Corporate Governance Reforms Around the World: The Effect on Corporate Social Responsibility

Abstract

This study examines the effect of major corporate governance reforms on corporate social responsibility (CSR) in countries around the world. Using a difference-in-differences design, we find robust evidence that worldwide corporate governance reforms result in an increase in CSR performance in both the environmental and social dimensions. Relative to countries with comply-or-explain reforms, countries with rule-based reforms tend to experience a greater increase in CSR performance post-reform. In addition, the effect of reforms on CSR performance is more pronounced for firms with higher levels of institutional ownership or lower levels of insider ownership and in countries with weaker CSR awareness and a more stringent legal and regulatory environment. Further analyses show that the reforms strengthen the relation between CSR and future financial performance. Collectively, our evidence suggests that increases in substantive CSR investment represent a potential channel through which corporate governance reforms can increase shareholder value and that the effectiveness of reforms varies with both firm- and country-level characteristics related to the relative influence of external shareholders.