What shapes CSR performance? Evidence from the changing enforceability of non‐compete agreements in the United States

Abstract

This paper investigates whether companies strategically engage in corporate social responsibility (CSR) practices to retain employees. Under a unique setting of exogenous variations in noncompete law enforceability in the U.S., we examine the relation between the changing enforceability of non-compete agreements and firms' CSR performance. Using a difference-indifferences design, we find that an increase in the enforcement of non-compete agreements (which enhances a firm's ability to retain employees) deteriorates CSR performance. In cross-sectional tests, we find that peer pressure affects CSR performance interactively with the enforceability of non-compete agreements; specifically, the strategic role of CSR performance in employee retention is more pronounced for firms facing higher peer pressure (i.e., firms that are R&D intensive and in highly competitive industries). We further find a negative relation between the absolute enforceability of non-compete agreements and CSR performance. The above findings are consistent with the notion that firms strategically engage in CSR practices to retain employees, thereby reducing the knowledge spillover associated with employee mobility.

The Effect of the Security and Exchange Commission’s Investigations into Corporate Social Responsibility Performance

“…These results are consistent with those of prior studies. For example, firms with more cash on hand or higher tangible assets such as property, plant and equipment (PP&E) tend to have higher CSR performance, as higher levels of PP&E indicate a greater supply of internal resources and a higher ability to attract investment from external sources [19,75]. Furthermore, while some authors document a positive relationship between CSR and corporate financial performance (CFP) [76], others document a more limited magnitude of this effect and the causal relationship [77], and some find both over-and under-investment in CSR to be negatively related to a firm's short-term financial performance [78].…”

“…We further obtain CSR performance data from the MSCI ESG KLD STATS database (hereafter "KLD"). KLD's (produced by Kinder, Lydenberg, and Domini) CSR ratings have been widely used in prior literature (e.g., [19,[63][64][65][66]) and provide binary summaries of positive and negative CSR ratings (i.e., strengths and concerns) along seven dimensions related to community, corporate governance, diversity, employee relations, the environment, human rights, and products. We utilize the KLD database, as it is widely recognized as the most extensive, publicly available, and largest multidimensional corporate social performance database and the prevailing standard in current CSR research.…”

“…Prior literature documents a variety of reasons why firms engage in CSR. Apart from the social benefits [27,28] of being a responsible corporate entity, a firm also strategically manages its CSR activities to mitigate the conflicts between shareholders and other stakeholders [29,30], to enhance its reputation or for window-dressing purposes [9,10], to improve its competitive advantage [31,32] or to retain its employees [19,33]. The nonpublic nature of SEC investigations provides a unique setting in which to understand how regulatory scrutiny affects managerial behavior with regard to CSR, as the typical external stakeholders are unaware of the alleged misconduct.…”

“…Second, we employ the propensity score matching (PSM) method to enhance the comparability between the companies undergoing treatment and those in the control group. Specifically, we identify a control firm comparable to each treatment firm in various dimensions by implementing one-to-one nearest neighbor matching without replacement [18,19]. Finally, we investigate how SEC investigations affect CSR performance along its seven dimensions and find that the negative effect of SEC investigations on CSR performance manifests itself in the areas related to "corporate governance and product".…”

“…Independent variables: Following recent CSR literature [19,72,73], we include a set of control variables, where X is a vector of firm-specific characteristics such as total assets (TA), Tobin's Q (TQ), losses (Loss), leverage (LEV), profitability (Profit), tangibility (Tangible), cash holdings (Cash), and institutional ownership (IO). The indicator variables µ t and µ j refer to year and firm fixed effects, respectively.…”