1

Doing Less Badly by Doing Good: Corporate Social Responsibility

Amir Barnea, Robert Heinkel,

Alan Kraus

2

Objectives

Construct model of interactions between individual and corporate

social giving.

Use this model to

– Understand relative stock market returns of ‘good’ and ‘bad’ firms.

– Address tax policy questions re social contributions.

3

Model

Expected end of period cash flow

Neutral investor objective

Altruistic investor objective

2

1 2

1,

2j j j j jk K D k K D j b g

2 2 2 212

2n nb b ng g nb b ng g nb ng bg

nb nb b ng ng g

U x x x x x x

x P x P

2 2 2 212

2

, , , , 1

a ab b ag g ab b ag g ab ag bg

ab ab b ag ag g

b g I ab ag i I

U x x x x x x

x P x P

W D D D x x t D

4

Altruistic investor utility for donations and CSR expenditures

Entrepreneur objective

2 2

2 2

1 1

2 2

1 1

2 2

where

i i I I b ab b b b b

g ag g g g g

a I b b g g

W u D vD x u D vD w

x u D vD w T T

T I D N D N D

Maximize P 1 ,j c j j j j jt D D K j b g

5

Model solution

Equilibrium prices

Equilibrium demands

2 2

2 2

1 1

2

1 1

2

ab b b b g bg b b b b b

B

ag g b bg g g g g g g g

G

IP N N u D vD w

I I

IP N N u D vD w

I I

* 2 * 2

* 2 * 2

2 2 2where and

gb a anb b g g bg ng g b b bg

gb n nab b g g bg ag g b b bg

b g bg n a

NN I Ix B G x G B

I I I I

NN I Ix B G x G B

I I I I

I I I

6

Equilibrium CSR expenditures

Equilibrium altruistic investor donations

Note that Dj* is independent of ti but DI

* depends on tc through Db and Dg.

*

2

1i i a a b b g g i

Ia

u I I N D N D tD

v I

* 11max 0, ,c j

j ja j

tID u j b g

v I

7

General model results

• Firms’ investments Kb*-Db

* and Kg*-Dg

* are independent of Ia.

• At high levels of Ia, firms may make CSR expenditures Db* and/or Dg

* past the cutoff for tax rebate.

• Stock prices Pb and Pg may be non-monotonic in Ia.

• For Ia>0, b firm’s stock has higher expected return than g firm’s stock.

• Altruistic individual donation DI* is non-monotonic in Ia.

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Numerical example parameters

k1=6 =200 1=0.1 wb=1

k2=1 ui=2 b=0.6 wg= -1

b=20 ub=4 g=0.6 tc=0.4

g=20 ug=3 β=6 tI=0.3

bg=200 v=2.5 =0.5

Nb=0.5 Ng=0.5 Ib=lg=0.5

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Equilibrium stock prices

15.6

15.8

16.0

16.2

16.4

16.6

16.8

17.0

17.2

17.4

17.6

17.8

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

P g

P b

I a / I

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CSR expenditures

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1I a / I

D b

D g

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Individual donations

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

DI

I a / I

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Numerical example tax policy results

• Social surplus decreases with the personal donation tax break (ti).

• Social surplus is non-monotonic and concave in the corporate CSR expenditure tax break (tc)

• The corporate tax break that maximizes social surplus (tc* ) varies

non-monotonically with the upper limit on deductible CSR expenditures (Ij).

• The maximum social surplus is weakly monotonically increasing and concave in the upper limit on deductible CSR expenditures (Ij).

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Social Surplus (Ia=0.4)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

0 0.1 0.2 0.3 0.4 0.5 0.6t i

C

SS

T

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Social Surplus (Ia=0.4)

1.20

1.30

1.40

1.50

1.60

1.70

1.80

1.90

2.00

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1t c

SSl j =0.05

SSl j =0.025

SSlj=0.075

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Optimal corporate tax break (Ia=0.4)

0.30

0.35

0.40

0.45

0.50

0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.10l j

t c*

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Maximum Social Surplus (Ia=0.4, tc=tc* )

1.680

1.700

1.720

1.740

1.760

1.780

1.800

1.820

0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.10l j

SS *