of investor cognizance about managerial actions. Therefore, analyst following should have a
positive impact on the market value of firms. Lang and
Lundholm (1996) find that information disclosure tends to
have larger analyst following, less dispersion among analyst forecasts and less volatility in forecast revisions. Jo and
Kim (2007, 2008) further indicate that an improved corporate transparency through frequent voluntary disclosure
will reduce the information asymmetry between insiders
and outsiders, discourage managerial self-dealings, and
enhance firm value.
When analysts are experiencing higher asymmetric
information, existing studies have documented that disagreements among analysts reduce the future stock return
and firm value. Miller (1977) indicates that investors under
uncertainty due to asymmetric information tend to have
divergence of opinions about the stock price. He further
shows that the divergence of opinions among investors is
more likely to create higher risk (volatility of stock returns)
and more likely to have lower stock returns. Grossman and
Stiglitz (1980) develop a theoretical model to explain
information asymmetry between informed and uninformed
investors. They maintain that the degree of information
asymmetry affects the search cost of information, the
quality of information, noises of investment in risky assets,
and proportion of informed investors. Gennotte and Leland
(1990) show that in a rational expectations model with
asymmetric information, if some participants are not aware
of the presence of hedging trades, very large price drops
are misconstrued as information by traders. This information asymmetry can cause prices to drop much further and
can cause the market to crash.
Other studies have documented that disagreements
among security analysts reduce the future stock return and
firm value (Diether et al. 2002; Dische 2002). Johnson
123
(2004) indicates that analyst dispersion (disagreement) is a

proxy for firms idiosyncratic risk, and therefore is negatively related to stock value. Botosan et al. (2004) and
Kothari et al. (2009) show that analyst dispersion also
influences the firms COC. Our study extends this literature
by focusing on the relation between CSR and the dispersion of analyst earnings forecast, firm risk, COC, and
value. Specifically, it compares the impact of legal CSR
versus normative CSR on analyst dispersion measured by
standard deviation of analyst earnings estimates over the
absolute value of the mean of earnings estimates, firm risk
measured by the volatility of stock returns, firms implicit
cost of equity, and firm value.
There has been acceleration of significant studies among
researchers to examine the relation among CSR, analyst
coverage, and the role of CSR as an information disclosure.
Dhaliwal et al. (2011, 2012) find that firms with superior
social responsibility performance attract dedicated analyst
coverage. They also find that analysts have lower forecast
errors and lower dispersion for firms with better CSR disclosure. Firms exploit the benefit of lower cost of equity
and higher value associated with the CSR disclosure.
Ioannou and Serafeim (2010) provide evidence that
socially responsible firms receive more favorable analyst
recommendations in the recent years. They find that firms
with higher visibility are more likely to receive favorable
recommendation when they engage in CSR activities. They
also claim that analysts with more experience on CSR
awareness are more likely to perceive CSR as value
creation.
Our first hypothesis is based on the assumption that the
analysts, on average, are fully informed about managers
decisions to engage in CSR activities as follows.
H1 To the extent that analysts are fully informed about
the net benefits of CSR engagement, the impact of firms
engagement in overall CSR will reduce analyst dispersion,
volatility of stock return, COC, and increase firms value.
The null hypothesis is that CSR engagement does not
affect analyst dispersion, stock return volatility, COC, and
firm value.
Next, we aim to contrast the difference between CSR
that attempt to follow economic profits and legal requirements versus CSR that attempt to accomplish the social
norms beyond what are required by laws. In business ethics
literature, there are two representative, but opposing views
about the net effect of CSR to the society. The contractarian view (i.e., Friedman 1970) believes that following
economic and legal responsibilities are considered maximizing social welfare. Any actions beyond the economic
and legal responsibilities impose tax to owners,
employees, and customers. The stakeholder theory, on the
other hand, argues that CSR is not simply following the
123
economic and legal responsibilities. Carroll (1991)

describes the pyramid of CSR and distinguishes the difference in levels of CSR between firms that follow economic and legal responsibilities versus firms that follow
ethical and philanthropic responsibilities. He argues that
total CSR of business should comprise all four distinct
components of this pyramid, if taken together, constitute a
complete CSR. Donaldson and Preston (1995) urge that
examining the normative aspect of CSR is far more
important than establishing the descriptive and instrumental concepts that explain corporate characteristics and
behavior such as the nature of firm, the way managers
think, how board members think about constituencies
interests, and how a corporation is actually managed.
Existing accounting and finance literature indicate that
analysts are under the two different levels of awareness
over managers action to engage in these two different CSR
activities. In the first level, analysts are likely to receive
more public announcements and disclosures from managers, if managers engage in CSR activities that are compliant with the law and regulations. More importantly, the
direct costs and benefits of conforming to the law and
regulation are easily measured since usually the reward or
punishment (including operational, financial, and legal
risks such as litigations, lawsuits, etc.) from conforming or
not conforming to regulations are stated by local government and authorities. These disclosures reduce the search
cost for information, and therefore, increase the proportion
of informed analysts. Therefore, we expect lower disagreement among analysts when the firm engages in CSR
to satisfy the legal requirements.
The second level represents several possible motives for
managers to engage in normative CSR. Managers may feel
morally obligated to do the right thing or CSR is a form of
managers ethical or altruistic behavior. Alternatively,
managers may engage in CSR voluntarily due to their own
self-interests such as receiving public accolades, managerial perquisites, or personal warm glow from social activities (Cespa and Cestone 2007). Managers may also engage
in CSR to resolve conflict of interests between investing
and non-investing stakeholders (Jo and Harjoto 2011,
2012). Whatever the managers true intentions are when
they engage in CSR, analysts have relatively less inside
information than managers. Fieseler (2011) shows that the
equity analysts in the German stock exchange perceive
economic, legal, ethical, and philanthropic CSR strategies
as value creations, since these CSR strategies provide
information disclosure and open dialog between managers
and shareholders.
If managers conduct normative CSR that is not required
by laws and regulations, analysts are facing relatively
higher search costs despite the potential that normative
CSR provides valuable signals of the expected future firm
performance because of relatively less available information. These activities are usually voluntary activities that
conform to the societal norms, non-investing stakeholders
expectations, or unwritten rules. Analysts have less information, and therefore, the proportion of informed analysts
is lower. Consequently, we expect that disagreements
among themselves increase and the impact of normative
CSR on stock returns volatility is positive, at least initially.
Over time, however, analysts are able to learn from the
observed prices and returns on CSR firms investments.
Therefore, the proportion of informed analysts and information transparency are expected to increase over time.
Our second hypothesis is based on the premise that
analysts are relatively more (less) informed when the
managers engage in CSR to satisfy legal (normative)
requirements. Therefore, we expect relatively lower
(higher) analyst dispersion and lower (higher) firm risk, if
firm engages in legal (normative) CSR. Notice that the
normative CSR is conducted voluntarily by firms. We
maintain those firms conducting normative CSR activities
have a long-term goal of reputation building even though
not required by law or regulation in an anticipation that
firms information environment, and firm value will
improve over the long term. Achieving success with CSR is
often a long-term process, taking years to fully develop,
institute, and pay off financially. Yet most existing research
is based on a short time horizon and shows mixed results in
linking CSR to profitability. Freeman (1984) suggests that
meeting the needs of diverse stakeholders will lead to
favorable CFP. Serving the implicit claims of stakeholders
enhances the companys reputation in a way that positively
influences its CFP over the long term (Freeman 1984;
Makni et al. 2009). Conversely, disappointing stakeholders
may have an adverse effect on CFP (Preston and OBannon
1997). Based on this explanation, a company perceived by
its stakeholders as having a good reputation will produce a
better CFP through the reputation-building mechanism
over time.
This reputation building is particularly important in the
firms with CSR activities because those firms are repetitive
players in the financial market.5 In particular, maintaining
Focusing on the CSR brand, Ogrizek (2002) argues that CSR

branding is also becoming of paramount importance. If the firm
mismanages the CSR branding, its reputation can be damaged, which
could have direct and indirect negative effects on firm performance.
Luo and Bhattacharya (2006) use CSR to investigate the relation
between CSR and firm value. They develop a conceptual framework
for predicting that (a) customer satisfaction partially mediates the
relation between CSR and firm market value, (b) corporate abilities
moderate the financial returns to CSR and (c) these moderated
relations are mediated by customer satisfaction. They find the results
supporting the reputation-building framework and customer satisfaction plays a significant role in the relation between CSR and CFP.
qualified personnel is crucial for firms with CSR programs

to remain competitive. Firms can hire competent staff
through outstanding CSR activities. Turban and Greening
(1997) and Albinger and Freeman (2000) argue that
through CSR activities a typical firm can gain reputation,
and this will in turn let the firm look attractive to employee
applicants. Greening and Turban (2000) present some
interesting signaling theory which shows that a firms CSR
sends positive signals to prospective job applicants about
what it would be like to work for a firm. Social identity
theory further suggests that job applicants have higher selfimages when working for socially responsive firms over
their less responsive counterparts.
Empirical evidence suggests that firms CSR activities
will raise firm reputation and hence consumers and other
stakeholders will have favorable attitude on firm products,
thereby increasing sales and gaining consumer loyalty.
Creyer (1997) shows that firms with the high standard of
business ethics provide significantly positive impact on
consumer purchase decision. Consumers prefer products of
ethical firms to those of unethical firms. Mohr et al. (2001)
report that the level of CSR activities affects consumer
purchase decision making along with firm investment
decision. In particular, they report that consumers frequently base their purchasing decisions on such factors that
whether firms behave ethically. Crespo and del Bosque
(2005) provide evidence that firms with ethical codes and a
clear philosophy of social commitment, respect for honesty
in its relationships with the stakeholders, are more likely to
achieve better economic performance. We develop two
possible hypotheses based on whether the firm conducts
legal or normative CSR.
H2a To the extent that analysts are relatively more
informed regarding legal CSR activities, the legal CSR
reduces analyst dispersion, stock return volatility, COC,
and increases firm value.
H2b To the extent that analysts are relatively less
informed regarding normative CSR activities, the normative CSR increases analyst dispersion, stock return volatility, cost of capital, and decreases firm value, at least
contemporaneously. As time passes by, however, we predict that firms analyst dispersion, stock return volatility,
cost of capital will decrease while firm value will eventually improve over time.
The null hypothesis predicts no relation between legal
CSR (normative CSR) analyst dispersion, volatility stock
return, COC, and firm value. If it is the difference in
information of different CSR activities that drives the main
relations, one can expect that the legal CSR activities in
t - 1 has no impacts at all on current analyst forecast
dispersion, stock return volatility, COC, and firm value.
123
The underlying rationale for this conjecture is that as the

legal CSR activities are relatively easy for analysts to
understand and use, the analysts should respond immediately to the current legal CSR activities information, and
one should observe no relationship between the previous
legal CSR activities and current analyst forecast dispersion,
volatility stock return, COC, and firm value.
But which of our mutually exclusive hypotheses is
correct? Because it is an open empirical question whether
hypothesis 1 or hypothesis 2 or null hypothesis has
greater validity, we turn next to examine the impact that
CSR (overall CSR, legal CSR, and normative CSR) has
on analyst dispersion, stock return volatility, COC, and
firm value by using empirical data in the following
sections.
Data, Measurements, and Empirical Model

Data and CSR Variables
The sample from KLD database is merged with the data for
analyst earnings forecast and analyst following from the
institutional brokers estimation services (I/B/E/S) database. We also require that firms are covered in the Compustat and the Center for Research in Security Prices
(CRSP) databases for their financial information, stock
prices, and volatility of monthly stock returns. After
matching across all these four databases and accounting for
lags and changes in CSR, analyst earnings forecasts and
volatility of monthly stock returns variables, the combined
sample consists of 9,259 firm-year observations (2,034
firms) from 1993 to 2009.
We utilize the 1992 data as the lag effect of CSR. KLDs
Stats inclusive social rating criteria covers eighty strengths
and concerns ratings in seven major qualitative areas
including community, corporate governance, diversity,
employee relations, environment, human rights, and product. Detailed information about KLD Stats data is discussed in existing studies such as Graves and Waddock
(1994), Ioannou and Serafeim (2010), Jo and Harjoto
(2011, 2012), and Kim et al. (2012). We include all seven
KLD inclusionary categories and assign zero value for
categories that were not yet created or were reassigned.6
First, we calculate the net of strengths and concerns
ratings consistent with Cai et al. (2011). KLD strengths and
concerns criteria are assigned with zero or one value. We
assign positive one (?1) value for each strength rating and
assigned negative one (-1) value for each concern criteria.
Since KLD ratings change from year to year, our CSR

index is constructed by dividing the net of strengths and
concerns with the maximum value of net strengths and
concerns in each year consistent with Baron et al. (2011).7
Let Cijt denotes CSR index for firm i and year t with
strength j minus concern j and Ct the maximum value of
KLD strengths minus concerns for any firm in year t,
the index Cit of CSR composite for firm-year observation
it is
X
C it
C ijt =C t ;
j
where firms with higher CSR index (Cit) are considered

more socially responsible firms.
Then, we categorize eighty ratings across seven criteria
into two major groups of CSR activities: CSR activities
that can be considered as following the laws and regulations (legal CSR) such as tax disputes, accounting concerns, non-representation, regulatory problem, labor rights,
antitrust, product safety, etc. and CSR activities that can be
considered as following social norms (normative CSR)
such as charitable giving, transparency concern, employment of the disabled, work life benefits, benefits to economically disadvantage, etc. Appendix 1 lists detail
classifications of eighty ratings into legal CSR and normative CSR. As indicated before, we define normative
CSR, following McWilliams and Siegel (2001), as a firms
implementation of CSR that goes beyond compliance and
engages in CSR activities that appear to further certain
social good, beyond which is required by law. Accordingly,
we classify legal CSR activities based on KLD variable
description if the firm is conducting the compliant CSR
based on certain law or regulation (http://www.kld.com/
research/stats/indicators.html). On the other hand, we
classify normative CSR based on KLD variable description
if not required by law or certain regulation. In certain situations, it is not perfectly clear whether KLD variable
descriptions explicitly point the existence of law or regulation requirement. In such cases, we use our intuition to
judge. Because our intuition-based judgment could be
subjective, we also solicit feedback from a panel of
researchers to classify these eighty KLD ratings into legal
CSR and normative CSR and in general, our classifications
are, in general, consistent with classifications from the
panel. Legal CSR index and normative CSR index are
constructed based on the above equation and higher positive value of the index indicates that the firm is more
socially responsible.
7
6
When we exclude KLD corporate governance category from our

sample, however, our main results remain qualitatively unchanged.
123
We also conduct robustness check with CSR counts instead of CSR

index. Our unreported results using CSR counts are consistent with
results reported in this paper.
Measurements of Dependent Variables

The I/B/E/S database provides the means and medians of
analysts earnings forecasts and the standard deviations of
earnings forecasts. We calculate standard deviations of
earnings forecasts over the absolute value of the mean of
earnings forecasts among analysts (DISP) as a measure of
the disagreements among financial analysts from I/B/E/S.
This measure of analyst dispersion is consistent with
Diether et al. (2002), Dische (2002), and Johnson (2004).
Similarly, based on the accounting and finance literature,
we measure firms idiosyncratic risk from the volatility
(standard deviation) of monthly stock returns (DEVRET)
from the CRSP database. The COC is calculated from the
average of implicit cost of equity premium above the
10-years U.S. Treasury Bond based on Claus and Thomas
(2001), Gebhardt et al. (2001), Easton (2004), and Ohlson
and Juettner-Nauroth (2005). The firm value is measured
by the FamaFrench 48 industry-adjusted Tobin
Q (Campbell 1996). The other financial variables that
measure firms characteristics are taken from Compustat
database.
Empirical Models and Instrumental Variable (IV)
Estimations
A firms choice to engage in CSR is endogenous. To
address this issue properly, we conduct an endogeneity
correction for the treatment effects. Without correcting the
endogeneity problem, the CSR involvements contribution
to analyst dispersion, firm risk, COC, and firm value can,
therefore, be estimated incorrectly (Greene 2008). In our
analysis, we have carefully controlled for firm characteristics variables that are known to matter for analyst dispersion, firm risk, COC, and firm value. We also use lagged
CSR measures to address the potential problems of reverse
causality and simultaneity. However, we cannot rule out
the possibility that some omitted variables might be driving
the results, i.e., the relation between CSR, analyst dispersion, firm risk, COC, and firm value that we document is
driven by some unobserved firm characteristics. To address
this concern, we take the instrumental variable (IV) estimation approach.8
We first estimate the following pooled time-series crosssectional two-stage least squares (2SLS) regressions of
analyst dispersion, firm risk, COC, and firm value,
respectively, on controls. In the first-stage, we estimate
firm-level CSR in a given year, using industry-median CSR
based on FamaFrench (1997) 48 industry classification in
that year as an instrument. The control variables are those
in Table 4. We then use fixed effects and instrumented our
original CSR with industry-median CSR. This study
empirically examines the impact of firms overall CSR
activities on the firms analyst dispersion, volatility of
stock return, COC, and firm value firm risk in the main
structural equations as follows:
X
DISPit a bCSRit cCSRit1
ak Zit eit
k
1
DEVRETit a bCSRit cCSRit1
X
ak Zit eit
COCit a bCSRit cCSRit1
2
ak Zit eit
3
TOBINQit a bCSRit cCSRit1
X
ak Zit eit ;
where DISPit is measured by the dispersion of analyst

earnings forecast (DISP) as a measure of disagreement
among analysts. DEVRETit is measured by standard
deviation of monthly stock returns (stock return volatility)
which can be considered as a measure of firm risk. COC is
the average of implicit cost of equity based on Claus and
Thomas (2001), Gebhardt et al. (2001), Easton (2004), and
Ohlson and Juettner-Nauroth (2005). And TOBINQ is the
Tobin Q ratio adjusted by the FamaFrench 48 industries
(Campbell 1996). Other control variables are closely following Jo and Harjoto (2011, 2012). Zit are firms financial
characteristics such as firm size (measured by the log of
total assets (LOGASSET) or by the market value of equity
(MKTVAL)), total debt ratio (DEBTR), research and
development ratio (RNDR), advertising expense ratio
(ADVR), capital expenditure ratio (CAPXR), 1 year sales
Moffitt (1999) suggest using the IV method, which focuses on

finding a variable (or variables) that influences the first-stage, but does
not influence the second-stage dependent variable (and thus is not
correlated with the random error term in the second-stage equation).
Angrist (2000) asserts that the IV method works if the researcher
focuses on the causal effects. Moffitt (1999) further suggests that each
IV that is indeed uncorrelated with the random error term in the
second-stage (i.e., analyst dispersion, firm risk, cost of capital, and
firm value) equation will yield unbiased estimates. Certain IVs will
yield more precise estimates, however. The more highly correlated
the IV is with the first-stage dependent variable, i.e., CSR
Footnote 8 continued
engagement, the more precise the estimates will be. Thus, the challenge in an IV estimation is to find an appropriate IV that is highly
correlated with the first-pass CSR variable, but uncorrelated with the
second-pass analyst dispersion, firm risk, cost of capital, and firm
value. Unfortunately, it is often hard to find variables that meet both
of these requirements, and therefore it is difficult to find good IVs
among the many potential IVs.
123
growth rate (SALEGRW), and also the FamaFrench

(1997) 48 industry dummy variables (Fama and French
1997). CSRit and CSRit-1 are the contemporaneous and
1 year lag of CSR index for firm i. We include the lag
effect of CSR to capture any lag effect of CSR on firm risk
and dispersion. Then, we classify overall CSR activities
into legal and normative CSR and re-estimate Eqs. (1)(4)
by consecutively replacing CSR with legal CSR (CSRLEGAL) versus normative CSR (CSRNORM).
Gelb and Strawer (2001) argue that firms disclose
because it is socially responsible to do so. They further
maintain that companies have incentives to engage in
stakeholder management by undertaking socially responsible activities and that providing extensive and an informative disclosure is one such practice. Based on disclosure
rankings provided by the annual Association for Investment Management and Research (AIMR) Reports, they
suggest that there is a positive relation between disclosure
level and CSR, and conclude that increased disclosure is a
form of socially responsible behavior. Similar to Gelb and
Strawer (2001), Jo and Kim (2008) use a persistent and
frequent disclosure over an extended period as socially
responsible, transparency-increasing disclosure. Following
Gelb and Strawer (2001) and Jo and Kim (2008), we
measure disclosure quality using persistent CSR disclosure
dummy (PERSISTCSR) of one if firms CSR is in the top
quartile of industry CSR for the three consecutive years
prior to current year or zero otherwise.
Jo and Kim (2008) argue that the aggressive earnings
management is inversely associated with socially responsible disclosure, and vice versa. They also assert that firms
with aggressive earnings management and socially irresponsible disclosure tend to have an inferior long-term
return performance, to the extent that investors, in general, prefer stocks of ethical companies over those of
unethical companies if other factors are held constant.
Following Jo and Kim (2007, 2008), we use earnings
management proxies, i.e., Kothari et al.s (2005) performance-adjusted discretionary accruals as a measure of
accounting quality.9
Empirical Results
Univariate Statistics and Bivariate Correlation
Descriptive statistics of sample data for this study are
presented in Table 1. The mean of CSR index is 0.003,
indicating that the firms in our samples, the strengths and
9
Our results remain qualitatively unchanged when we use discretionary accruals based on the Jones (1991) model instead of Kothari
et al.s (2005) performance-adjusted discretionary accruals.
123
concerns scores are almost equal. The mean of legal CSR

index (CSRLEGAL) is -0.150 with a standard deviation of
0.161, while the mean of normative CSR index (CSRNORM) is 0.098 with a standard deviation of 0.268. As
expected, the CSRLEGAL has a much lower standard
deviation of 0.161 than that of CSRNORM (0.268) since
the former is required by law and the latter is on firms own
discretion. Legal CSR index is negative since 20 out of 22
total ratings that we consider comes from satisfying legal
and regulatory requirements raised by concerns items. On
the other hand, the average of normative CSR index is
positive because 42 out of 58 ratings come from strengths
and only 16 ratings come from concerns ratings. The
average natural log of the number of analysts following
plus one (following Lim (2001) is 2.108 indicating that the
average number of analysts following for each firm in the
sample is approximately 8 analysts.
The average analyst dispersion, measured by standard
deviation of analyst earnings forecasts over the absolute
value of the mean of earnings forecasts is 4.51 %; which is
slightly lower than the median dispersion of 5.3 % reported
by Diether et al. (2002). The average stock return volatility
is 0.115. The average COC is 0.046 which is consistent
with the sample of El Ghoul et al. (2011). The average of
industry-adjusted Tobin Q ratio is 0.844. The averages of
firms financial characteristics reported in Table 1 are
comparable with those in Ioannou and Serafeim (2010),
Baron et al. (2011), Dhaliwal et al. (2011), and Jo and
Harjoto (2011, 2012). We exclude financial and utility
industry firms from our sample to avoid unnecessary confounding effects and show sample observations per each
industry in Table 2. Table 2 shows that business services
firms (1,096) and retailing industry firms (888) have the
largest sample observations.
Table 3 provides bivariate correlation matrices for
variables that are used in this study. We find that overall
CSR (CSR) is positively correlated with the number of
analyst following (ANALYST). The correlation between
CSR and analyst dispersion (DISP) is positive while CSR is
negatively correlated with stock return volatility (DEVRET) and COC (COC). CSR is positively correlated with
Tobin Q. Legal CSR (CSRLEGAL) is negatively correlated with normative CSR (CSRNORM), analyst following
(ANALYST), and analyst dispersion (DISP) while it is
positively correlated with stock return volatility (DEVRET) and Tobin Q. The Normative CSR (CSRNORM) is
positively correlated with DISP and Tobin Q while it is
negatively related to DEVRET and COC. Firm size
(LOGASSET) and advertising ratio (ADVR) are positively
correlated with both analysts and CSR measures. In contrast, financial leverage ratio (DEBTR) is generally negatively correlated with both analysts and CSR measures.
CSRNORM is more correlated with overall CSR compared
Table 1 Sample statistics

Panel A: Descriptive statistics
Variable
Obs
Mean
Median
SD
Min
Max
CSR
9,259
0.003
CSRLEGAL
9,259
-0.150
CSRNORM
9,259
0.098
0.053
ANALYST
9,259
2.108
2.064
0.587
0.693
3.845
DTA_PERSIST
9,259
0.012
0.107
DISP
9,259
4.505
0.94
10.724
148.56
DEVRET
COC
9,259
9,259
0.115
0.046
0.103
0.042
0.053
0.025
0.032
-0.038
TOBINQ
9,259
0.844
0.790
0.315
0.128
2.885
ASSET
9,259
7.442
7.405
1.482
3.290
13.587
13.054
0.059
-0.26
0.328
-0.1
0.161
-1
0.167
0.268
-1
0.500
0.221
MKTVAL
9,259
6.131
7.056
3.334
2.304
DEBTR
9,259
0.165
0.146
0.153
2.028
RNDR
9,259
0.032
0.006
0.051
0.680
ADVR
9,259
0.019
0.047
0.963
CAPXR
9,259
0.060
0.044
0.056
SGROWTH
9,259
0.119
0.090
0.230
-0.814
7.110
ADJDTA
9,259
0.074
0.053
0.146
-1.716
1.424
PERSISTCSR
9,259
0.075
0.263
0.565
CSR is CSR composite index in current year derived from the sum of CSR strengths minus CSR concerns scores over the maximum score of
strengths minus concerns scores in each year. CSRLEGAL is CSR index based on what are required by laws (legal characteristics of CSR)
defined in Appendix 1 and calculated based on the sum of CSR strengths minus CSR concerns scores over the maximum score of strengths minus
concerns scores in each year. CSRNORM is CSR index based on what are required by norms that are not required by laws (normative
characteristics of CSR) defined in Appendix 1 and calculated based on the sum of CSR strengths minus CSR concerns scores over the maximum
score of strengths minus concerns scores in each year. ANALYST is the natural log of one plus the analyst following. DTA_PERSIST is equal to
one if the firms are consistently within the lowest quartile of performance-adjusted discretionary total accrual (Kothari et al. (2005)) for three
consecutive years prior to current year or zero otherwise. DISP is the standard deviation of analysts earnings estimates relative to the absolute
value mean of earnings estimates stated in % (Diether et al. 2002). DEVRET is the standard deviation of monthly stock returns within 1 year.
COC is the cost of equity based on the average of implied cost of equity premium estimated from Claus and Thomas (2001), Gebhardt et al.
(2001), Easton (2004), and Ohlson and Juettner-Nauroth (2005). TOBINQ is the industry-adjusted Tobins Q based on the FamaFrench 48
industries (excluding financials and utilities). ASSET is the natural log of total asset ($ million). MKTVAL is the natural log of total market value
of equity ($ million). DEBTR is long-term debt divided by total asset. RNDR is research and development expense divided by total net sales.
ADVR is advertising expense divided by total net sales. CAPXR is capital expenditure expense divided by total net sales. SGROWTH is total net
sales growth rate during 1 year from the previous year. ADJDTA is performance-adjusted discretionary total accrual based on Kothari et al.
(2005). PERSISTCSR is equal to one if firms CSR is in the top quartile of industry CSR for the three consecutive years prior to current year or
zero otherwise
to CSRLEGAL. Notice that there is a significant correlation between CSRLEGAL and CSRNORM, and that may
cause a multicollinearity problem if we include both
CSRLEGAL and CSRNORM together in the regression
analysis. In addition the correlations of CSRLEGAL with
DISP, DEVRET, COC, and TOBINQ behave differently
from the correlations of CSRNORM with DISP, DEVRET,
COC, and TOBINQ. Our unreported results suggest a
similar correlation coefficients if we use the net scores of
the difference between CSR strengths and CSR concerns
instead of CSR index measures. Next, we proceed to
multivariate tests to examine the incremental effect of CSR
on our dependent variables.
Multivariate Regression Analysis

The first regression analysis examines the impact of overall
CSR activities on analyst dispersion, stock return volatility,
COC, and firm value based on the multivariate regression
stated in Eqs. (1)(4). We utilize the standard deviation of
analyst earnings forecast divided by absolute value of mean
for analyst earnings forecast and the standard deviation of
monthly stock returns as measures of analyst dispersion
and firm risk, respectively. We use the average of implicit
cost of equity from previous studies (Claus and Thomas
2001; Gebhardt et al. 2001; Easton 2004; Ohlson and Juettner-Nauroth 2005) as a measure of COC. And we use the
123
10
industry-adjusted Tobin Q as a measure of firm value. The

independent variables are contemporaneous CSR index,
1 year lag CSR index, and firms characteristics as control
variables. The 1 year lag of CSR is included in the
regression to capture any time delay (lag effect) of CSR.
Table 4 presents the regression results from 2SLS
estimations.
We find that in the first stage, we find that large firm,
firms with high R&D, high advertizing expense, high
capital expenditure, and low leverage tend to engage in
CSR activities, while in the second stage, we find that the
impact of CSR on analyst dispersion of earning forecasts
(DISP) is negative and statistically significant both in
contemporaneous and 1 year lag effect.10 This provides
evidence that the sell-side analysts seem to be affected by
the firms CSR activities. We also find that CSR activities
reduce the firm risk measured by stock return volatility
(DEVRET). This latter finding is consistent with existing
studies (Heinkel et al. 2001; Orlitzky and Benjamin 2001;
Husted 2005; Lee and Faff 2009; Salama et al. 2011;
Oikonomou et al. 2012).
We further find that both the contemporaneous and lag
effect of CSR reduce the COC. This finding is consistent
with Dhaliwal et al. (2011) and El Ghoul et al. (2011). In

addition, we find that the contemporaneous and lag effect
of CSR increase firm value measured by Tobins Q, which
is consistent with existing studies (Waddock and Graves
1997; Blazovich and Smith 2011; Jo and Harjoto 2011,
2012). Furthermore, while CSR composite reduces analyst
dispersion, firm risk, and COC, and increases industryadjusted Tobins Q, for firms that persistently have lower
discretionary total accruals (firms with better accounting
and disclosure quality)the impact of CSR on dispersion,
risk, COC, and Tobins Q is offset by the firm quality of
accounting reporting. Overall, however, our baseline
regression results are supportive of our first hypothesis
(H1).
Next, we re-estimate the 2SLS regression models stated
in Eqs. (1)(4) for legal CSR separately in conjunction with
the first-stage CSR regressions. Table 5 indicates that CSR
Legal reduces analyst dispersion, risk, COC, and increases
industry-adjusted Tobins Q on the contemporaneous period. And the impact of CSR Legal on dispersion, risk,
COC, and Tobins Q is not offset even if firms persistently
have lower discretionary total accruals (firms with better
accounting and disclosure quality). Overall, we find evidence that when firms engage in legal CSR activities,
analysts are relatively more informed, and therefore, support the hypothesis H2a.
On contrary, analysts are not fully informed when firms
conduct normative CSR. Table 6 suggests that the contemporaneous effect of normative CSR increases stock
return volatility and decreases firm value while CSRNORM does not affect analyst dispersion and COC. After
1 year, however, the lag of normative CSR more than
offsets the positive contemporaneous effect of normative
CSR on stock return volatility. In fact, CSRNORM reduces
dispersion, risk, COC, and increases industry-adjusted
Tobins Q in 1 year lag period. But for firms that persistently have lower discretionary total accruals (firms with
better accounting and disclosure quality)the impact of
CSRNORM on dispersion, risk, COC, and Tobins Q is
offset by the firm quality of accounting reporting in 1 year
lag period. We believe that over time, the search cost of
information by analyst decreases and the proportion of
informed analysts increases. Therefore, dispersion among
participants decreases over time. The contemporaneous
impact of normative CSR also increases stock return volatility and its lag effect offset its contemporaneous effect.
Normative CSR also reduces firm value, measured by
Tobin Q, contemporaneously and its lag effect more than
offsets its contemporaneous negative effect on firm
value.11 Overall, we find empirical evidence to support our
10
11
Table 2 Distribution of sample across industries

Industries
Agriculture
Obs.
Pct (%)
Industries
Obs.
Pct (%)
28
0.3
Restaurants
240
2.59
Food
289
3.12
Auto
147
1.59
Soda
23
0.25
Aero
89
0.96
Beer
68
0.73
Ship
38
0.41
Smoke
24
0.26
Guns
29
0.31
Toys
75
0.81
Gold
24
0.26
Fun
120
1.3
Mines
27
0.29
Books
181
1.95
Coal
27
0.29
Household
250
2.7
Energy
345
3.71
Clothes
235
2.54
Communication
Health
Med. Equip
172
372
1.86
4.02
Pesonal Svc.
Business Svc.
Drugs
445
4.81
Computers
419
4.53
Chemicals
326
3.52
Chips
722
7.8
Rubber
55
0.59
Lab. Equip
233
2.52
Textiles
47
0.51
Paper
198
2.14
232
2.51
124
1,096
1.34
11.84
Build. Mat
171
1.85
Boxes
56
0.6
Construction
100
1.08
Transportation
299
3.23
Steel
101
1.09
Wholesale
313
3.38
888
9.59
Fab. Prod
10
0.11
Retail
Machine
417
4.5
Miscellaneous
Elec. Equip
158
1.71
Total
46
0.5
9,259
100
We also examine 2-, 3-, 4-, and 5-year lag effect, but find
insignificant results.
123
We further examine 2-, 3-, 4-, and 5-year lag effect, but find
insignificant results.
LOGMKTVAL
DEBTR
RNDR
11
12
13
0.03*
0.003
0.18*
0.80*
0.40*
0.44*
0.07*
-0.002
0.02
0.09*
0.12*
-0.08*
-0.04*
0.07*
0.14*
-0.06*
-0.16*
0.06*
-0.04*
0.08*
0.03
0.05*
0.02
-0.13*
-0.18*
-0.22*
0.12*
0.22*
-0.03*
-0.20*
0.01
-0.21*
-0.21*
0.30*
0.43*
0.10*
-0.05*
0.03*
0.09*
0.09*
-0.01
-0.02
0.24*
0.09*
-0.19*
-0.15*
0.10*
-0.0004
1
0.06*
0.02
0.16*
0.05*
0.002
0.16*
0.05*
0.12*
-0.01
-0.29*
0.32*
0.14*
-0.21*
-0.28*
0.05*
-0.12*
-0.02
-0.002
-0.01
-0.04*
0.06*
-0.09*
0.03*
-0.08*
-0.03*
0.03*
-0.04*
0.05*
0.07*
-0.01
-0.02
-0.01
-0.01
0.06*
0.33*
0.31*
0.01
-0.06*
0.03
0.03*
1
0.20*
-0.13*
-0.02
0.19*
-0.03*
-0.01
0.28*
-0.16*
0.13*
-0.24*
-0.12*
-0.25*
-0.09*
-0.01
-0.05*
-0.06*
0.16*
0.04*
-0.07*
-0.38*
0.09*
0.41*
0.21*
0.13*
0.14*
0.05*
-0.24*
0.10*
-0.13*
0.14*
-0.01
-0.09*
0.01
-0.04*
-0.15*
0.31*
0.22*
10
-0.03
0.19*
0.05*
-0.14*
-0.05*
0.02
0.03*
11
-0.001
-0.19*
-0.04*
0.07*
-0.05*
-0.27*
12
0.03*
0.08*
0.07*
-0.14*
-0.08*
13
0.07*
0.08*
-0.05*
0.05*
14
0.04*
-0.01
0.10*
15
-0.04*
0.18*
16
0.05*
17
* indicates level of significance at 1 %
CSR is CSR composite index in current year derived from the sum of CSR strengths minus CSR concerns scores over the maximum score of strengths minus concerns scores in each year.
CSRLEGAL is CSR index based on what are required by laws (legal characteristics of CSR) defined in Appendix 1 and calculated based on the sum of CSR strengths minus CSR concerns
scores over the maximum score of strengths minus concerns scores in each year. CSRNORM is CSR index based on what are required by norms that are not required by laws (normative
characteristics of CSR) defined in Appendix 1 and calculated based on the sum of CSR strengths minus CSR concerns scores over the maximum score of strengths minus concerns scores in each
year. ANALYST is the natural log of one plus the analyst following. DTA_PERSIST is equal to one if the firms are consistently within the lowest quartile of performance-adjusted discretionary
total accrual (Kothari et al. (2005)) for three consecutive years prior to current year or zero otherwise. DISP is the standard deviation of analysts earnings estimates relative to the absolute value
mean of earnings estimates stated in % (Diether et al. 2002). DEVRET is the standard deviation of monthly stock returns within 1 year. COC is the cost of equity based on the average of
implied cost of equity premium estimated from Claus and Thomas (2001), Gebhardt et al. (2001), Easton (2004), and Ohlson and Juettner-Nauroth (2005). TOBINQ is the industry-adjusted
Tobins Q based on the FamaFrench 48 industries (excluding financials and utilities). ASSET is the natural log of total asset ($ million). MKTVAL is the natural log of total market value of
equity ($ million). DEBTR is long-term debt divided by total asset. RNDR is research and development expense divided by total net sales. ADVR is advertising expense divided by total net
sales. CAPXR is capital expenditure expense divided by total net sales. SGROWTH is total net sales growth rate during 1 year from the previous year. ADJDTA is performance-adjusted
discretionary total accrual based on Kothari et al. (2005). PERSISTCSR is equal to one if firms CSR is in the top quartile of industry CSR for the three consecutive years prior to current year or
zero otherwise
PERSISTCSR
LOGASSET
10
18
TOBINQ
ADJDTA
DEVRET
COC
7
8
17
DISP
SGROWTH
DTA_PERSIST
16
ANALYST
ADVR
CSRNORM
CAPXR
CSRLEGAL
14
CSR
15
Variables
No.
Table 3 Correlation matrix

11
123
123
0.0154 (2.53)**
0.1130 (7.51)***
0.0310 (2.28)**
0.1037 (8.33)***
0.0024 (0.91)
RNDR
ADVR
CAPXR
SGROWTH
-0.0008 (0.36)
-0.0861 (7.75)***
0.1590
9,259
2,034
INTERCEPT
R2
Observations
# Firms
2,034
9,259
0.0850
-0.0093 (2.56)**
2,034
9,259
0.1590
-0.0861 (7.75)***
-0.0008 (0.36)
0.0070 (3.14)***
-0.0022 (0.98)
0.0024 (0.91)
0.1037 (8.33)***
0.0310 (2.28)**
0.1130 (7.51)***
-0.0202 (4.73)***
-0.0073 (4.72)***
2,034
9,259
0.3605
0.1540 (5.99)***
-0.0382 (3.41)***
-0.0066 (0.61)
0.0324 (6.50)***
0.0110 (0.43)
0.0445 (1.65)*
0.0953 (2.22)**
0.0209 (2.17)**
2,034
9,259
0.1590
-0.0861 (7.75)***
-0.0008 (0.36)
0.0070 (3.14)***
-0.0022 (0.98)
0.0024 (0.91)
0.1037 (8.33)***
0.0310 (2.28)**
0.1130 (7.51)***
-0.0202 (4.73)***
0.0040 (7.46)***
First stage
CSR
2,034
9,259
0.3302
-0.0232 (1.95)*
-0.0133 (2.57)**
-0.0048 (0.96)
-0.0014 (0.59)
0.0279 (2.32)**
0.0216 (1.72)*
0.0623 (3.13)***
0.0049 (1.10)
-0.0063 (8.77)***
0.0045 (6.52)***
-0.0109 (6.98)***
1.6601 (3.19)***
1.8335 (3.22)***
-1.6581 (3.24)***
-1.8833 (3.25)***
Second stage
COC
2,034
9,259
0.1590
-0.0861 (7.75)***
-0.0008 (0.36)
0.0070 (3.14)***
-0.0022 (0.98)
0.0024 (0.91)
0.1037 (8.33)***
0.0310 (2.28)**
0.1130 (7.51)***
-0.0202 (4.73)***
0.0040 (7.46)***
First stage
CSR
2,034
9,259
0.5248
2.2165 (15.34)***
0.1812 (2.87)***
0.6370 (10.45)***
0.1302 (4.65)***
0.2325 (1.59)
0.0758 (0.50)
-0.0202 (0.08)
0.0560 (1.03)
0.1449 (16.60)***
-0.1460 (17.38)***
0.0439 (2.32)**
-1.2195 (3.20)***
-1.6937 (3.28)***
1.3694 (3.28)***
1.2478 (3.31)***
Second stage
TOBINQ
CSR is CSR composite index in current year derived from the sum of CSR strengths minus CSR concerns scores over the maximum score of strengths minus concerns scores in each year. ANALYST is the
natural log of one plus the analyst following. DTA_PERSIST is equal to one if the firms are consistently within the lowest quartile of performance-adjusted discretionary total accrual (Kothari et al. (2005))
for three consecutive years prior to current year or zero otherwise. DISP is the standard deviation of analysts earnings estimates relative to the absolute value mean of earnings estimates stated in % (Diether
et al. 2002). DEVRET is the standard deviation of monthly stock returns within 1 year. COC is the cost of equity based on the average of implied cost of equity premium estimated from Claus and Thomas
(2001), Gebhardt et al. (2001), Easton (2004), and Ohlson and Juettner-Nauroth (2005). TOBINQ is the industry-adjusted Tobins Q based on the FamaFrench 48 industries (excluding financials and
utilities). ASSET is the natural log of total asset ($ million). MKTVAL is the natural log of total market value of equity ($ million). DEBTR is long-term debt divided by total asset. RNDR is research and
development expense divided by total net sales. ADVR is advertising expense divided by total net sales. CAPXR is capital expenditure expense divided by total net sales. SGROWTH is total net sales
growth rate during 1 year from the previous year. ADJDTA is performance-adjusted discretionary total accrual based on Kothari et al. (2005). PERSISTCSR is equal to one if firms CSR is in the top quartile
of industry CSR for the three consecutive years prior to current year or zero otherwise. FamaFrench (1997) 48 industry and year dummy variables are included but not reported in this table to conserve
space. Robust t statistics in parenthesis are clustered at firm level. *, **, and *** indicate level of significance at 10, 5 and 1 % respectively
0.0070 (3.14)***
ANALYST(t - 1)
ZEROKLD
-0.0041 (2.60)***
-0.0022 (0.98)
PERSISTCSR
ANALYST(t)
0.0028 (1.80)*
ADJDTA
-0.0010 (1.36)
0.0057 (1.56)
0.0038 (0.98)
0.0010 (4.57)***
-0.0037 (2.69)***
-0.0202 (4.73)***
MKTVAL
DEBTR
-0.0094 (6.27)***
-0.0116 (3.43)***
0.0040 (7.46)***
-0.0007 (1.39)
0.0006 (2.94)***
DTA
ASSET
0.0040 (7.46)***
4.0050 (3.26)***
3.6655 (3.26)***
0.5379 (3.09)***
0.4886 (3.07)***
DTA 9 CSR(t)
DTA 9 CSR(t - 1)
-4.1224 (3.30)***
-3.6546 (3.31)***
Second stage
DEVRET
-0.5453 (3.08)***
First stage
CSR
-0.4824 (3.08)***
Second stage
DISP
CSR(t)
First stage
CSR
CSR(t - 1)
Dependent variables:
Table 4 2SLS for CSR composite
12
0.0002 (1.28)
ASSET
0.1132 (4.03)***
0.3997
9,259
2,034
INTERCEPT
R2
Observations
# Firms
2,034
9,259
0.0705
-0.0034 (1.87)*
2,034
9,259
0.3997
0.1132 (4.03)***
0.1191 (19.37)***
0.0147 (2.61)***
0.0059 (1.04)
0.0413 (5.98)***
0.1388 (4.31)***
0.0221 (0.65)
-0.1439 (3.82)***
0.0321 (3.01)***
-0.0615
(46.53)***
First stage
CSRLEGAL
2,034
9,259
0.4915
0.1078 (12.47)***
-0.0032 (1.92)*
0.0033 (0.83)
0.0282 (14.11)***
0.0482 (5.29)***
0.0785 (8.16)***
0.1847 (17.20)***
0.0029 (0.91)
-0.0066
(11.37)***
-0.0077 (9.37)***
-0.0140 (6.68)***
0.0089 (0.29)
-0.0021 (0.06)
-0.0085 (0.30)
-0.0049 (2.13)**
Second stage
DEVRET
2,034
9,259
0.3997
0.1132 (4.03)***
0.1191 (19.37)***
0.0147 (2.61)***
0.0059 (1.04)
0.0413 (5.98)***
0.1388 (4.31)***
0.0221 (0.65)
-0.1439 (3.82)***
0.0321 (3.01)***
-0.0615
(46.53)***
First stage
CSRLEGAL
2,034
9,259
0.3577
0.0014 (0.31)
-0.0014 (1.48)
-0.0113 (5.15)***
-0.0001 (0.10)
0.0056 (1.12)
0.0086 (1.64)
0.0095 (1.62)
0.0127 (7.35)***
-0.0068
(21.51)***
0.0028 (6.15)***
-0.0121
(10.57)***
-0.0235 (1.43)
0.0364 (1.87)*
0.0215 (1.39)
-0.0391 (1.95)*
Second stage
COC
2,034
9,259
0.3997
0.1132 (4.03)***
0.1191 (19.37)***
0.0147 (2.61)***
0.0059 (1.04)
0.0413 (5.98)***
0.1388 (4.31)***
0.0221 (0.65)
-0.1439 (3.82)***
0.0321 (3.01)***
-0.0615
(46.53)***
First stage
CSRLEGAL
2,034
9,259
0.5486
1.9858 (39.35)***
0.0140 (1.44)
0.6959 (29.67)***
0.1106 (9.49)***
0.4253 (7.98)***
0.2102 (3.75)***
0.6224 (9.93)***
-0.0137 (0.74)
0.1565 (46.55)***
-0.1365
(28.52)***
0.0550 (4.50)***
-0.0835 (0.47)
-0.0777 (0.37)
0.0376 (0.23)
0.0504 (2.23)**
Second stage
TOBINQ
*, **, and *** indicate level of significance at 10, 5 and 1 % respectively
CSRLEGAL is CSR index based on what are required by laws (legal characteristics of CSR) defined in Appendix 1 and calculated based on the sum of CSR strengths minus CSR concerns scores over the
maximum score of strengths minus concerns scores in each year. ANALYST is the natural log of one plus the analyst following. DTA_PERSIST is equal to one if the firms are consistently within the lowest
quartile of performance-adjusted discretionary total accrual (Kothari et al. (2005)) for three consecutive years prior to current year or zero otherwise. DISP is the standard deviation of analysts earnings
estimates relative to the absolute value mean of earnings estimates stated in % (Diether et al. 2002). DEVRET is the standard deviation of monthly stock returns within 1 year. COC is the cost of equity
based on the average of implied cost of equity premium estimated from Claus and Thomas (2001), Gebhardt et al. (2001), Easton (2004), and Ohlson and Juettner-Nauroth (2005). TOBINQ is the industryadjusted Tobins Q based on the FamaFrench 48 industries (excluding financials and utilities). ASSET is the natural log of total asset ($ million). MKTVAL is the natural log of total market value of equity
($ million). DEBTR is long-term debt divided by total asset. RNDR is research and development expense divided by total net sales. ADVR is advertising expense divided by total net sales. CAPXR is
capital expenditure expense divided by total net sales. SGROWTH is total net sales growth rate during 1 year from the previous year. ADJDTA is performance-adjusted discretionary total accrual based on
Kothari, Leone, and Wasley (2005). PERSISTCSR is equal to one if firms CSR is in the top quartile of industry CSR for 3 consecutive years prior to current year or zero otherwise. FamaFrench (1997) 48
industry and year dummy variables are included but not reported in this table to conserve space. Robust t statistics in parenthesis are clustered at firm level
0.0147 (2.61)***
0.1191 (19.37)***
ANALYST(t - 1)
ZEROKLD
0.0059 (1.04)
ANALYST(t)
0.0015 (1.72)*
-0.0000 (0.03)
-0.0007 (1.77)*
ADJDTA
0.0413 (5.98)***
SGROWTH
0.0016 (0.82)
-0.0001 (0.07)
0.0007 (0.32)
PERSISTCSR
0.0221 (0.65)
0.1388 (4.31)***
CAPXR
RNDR
ADVR
0.0321 (3.01)***
-0.1439 (3.82)***
DEBTR
-0.0015 (2.30)**
-0.0012
(2.77)***
DTA
0.0008 (6.93)***
0.0025 (0.39)
DTA x CSRLEGAL(t 1)
MKTVAL
0.0027 (0.37)
DTA x CSRLEGAL(t)
-0.0615
(46.53)***
-0.0017 (2.22)**
-0.0029 (0.49)
Second stage
DISP
CSRLEGAL(t)
First stage
CSRLEGAL
CSRLEGAL(t - 1)
Table 5 2SLS for legal CSR (CSRLEGAL)

13
123
14
hypothesis H2b that when firms engage in normative CSR

activities, market participants are relatively less informed
compared to engaging in legal CSR.
Additional Tests
One of the potential issues of 2SLS regressions for panel
data is that the errors are correlated within each panel or
firms. We use the industry-median CSR as an instrumental
variable because it is likely to fulfill both the relevancy
condition and the exclusion restriction. Cai et al. (2011)
suggests that the level of CSR may vary considerably
across industries due to the nature of the products produced, regulatory environment, shifts in social norms, or
certain problems arose in a social arena (e.g., Waddock and
Graves 1997; McWilliams and Siegel 2001; Fisman et al.
2005). Therefore, we expect firm-level CSR to be closely
related to its industry norm, as captured by its industrymedian CSR. At the same time, however, it is not obvious
why the industry-median CSR should be linked to analyst
dispersion, firm risk, COC, and firm value. In our sample,
our unreported results suggest that the correlation coefficient between firm-level CSR composite index and its
industry-median value is 0.36 and statistically significant at
the one percent level. In contrast, there is almost no statistically significant (or relatively weaker) correlation
between industry-median CSR and analyst dispersion, firm
risk, COC, and firm value measures.
Thus, we use fixed effects panel data regression and
estimate the fixed effects panel regression model for CSR
regressions using the corresponding industry-median CSR
as an instrumental variable (IV) of CSR composite score
(CSR), CSRLEGAL, and CSRNORM, respectively, following Cai et al. (2011). In particular, CSR is instrumented
with industry-median CSR, CSRLEGAL is instrumented
with industry-median CSRLEGAL, and CSRNORM is
instrumented with industry-median CSRNORM, respectively. The industry-median CSR measures worked reasonably well as instrumental variables for our CSR
measures since they are highly correlated to our CSR
measures but mostly insignificantly correlated with our
dependent variables. Our unreported results based on fixed
effects panel regression with instrumental variable (IV) for
CSR, CSRLEGAL, and CSRNORM are generally consistent with the results reported in Tables 4, 5, and 6.
We also conduct the 2SLS instrumental variables by
instrumenting CSR concern with the median-industry CSR
concerns and CSR strengths with the median-industry CSR
strengths. When we conduct additional tests by replacing
CSRLEGAL with CSR concerns index and replacing the
CSRNORM with CSR strengths index, our untabulated
2SLS with IV results show that the CSR concerns are
generally consistent with CSRLEGAL results presented in
123
Table 5, while the CSR strengths results are consistent with

CSRNORM results in Table 6, although not completely
identical. Presumably, the similar results are due to the
high correlation between CSRLEGAL and KLD CSR
concerns index (0.89), and the high correlation between
CSRNORM and CSR strengths index (0.94).
Discussion
Researchers have defined that CSR into two main categories. Friedman (1970) defines CSR as conducting the
business in accordance with shareholders desires, which
generally is to make as much money as possible while
conforming to the basic rules and laws of society. Carroll
(1979) defines the hierarchical CSR as economic, legal,
moral, and philanthropic actions of firms that influence the
quality of life of relevant stakeholders. Donaldson and
Preston (1995) classify CSR based on the stakeholder
theory, which consists of descriptive, instrumental, and
normative CSR. However, the impact of CSR activities on
shareholder value is still unclear (Starks 2009). And
therefore, security analysts play a critical role to enhance
information transparency between managers and external
investors.
We find supporting empirical evidence that legal CSR
activities reduce disagreement (dispersion) among analyst
earnings forecasts, stock return volatility, and COC while
legal CSR increases firm value. In contrast, we find normative (discretionary) CSR contemporaneously increases
analyst dispersion, stock returns volatility, and COC while
it contemporaneously decreases firm value. Our findings
are consistent with information asymmetry argument given
legal CSR entails less information asymmetries among
analysts compared to normative CSR. We find that the
impact of normative CSR reduces analyst dispersion, volatility stock return, COC, and it increases firm value after
1 year lag. According to the asymmetric information theory, we interpret the latter finding as evidence that disagreements among the sell-side analysts decrease over time
because the proportion of informed analysts increases and
relevant information tends to be more available as time
passes by. We also find that the impact of 1 year lag of
normative CSR is reduced when the firms have better
accounting and disclosure quality.
There are two main implications of this study. First, the
analysts are relatively better informed when firms conduct
CSR activities that are according to the laws (legal CSR).
In contrast, when firms pursue CSR activities that are not
required by laws, analysts are relatively less informed.
Eventually, however, the impact of following the norms
reduces disagreement and volatility because the search cost
of information decreases, and the proportion of informed
-0.0021 (2.43)**
-0.0979 (8.10)***
0.3840 (8.98)***
0.1400 (3.63)***
0.2787 (7.64)***
-0.0161 (2.05)**
DEBTR
RNDR
ADVR
CAPXR
SGROWTH
-0.0795 (11.40)***
-0.2445 (7.68)***
0.2746
9,259
2,034
INTERCEPT
R2
Observations
# Firms
2,034
9,259
0.0187
-0.0050 (2.13)**
-0.0099 (7.16)***
2,034
9,259
0.2746
2,034
9,259
0.2918
2,034
9,259
0.2746
-0.2445 (7.68)***
-0.0795 (11.40)***
-0.2445 (7.68)***
0.0029 (0.45)
-0.0155 (2.40)**
-0.0161 (2.05)**
0.2787 (7.64)***
0.1400 (3.63)***
0.3840 (8.98)***
-0.0979 (8.10)***
0.0462 (30.83)***
-0.0795 (11.40)***
0.1251 (9.70)***
-0.0121 (3.14)***
-0.0005 (0.09)
0.0285 (11.99)***
0.0330 (2.71)***
0.0624 (4.76)***
0.1560 (8.69)***
0.0094 (2.01)**
-0.0061 (8.74)***
0.0029 (0.45)
-0.0155 (2.40)**
-0.0161 (2.05)**
0.2787 (7.64)***
0.1400 (3.63)***
0.3840 (8.98)***
-0.0979 (8.10)***
0.0462 (30.83)***
-0.0170 (7.28)***
First stage
CSRNORM
2,034
9,259
0.3431
0.0022 (0.37)
-0.0046 (2.55)**
-0.0120 (5.12)***
-0.0004 (0.34)
0.0019 (0.34)
0.0056 (0.91)
0.0067 (0.80)
0.0133 (6.07)***
-0.0068 (20.81)***
0.0033 (5.07)***
-0.0102 (9.34)***
0.0440 (2.90)***
0.0570 (0.84)
-0.0474 (2.79)***
0.0599 (0.84)
Second stage
COC
2,034
9,259
0.2746
-0.2445 (7.68)***
-0.0795 (11.40)***
0.0029 (0.45)
-0.0155 (2.40)**
-0.0161 (2.05)**
0.2787 (7.64)***
0.1400 (3.63)***
0.3840 (8.98)***
-0.0979 (8.10)***
0.0462 (30.83)***
First stage
CSRNORM
2,034
9,259
0.4707
2.0772 (30.08)***
0.0131 (0.64)
0.6783 (25.23)***
0.1170 (9.20)***
0.3795 (5.83)***
0.1469 (2.09)**
0.4787 (4.98)***
0.0165 (0.66)
0.1582 (42.18)***
-0.1526 (20.67)***
0.0034 (0.27)
-1.3961 (1.80)*
1.0813 (1.57)
1.4658 (1.81)*
-1.2160 (1.78)*
Second stage
TOBINQ
*, **, and *** indicate level of significance at 10, 5 and 1 % respectively
CSRNORM is CSR index based on what are required by norms that are not required by laws (normative characteristics of CSR) defined in Appendix 1 and calculated based on the sum of CSR strengths minus
CSR concerns scores over the maximum score of strengths minus concerns scores in each year. ANALYST is the natural log of one plus the analyst following. DTA_PERSIST is equal to one if the firms are
consistently within the lowest quartile of performance-adjusted discretionary total accrual (Kothari et al. (2005)) for three consecutive years prior to current year or zero otherwise. DISP is the standard deviation
of analysts earnings estimates relative to the absolute value mean of earnings estimates stated in % (Diether et al. 2002). DEVRET is the standard deviation of monthly stock returns within 1 year. COC is the
cost of equity based on the average of implied cost of equity premium estimated from Claus and Thomas (2001), Gebhardt et al. (2001), Easton (2004), and Ohlson and Juettner-Nauroth (2005). TOBINQ is the
industry-adjusted Tobins Q based on the FamaFrench 48 industries (excluding financials and utilities). ASSET is the natural log of total asset ($ million). MKTVAL is the natural log of total market value of
equity ($ million). DEBTR is long-term debt divided by total asset. RNDR is research and development expense divided by total net sales. ADVR is advertising expense divided by total net sales. CAPXR is
capital expenditure expense divided by total net sales. SGROWTH is total net sales growth rate during 1 year from the previous year. ADJDTA is performance-adjusted discretionary total accrual based on
Kothari, Leone, and Wasley (2005). PERSISTCSR is equal to one if firms CSR is in the top quartile of industry CSR for 3 consecutive years prior to current year or zero otherwise. FamaFrench (1997) 48
industry and year dummy variables are included but not reported in this table to conserve space. Robust t statistics in parenthesis are clustered at firm level
0.0029 (0.45)
ANALYST(t - 1)
ZEROKLD
-0.0005 (0.66)
-0.0155 (2.40)**
PERSISTCSR
ANALYST(t)
0.0015 (1.60)
ADJDTA
-0.0009 (2.01)**
0.0017 (0.76)
0.0007 (0.29)
0.0028 (0.85)
0.0008 (5.88)***
MKTVAL
0.0006 (2.29)**
-0.0003 (0.72)
DTA
0.0462 (30.83)***
0.0279 (1.89)*
ASSET
0.3251 (1.24)
0.0284 (1.07)
DTA 9 CSRNORM(t)
DTA x CSRNORM(t - 1)
0.2873 (2.24)**
-0.3042 (2.39)**
0.3622 (2.39)**
Second stage
DEVRET
0.0285 (1.03)
First stage
CSRNORM
-0.0282 (2.21)**
Second stage
DISP
CSRNORM(t)
First stage
CSRNORM
CSRNORM(t - 1)
Table 6 2SLS for CSR Normative (CSRNORM)

15
123
16
analysts increases over time. Second, managers cannot

expect immediate favorable reactions from the analysts
when they conduct CSR to follow the norms since analysts
are more likely to experience greater information asymmetry compared to pursuing legal CSR activities. Gennotte
and Leland (1990) indicate that under information asymmetry, market participants will interpret any movements in
the stock prices as information which may lead to significant decline in stock prices. Therefore, we believe that
managers should provide greater disclosure for the analysts
to reduce asymmetric information especially when they
pursue CSR activities voluntarily that are not required by
laws.12 Normative CSR also acts as one of the important
firms reputation building mechanisms, and therefore,
requires longer time to realize its benefits.
One caveat of the KLD data is its unbalanced panel
structure and certain construct-validity issue (Chatterji et al.
2009). In addition, KLD data is qualitative in nature. We
also acknowledge that there are certain limitations in this
study in terms of subjectivities in our legal vs. normative
CSR classifications. For robustness check, we conduct the
instrumental variable regressions and we employ a panel of
researchers to reclassify the legal and normative CSR, and
find that our main results remain robust.
It will be fruitful if future studies examine legal vs.
normative CSR connecting third-party verification of CSR
practices, such as recent APCO Global CSR Study Report
because the report suggests that our society is listening to
companies CSR activities, but still does not feel well
informed. Analysts who are listening believe a CSR disclosure is both credible and important. In addition, future
studies can examine other third-party verification from
non-governmental organizations, i.e., Global Reporting
Initiatives (GRI), media, government, employees, customers, and other key stakeholders to verify analysts credibility of the firms CSR engagement.13 Future researchers,
however, should be extremely careful because a recent
study warns the insufficient nature of GRI reporting
guideline. Milne and Gray (2013), for instance, offer a
critique of sustainability reporting and, in particular, a
critique of the modern disconnect between the practice of
sustainability reporting and the urgent matter of sustaining
the life-supporting ecological systems. They assert that the
12
For instance, General Mills, Intel Corporation, Starbucks, and

many other corporations listed and have improved their rankings in
Corporate Responsibility Magazine 100 Best Corporate Citizens
when they continuously provide news and media releases about their
progresses in CSR activities especially those which are not required
by laws.
13
APCO Worldwide (2004) is a consulting firm that addresses firms
interests and objectives through communication and public affairs and
consulting that combines a global perspective with local expertise to
understand the issues, events and trends that impact businesses and
organizations around the world (http://www.apcoworldwide.com/).
123
GRIs sustainability reporting guidelines are fatally insufficient for organizations contributing to the sustaining of
the Earths ecology, claiming that such reporting guidelines
may reinforce business-as-usual and greater levels of unsustainability.
Conclusions
The primary purpose of this paper is to contrast the level of
information asymmetries among the sell-side analysts by
examining the analyst reactions when firms conduct CSR
that comply the laws (legal CSR) versus when firms engage
in CSR that follow social norms (normative CSR). This
study relies on the asymmetric information theory to
explain the impact of CSR engagement (legal and normative) on dispersion of analyst earnings forecasts, stock
return volatility, COC, and firm value.
We hypothesize that analysts are more likely to face
greater asymmetric information about firms engagement
in CSR activities to the extent that analysts are not properly
and timely informed. If analysts are fully informed about
the specific rationales behind CSR engagements, CSR
activities will reduce analyst dispersion, stock return volatility, and COC while enhancing firm value. However,
when analysts are not fully informed, CSR activities, at
least contemporaneously, increase analyst dispersion, stock
return volatility, and COC while it reduces firm value.
Using a sample of U.S. firms from the KLD Stats
database during 19932009, this study finds that analysts
are affected by firms overall engagement in CSR activities. Consistent with our hypothesis, we find that the impact
of CSR activities on analyst dispersion is negative and
statistically significant. We also find that firms volatility of
stock return and COC decrease as the firms CSR activities
increase. The firms CSR activities also increase firm value.
When we classify CSR into legal and normative CSR, we
find evidence that suggest analysts are fully informed about
firms engagement in CSR activities to fulfill legal
requirements (legal CSR). In contrast, when firms engage
in CSR activities that are not required by laws (normative
CSR), analysts are not fully informed. The analyst dispersion, stock returns volatility, and COC increase while
the firm value decreases contemporaneously with firms
engagement in normative CSR. However, over 1-year lag,
the normative CSR reduces analyst dispersion, stock
returns volatility, and COC while it increases firm value as
analysts begin to acquire information about the net benefit
of pursuing normative CSR. We maintain the major reason
behind the phenomena is firms reputation building. We
also find that the benefit of CSR, especially normative CSR
is offset for firms with better external accounting and
information disclosure quality.
17
Acknowledgments Hoje Jo appreciates Gerald and Bonita Wilkinson Professorship endowment, Leavey Research grant, and sabbatical support of the Leavey School of Business at Santa Clara
University. We appreciate Gary Monroe, Section Editor, for insightful
guidance and one anonymous referee for many constructive and
valuable comments. Harjoto acknowledges the Julian Virtue
KLD variables
Legal
Professorship endowment, and the Rothschild Fellowship awards for

financial support.
Appendix 1: Categories for legal and normative CSR
Normative
Strength
Charitable giving
Yes
Innovative giving
Yes
Support for housing
Yes
Support for education

Non-US charitable giving
Yes
Yes
1
1
Volunteer programs
Yes
Community other strength
Yes
Concern
Community
Investment controversies
Yes
-1
Negative economic impact
Yes
-1
Tax disputes
Yes
-1
Community other concerns
Yes
-1
Corporate governance
Limited compensation
Yes
Ownership strength
Yes
1
1
Transparency strength
Yes
Political accountability strength
Yes
Public policy strength
Yes
Corp gov other strength
Yes
High compensation
Yes
-1
Ownership concern
Accounting concern
Yes
Yes
-1
-1
Transparency concern
Yes
-1
Political accountability concern
Yes
-1
Public policy concern
Yes
-1
Corp gov other concerns
Yes
-1
Diversity
CEO
Yes
Promotion
Yes
Board of directors
Yes
Work life benefits
Yes
Women and minority contracting
Yes
Employment of the disabled
Yes
Gay and lesbian policies
Yes
Diversity other strength
Yes
Controversies
Non-representation
Diversity other concerns
Yes
Yes
-1
-1
Yes
-1
123
18
KLD inclusionary variables
Legal
Normative
Strength
Concern
Union relations
Yes
No layoff policy
Yes
Cash profit sharing
Yes
Employee involvement
Yes
Retirement benefits strength
Yes
Health and safety strength
Yes
Emp relations other strength
Yes
Union relations
Yes
-1
Yes
-1
Employee relations
Health and safety concern
Yes
Workforce reductions
Retirement benefits concern
-1
Yes
Emp relations other concerns
-1
Yes
-1
Environment
Beneficial products and services
Yes
Pollution prevention
Yes
Recycling
Yes
Clean energy
Yes
Property plant equipment
Yes
Management systems strength
Yes
Yes
Environment other strength

Hazardous waste
Yes
Regulatory problems
Yes
-1
-1
Ozone depleting chemicals
Yes
-1
Substantial emissions
Yes
-1
Agriculture chemicals
Yes
-1
Climate change
Yes
-1
Environment other concerns
Yes
-1
Human rights
Positive record in South Africa
Yes
Indigenous peoples relations strength
Yes
Labor rights strength
Yes
Human rights other strength
Yes
South Africa concern
Yes
-1
Northern Ireland concern
Yes
-1
Burma concern
Yes
-1
Mexico concern
Yes
-1
Labor rights concern
Yes
-1
Indigenous peoples concern
Yes
-1
Human rights other concerns
Yes
-1
Product
Quality
Yes
R & D innovation
Yes
Benefits to economically disadvantage
Yes
Yes
Product other strengths

Product safety
Yes
-1
Marketing contracting concern
Yes
-1
Antitrust
Yes
-1
Product other concerns
Yes
-1
If a rating is categorized as legal CSR, the same rating cannot be categorized as normative CSR
KLD variable descriptions are available at http://www.kld.com/research/stats/indicators.html
123
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Legal vs. Normative CSR: Differential Impact On Analyst Dispersion, Stock Return Volatility, Cost of Capital, and Firm Value

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J Bus Ethics (2015) 128:120

Legal vs. Normative CSR: Differential Impact on Analyst

Abstract This study examines how the sell-side analysts

We contrast the analysts reactions toward CSR activities that are

A few corporations are able to provide more tangible evidence of

We postulate that under asymmetric information, the

Our hypotheses are based on a theoretical model of asymmetric

A few corporations are able to provide more tangible evidence of

We postulate that under asymmetric information, the

Our hypotheses are based on a theoretical model of asymmetric

Legal vs. Normative CSR

performance-adjusted discretionary accrual (Kothari et al.

Literature Review and Hypotheses

reallocate resources among stakeholders, when the market

(2004) indicates that analyst dispersion (disagreement) is a

economic and legal responsibilities. Carroll (1991)

Legal vs. Normative CSR

Focusing on the CSR brand, Ogrizek (2002) argues that CSR

qualified personnel is crucial for firms with CSR programs

The underlying rationale for this conjecture is that as the

Data, Measurements, and Empirical Model

Since KLD ratings change from year to year, our CSR

where firms with higher CSR index (Cit) are considered

When we exclude KLD corporate governance category from our

We also conduct robustness check with CSR counts instead of CSR

Legal vs. Normative CSR

Measurements of Dependent Variables

COCit a bCSRit cCSRit1

where DISPit is measured by the dispersion of analyst

Moffitt (1999) suggest using the IV method, which focuses on

growth rate (SALEGRW), and also the FamaFrench

concerns scores are almost equal. The mean of legal CSR

Legal vs. Normative CSR

Table 1 Sample statistics

Multivariate Regression Analysis

industry-adjusted Tobin Q as a measure of firm value. The

with Dhaliwal et al. (2011) and El Ghoul et al. (2011). In

Table 2 Distribution of sample across industries

* indicates level of significance at 1 %

Table 3 Correlation matrix

Legal vs. Normative CSR

Table 4 2SLS for CSR composite

*, **, and *** indicate level of significance at 10, 5 and 1 % respectively

Table 5 2SLS for legal CSR (CSRLEGAL)

Legal vs. Normative CSR

hypothesis H2b that when firms engage in normative CSR

Table 5, while the CSR strengths results are consistent with

*, **, and *** indicate level of significance at 10, 5 and 1 % respectively

Table 6 2SLS for CSR Normative (CSRNORM)

Legal vs. Normative CSR

analysts increases over time. Second, managers cannot

For instance, General Mills, Intel Corporation, Starbucks, and

Legal vs. Normative CSR

Professorship endowment, and the Rothschild Fellowship awards for

Appendix 1: Categories for legal and normative CSR

Support for housing

Support for education

Community other strength

Negative economic impact

Community other concerns

Political accountability strength

Public policy strength

, , and indicate level of significance at 10, 5 and 1 % respectively

, , and indicate level of significance at 10, 5 and 1 % respectively