Does Corporate Social Responsibility Lead to Superior ...sites.bu.edu/cflammer/files/2019/03/Flammer_MgtSci2015.pdf · Between Social and Financial Performance The relationship between

MANAGEMENT SCIENCEVol. 61, No. 11, November 2015, pp. 2549–2568ISSN 0025-1909 (print) � ISSN 1526-5501 (online) http://dx.doi.org/10.1287/mnsc.2014.2038

© 2015 INFORMS

Does Corporate Social ResponsibilityLead to Superior Financial Performance?

A Regression Discontinuity Approach

Caroline FlammerIvey Business School, University of Western Ontario, London, Ontario N6G 0N1, Canada, [email protected]

This study examines the effect of shareholder proposals related to corporate social responsibility (CSR) onfinancial performance. Specifically, I focus on CSR proposals that pass or fail by a small margin of votes. The

passage of such “close call” proposals is akin to a random assignment of CSR to companies and hence provides aquasi-experiment to study the effect of CSR on performance. I find that the adoption of close call CSR proposalsleads to positive announcement returns and superior accounting performance, implying that these proposalsare value enhancing. When I examine the channels through which companies benefit from CSR, I find that laborproductivity and sales growth increase after the vote. Finally, I document that close call CSR proposals differfrom non-close proposals along several dimensions. Accordingly, although my results imply that adopting closecall CSR proposals is beneficial to companies, they do not necessarily imply that CSR proposals are beneficialin general.

Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.2038.

Keywords : corporate social responsibility; financial performance; regression discontinuity; shareholderproposals

History : Received January 4, 2013; accepted July 11, 2014, by Wei Jiang, finance. Published online in Articles inAdvance February 19, 2015.

1. IntroductionDoes corporate social responsibility (CSR) lead tosuperior corporate financial performance (CFP)?Anecdotal evidence points toward a positive relation-ship between the two. For instance, the UK retailerMarks & Spencer implemented an ambitious CSR pro-gram in 2007 “with the ultimate goal of becomingthe world’s most sustainable major retailer” (Brokaw2012). Five years later, this program turned out tobe very profitable. In particular, chief executive offi-cer (CEO) Marc Bolland qualifies the outcome as “astrong business case for sustainability, with £185 mil-lion in net benefits” (Brokaw 2012). More generally,recent surveys indicate that a large majority of CEOsbelieve that CSR can improve a firm’s competitive-ness and is critical to its future success (see, e.g., Lacyet al. 2010, Haanaes et al. 2012).

Understanding the relationship between CSR andCFP has spurred a large academic literature. In theirreview, Margolis et al. (2007) report that 167 studieshave examined the CSR–CFP link between 1972 and2007. These studies have been surveyed in no fewerthan 16 review articles. The typical approach in thisliterature is to regress measures of CFP (Tobin’s Q,return on assets, etc.) on measures of CSR (e.g., the

Kinder, Lydenberg, and Domini index of social per-formance). In their meta-analysis of these studies,Margolis et al. conclude that the overall correlationbetween CSR and CFP—more precisely, the coefficientof CSR in the above regression—is positive but small.

A limitation of this literature is that CSR is endoge-nous with respect to CFP, i.e., a company’s decision toengage in CSR activities likely correlates with unob-servable firm characteristics that may also affect CFP.For example, it could be that companies engage inCSR because they are more profitable or expect theirfuture profitability to be higher. Or it could be thatCEOs who implement long-term CSR strategies arealso those who are more likely to perform well (e.g.,since they are more talented). In sum, the positive cor-relation between CSR and CFP that emerges from theliterature, albeit interesting, does not warrant a causalinterpretation.1

Going beyond such a correlation is difficult. Froman empirical perspective, the ideal experiment wouldbe to randomly assign firms into a “high CSR group”

1 Similarly, Margolis et al. (2007) conclude their meta-analysis byhighlighting the need to move beyond the “simple correlationbetween CSP and CFP” (p. 33).

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Flammer: Does CSR Lead to Superior Financial Performance? A Regression Discontinuity Approach2550 Management Science 61(11), pp. 2549–2568, © 2015 INFORMS

and a “low CSR group” and compare their finan-cial performance following this “treatment.” Obvi-ously, such an ideal experiment would be difficult andunreasonably costly to implement in the field.

In this paper, I consider a quasi-natural experimentthat is very close in spirit to this ideal experiment.Specifically, I compare the effect of shareholder-sponsored CSR proposals that pass or fail by a smallmargin of votes in annual meetings. The passage ofsuch “close call” proposals is akin to a random assign-ment of CSR to companies and hence is uncorrelatedwith firm characteristics. Intuitively, there is no reasonto expect any systematic difference between a com-pany for which a CSR proposal passes with 50.1% ofthe votes and a company for which a similar proposalfails with 49.9% of the votes. Accordingly, close callCSR proposals provide a source of random variationin CSR that can be used to estimate the causal effect ofCSR on CFP. The general approach of comparing out-comes just above and below a discontinuous thresh-old is known as regression discontinuity design (RDD) inthe economic literature. In this paper, the discontinu-ity arises because, around the 50% majority threshold,a minor difference in vote shares leads to a discretechange (i.e., a discontinuity) in the adoption of CSRpolicies.2

The data on CSR proposals are obtained from Risk-Metrics and SharkRepellent, which compile informa-tion on shareholder proposals of U.S. publicly tradedcompanies that came to a vote from 1997 to 2012.The proposals are classified into two broad categories:social issues (e.g., the implementation of nondiscrim-ination policies) and environmental issues (e.g., thereduction of CO2 emissions).3

My main finding is that the passage of closecall CSR proposals significantly increases shareholdervalue. On the day of the shareholder meeting, a CSRproposal that passes by a narrow margin of votesyields an abnormal return of 0.92% compared witha CSR proposal that fails marginally. Since share-holder proposals are not binding, this estimate mea-sures only the effect of approving a CSR proposalas opposed to the effect of implementing a CSR pro-posal. The latter can be approximated by rescaling theestimated coefficient by the probability of implement-ing the proposal. I find that CSR proposals have a52% probability of being implemented. Accordingly,

2 See Lee and Lemieux (2010) and Roberts and Whited (2013) forsurveys of RDD applications in the economics and finance litera-ture. For a formal treatment of the RDD methodology as well aspractical advice, see Imbens and Lemieux (2008).3 Some scholars use a broader definition of CSR that also encom-passes corporate governance—i.e., “ESG” (environmental, social,and governance). The definition of CSR used in this paper does notinclude corporate governance. For a study of governance propos-als, see Cuñat et al. (2012).

my results imply that implementing a close call CSRproposal leads to an increase in shareholder value byabout 1.77%. This finding is consistent with the viewthat CSR is a valuable resource, which is in line with,e.g., the resource-based view of the firm (e.g., Hart1995, Russo and Fouts 1997), instrumental stakeholdertheory (e.g., Jones 1995), and Porter and Kramer’s(2006, 2011) shared value argument.

I then examine whether the increase in shareholdervalue depends on the level of CSR prior to the vote. Ifind that the value gains are larger for companies withrelatively low levels of CSR. This suggests that CSRis a resource with decreasing marginal returns; i.e.,the CSR–CFP relationship is concave. Intuitively, ini-tial efforts to improve CSR may yield substantial ben-efits (the “low-hanging fruits” of CSR). However, ascompanies keep increasing their social performance,the returns from an additional CSR initiative maydecrease.

Next, I examine the channels through which CSRincreases shareholder value. I find that the passingof close call CSR proposals has a positive impacton operating performance in the years followingthe vote. When I further examine what explains theincrease in operating performance, I find that theadoption of close call CSR proposals leads to anincrease in labor productivity and sales growth. Thisevidence suggests that these proposals improve jobsatisfaction and help companies cater to customersthat are responsive to sustainable practices.

Although my results imply that close call CSR pro-posals are beneficial to companies, they do not nec-essarily imply that CSR proposals are beneficial ingeneral. The vast majority of CSR proposals receivelittle support at shareholder meetings (the averagevote outcome is merely 13.5%), suggesting that share-holders may not find them desirable. Hence, it seemsplausible that close call proposals may not be repre-sentative of the average CSR proposal. When I charac-terize the subset of close call proposals, I indeed findthat they differ from non-close proposals along sev-eral dimensions. First, they are more likely to addressemployee satisfaction and the mitigation of environ-mental hazards. Second, a textual analysis of theirsupport statement shows that they more frequentlycontain arguments linking CSR to performance. Third,close call proposals are more frequently found amongcompanies operating in “stakeholder-sensitive” indus-tries, i.e., industries in which performance dependsgreatly on the relationship with employees and cus-tomers. Overall, this suggests that close call CSR pro-posals are more likely to be related to performancein some way. Accordingly, one must be cautious inextrapolating my results to non-close proposals.

The remainder of this paper is organized as fol-lows. Section 2 describes the competing hypotheses

Flammer: Does CSR Lead to Superior Financial Performance? A Regression Discontinuity ApproachManagement Science 61(11), pp. 2549–2568, © 2015 INFORMS 2551

on the CSR–CFP relationship. Section 3 describes thedata and empirical methodology. Section 4 presentsthe results. Section 5 discusses the external validity.Section 6 concludes.

2. Background: The RelationshipBetween Social and FinancialPerformance

The relationship between social and financial perfor-mance has received considerable attention in the the-ory literature. The early literature, in the spirit ofshareholder theory (e.g., Friedman 1962, 1970), viewssocial responsibility as a “donation” from sharehold-ers to stakeholders that reduces profits. Similarly, CSRmay be the outcome of an agency conflict betweenshareholders and managers (Jensen and Meckling1976): companies’ social engagement may be drivenby managers’ own social preferences or their desireto establish overly friendly relationships with specificstakeholders.

Whereas the early literature predicts a negativerelationship between CSR and financial performance,subsequent research emphasizes the potential value ofCSR. For example, Freeman’s (1984) stakeholder the-ory argues that companies should consider the inter-ests of everyone who can substantially affect, or beaffected by, the welfare of the company. This theoryhas been extended in various ways (for a review, seeAgle et al. 2008). For instance, instrumental stake-holder theory argues that CSR efforts are actionstaken to benefit stakeholders with the ultimate goalof benefiting shareholders; i.e., CSR is “instrumen-tal” to firm performance (e.g., Jones 1995). Similarly,in line with the literature on sustainability in busi-ness and the resource-based view of the firm, compa-nies may engage in CSR to improve their efficiencyand enhance, e.g., their reputation, brand, and trust(e.g., Barney 1991; Hart 1995; Porter 1991; Porter andKramer 2006, 2011; Russo and Fouts 1997). In turn,such actions may attract new customers (socially con-scious customers, “green” consumers, etc.), increasethe companies’ profitability, and enhance their com-petitiveness (e.g., Flammer 2015).

A large set of anecdotal evidence suggests thata growing number of multinational companies—including, e.g., General Electric (GE), Google, IBM,Intel, Johnson & Johnson, Marks & Spencer, Nes-tle, Unilever, and Walmart—see the benefits of cre-ating “shared value” (Porter and Kramer 2011) and,in particular, expect to gain a competitive advan-tage from CSR initiatives. For example, GE’s CEOJeffrey Immelt, discussing GE’s “ecomagination” pro-gram, stated, “We did it from a business standpointfrom Day 1, [0 0 0], it was never about corporate socialresponsibility” (Lohr 2011).

In sum, both the recent literature and anecdotalevidence suggest that CSR may be a causal determi-nant of financial performance. In this study, I exam-ine whether such a causal link is supported by thedata.

3. Data and Methodology3.1. Shareholder ProposalsThe data on shareholder proposals are obtained fromtwo databases: RiskMetrics and SharkRepellent. Risk-Metrics covers shareholder proposals that came to avote from 1997 to 2011 at S&P 1500 companies aswell as approximately 400–500 additional widely heldcompanies. SharkRepellent’s proxy voting databaseincludes shareholder proposals from a broad universeof about 4,000 companies in the Russell 3000 indexfrom 2005 to 2012. Both databases include firm iden-tifiers, a description of the proposal, the date of theannual meeting, the proposal’s sponsor, the votingrequirement, and the outcome of the vote.

I merge both databases to obtain a comprehen-sive data set of shareholder proposals that came toa vote between 1997 and 2012. I then restrict thesample to shareholder proposals that are related toCSR. In RiskMetrics, such proposals are identified bythe resolution type “SRI” (social responsible initia-tive); in SharkRepellent, they are identified by the pro-posal category “Social/Environmental Issues.” Thefinal sample consists of 2,729 CSR proposals. Two spe-cific examples are provided in Table 1.

Table 1 Examples of CSR Proposals

Panel A: Example of CSR proposal that was closely rejected

Company: Lear CorporationMeeting date: May 11, 2006Proposal: “[T]he shareholders request that the company commit

itself to the implementation of a code of conductbased on the aforementioned ILO human rightsstandards and United Nations’ Norms on theResponsibilities of Transnational Corporations withRegard to Human Rights, by its international suppliersand in its own international production facilities, andcommit to a program of outside, independentmonitoring of compliance with these standards.”

Voting result: Rejected (49.8% of the votes)Source: SharkRepellent

Panel B: Example of CSR proposal that was closely approved

Company: HCC Insurance Holdings, Inc.Meeting date: May 10, 2007Proposal: “The Shareholders request that management implement

equal employment opportunity policies based on theaforementioned principles prohibiting discriminationbased on sexual orientation and gender identity.”

Voting result: Passed (52.2% of the votes)Source: SharkRepellent


Figure 1 Distribution of Votes for Shareholder CSR Proposals

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Notes. This figure presents the histogram of the vote shares in favor of the CSR proposals. The horizontal axis indicates the vote share in 5% intervals.The vertical axis indicates the frequency of proposals. The sample consists of all CSR proposals in the RiskMetrics and SharkRepellent databases from 1997to 2012.

CSR proposals typically do not fare well at annualmeetings. Figure 1 provides the histogram of the voteoutcome of the 2,729 CSR proposals. As is shown,most proposals receive very little support: about 75%of the proposals receive less than 20% of favorablevotes. Only a small fraction of proposals make it closeto the majority threshold. This pattern suggests thatmost CSR proposals may be “symbolic” in nature.Shareholders submit them not so much because theyexpect the proposals to pass but rather to bring socialissues to the attention of management and the public(Loss and Seligman 2004).

My identification strategy relies on proposals with aclose call outcome. Fortunately, although the numberof close call proposals is small relative to the totalnumber of proposals, it is sufficiently large in absoluteterms: 61 proposals received a vote share within the±5% interval around the majority threshold and 122within the ±10% interval. This lends sufficient powerto the identification.

Table 2 provides more details about the 2,729 CSRproposals. Panel A reports the frequency of share-holder proposals by year as well as summary statisticson the vote outcomes. As can be seen, both the num-ber of proposals and the proportion of favorable voteshave increased over time. In particular, although theaverage percentage of votes in favor was merely 9%in the first half of the sample (1997–2004), it increasedto 17% in the second half (2005–2012). This evolutionis consistent with previous evidence documenting an

increase in shareholders’ awareness for CSR issuesover time (e.g., Flammer 2013).

Panel B in Table 2 further reports the breakdownof the proposals according to the different types ofCSR. The classification is obtained from the SharkRe-pellent database, where CSR proposals are partitionedinto two broad categories and nine subcategories. Theprecise definition of each subcategory is provided inthe appendix. RiskMetrics does not provide a clas-sification of CSR proposals but does include a one-sentence description of the proposal’s content. I usethis description to manually assign each proposal toa SharkRepellent category. As can be seen, the pro-posals that are most likely to be approved are thosepertaining to labor issues (5.27% are approved).

Panel C in Table 2 further provides a breakdownaccording to the type of proposal sponsor. The mostcommon sponsors are religious groups, yet they arealso the least likely to succeed. The most successfulactivists are public pension funds and SRI funds, whosee 3.89% and 3.36%, respectively, of their proposalsbeing approved.

3.2. MethodologyCuñat et al. (2012; henceforth CGG) develop a meth-odology that adapts the regression discontinuityframework so as to estimate the effect of shareholderproposals on shareholder returns and other outcomevariables. This paper uses the same methodology,except that CSR proposals are used instead of gov-ernance proposals. In the following, I provide a brief


Table 2 Shareholder CSR Proposals

Panel A: Summary statistics by year

Shareholder Approved Approved Average vote SD vote Vote outcome Vote outcomeYear proposals proposals proposals (%) outcome (%) outcome (%) ±5% ±10%

1997 111 0 0000 7005 3072 0 01998 119 0 0000 7083 5039 0 01999 126 1 0079 7082 7061 0 02000 144 0 0000 7042 4075 0 02001 159 1 0063 9023 7060 0 02002 162 2 1023 10001 8077 1 22003 142 1 0070 11084 11013 0 22004 187 4 2014 11036 13010 0 12005 195 2 1003 9097 9014 0 32006 206 5 2043 14008 12098 5 72007 215 7 3026 17023 15073 15 202008 212 6 2083 15032 14058 8 122009 196 8 4008 18001 14088 10 192010 197 4 2003 18066 14077 6 202011 179 7 3091 20015 16033 8 192012 179 3 1068 19069 14026 8 17Total 21729 51 1087 13048 12097 61 122

Panel B: Summary statistics by type of CSR proposal

Shareholder Approved Approved Average vote SD vote Vote outcome Vote outcomeProposal type proposals proposals proposals (%) outcome (%) outcome (%) ±5% ±10%

Environment issues 648 8 1023 15013 13016 17 38Environmental issues 504 5 0099 13008 11058 7 19Sustainability report 144 3 2008 22029 15067 10 19

Social issues 21081 43 2007 12097 12086 44 84Add minorities/women to board 79 2 2053 18029 12060 2 4Animal rights 130 0 0000 4099 3019 0 0Health issues 391 1 0026 7054 7060 0 1Human rights 227 1 0044 11090 11012 0 4Labor issues 455 24 5027 16042 14069 23 36Other social issues related 355 9 2054 9029 11064 7 9Political issues 444 6 1035 19011 13084 12 30

Panel C: Summary statistics by sponsor

Shareholder Approved Approved Average vote SD vote Vote outcome Vote outcomeProposal sponsor proposals proposals proposals (%) outcome (%) outcome (%) ±5% ±10%

Individual 449 6 1034 8088 9077 5 7Public pension fund 437 17 3089 21028 14071 27 49Religious 834 5 0060 10055 10031 5 14SRI fund 506 17 3036 16094 15016 13 33Union 201 4 1099 15048 12015 7 13Other 302 2 0066 10006 10058 4 6

Notes. This table displays the frequency of shareholder proposals, the frequency and percentage of approved proposals, the mean and standard deviation ofthe percentage of favorable votes, and the frequency of proposals whose vote share is within 5% and 10% of the majority threshold. The sample consists ofall CSR proposals in the RiskMetrics and SharkRepellent databases from 1997 to 2012. In panel A, proposals are classified by year; in panel B, by type of CSR;and in panel C, by the proposal’s sponsor.

summary of this methodology. For more details, seeSection II of CGG.

3.2.1. Regression Discontinuity in ShareholderVotes. The objective is to estimate the effect of pass-ing a CSR proposal on an outcome variable forfirm i at time t, denoted by yit (e.g., the stock mar-ket reaction on the day of the shareholder meeting).

The proposal receives a vote share vit . Whether theproposal is approved is denoted by the indicatorvariable passit = 1(vit ≥ v∗5, where v∗ is the majoritythreshold.4 To estimate the effect of CSR proposalson yit , I would ideally need a randomized assignment

4 For most companies, the threshold is 50% of the votes. In therare cases when companies have a stricter majority requirement


of the pass indicator. The RDD is helpful in approx-imating this ideal setting, since it relies on propos-als that pass or fail by a narrow margin of votes.Arguably, whether a proposal passes by 50.1% of thevotes or whether it fails by 49.9% is as good as ran-dom. Accordingly, such close call CSR proposals pro-vide a source of random variation in the adoption ofCSR proposals that can be used to estimate the causaleffect of passing a CSR proposal on yit .

The RDD can be implemented by estimating thedifference in average yit between CSR proposals thatpass or fail by a small margin of votes. Although thisdifference does provide an unbiased estimate of theeffect of passing a CSR proposal on yit , it comes at thecost of discarding all non-close proposals. A more effi-cient estimate can be obtained by using all CSR pro-posals and approximating the continuous relationshipbetween yit and vit with a polynomial in vit , allowingfor a discontinuous jump at the majority threshold v∗.Following CGG, I allow for a different polynomial forobservations on the left-hand side of the thresholdPl4vit , �l5 and on the right-hand side of the thresholdPr 4vit , �r 5. The RDD specification can be written asfollows:

yit = �× passit + Pl4vit1�l5+ Pr 4vit1�r 5+ �it0 (1)

The estimate of � captures the discontinuity at themajority threshold and hence provides a consistentestimate of the causal effect of passing a CSR pro-posal on yit .5 To account for within-firm dependenceacross observations, I cluster standard errors at thefirm level. Throughout the paper, I use polynomialsof order 3. The results are similar if I use second- orfourth-order polynomials instead.

3.2.2. Multiple Periods and Multiple Votes. AsCGG emphasize, the specification in Equation (1) issubject to two potential caveats. First, the shareholdervote at time t may have an impact on outcomes att+1, t+2, etc. Second, for each firm and meeting date,shareholders may have to vote on more than one CSRproposal.

To address these two caveats, CGG propose a mul-tiperiod version of specification (1) in which multipleCSR proposals in a given meeting are “aggregated.”In a nutshell, this procedure can be implemented asfollows. First, the multiple periods are accounted forby using a panel data set in which, for each firm-meeting (i1 t), observations at time t + � are pooledfor multiple � , including � < 0. Specifically, I use

(e.g., a “supermajority” requirement of two-thirds of the votes), Iadjust v∗ accordingly.5 Since shareholder proposals are not binding, � only measures theeffect of approving a CSR proposal as opposed to the effect ofimplementing a CSR proposal. The latter can be approximated byrescaling the estimate of � by the probability of implementation;see §4.2.

observations in periods t − 2 to t + T (as in CGG, Tis up to seven days for abnormal returns and up tofour years for annual variables such as the return onassets). The coefficient on the dummy for whether theproposal has passed �� is then �-specific and is con-strained to zero for � < 0. Similarly, the parameters ofthe polynomials �l1 � and �r1 � are allowed to vary for� ≥ 0. Since observations before and after the eventare pooled together, an advantage of this specifica-tion is that I can include firm-meeting fixed effects inthe regression �it . Doing so accounts for any unob-servable firm characteristics that are constant duringthe event window. Following CGG, I further includefixed effects for the time period relative to the meetingdate �� (“distance-to-the-election” fixed effects) andfixed effects for the calendar year �c.

Second, CGG propose an aggregation procedurethat accounts for the possibility of multiple propos-als in the same shareholder meeting. Implementingthis procedure is straightforward. Essentially, the passdummy in Equation (1) is replaced by the sum of thepass dummies for all n proposals that are voted on inthe same meeting (i.e., the “aggregated pass dummy”becomes a count variable for the number of CSR pro-posals that are passed in the meeting). The polynomi-als in vote share are adjusted accordingly. A formaltreatment of this aggregation procedure is providedin CGG.

The multiperiod version of Equation (1) thataccounts for the possibility of multiple proposals canbe expressed as follows:

yi1 t+� = ��

n∑

k=1

passkit+[

Pl

( n∑

k=1

vkit1�

kl1�

)

+Pr

( n∑

k=1

vkit1�

kr1�

)]

+�it+�� +�c+�i1 t+� 0 (2)

This specification is essentially Equation (7) in CGG(p. 1958). As in specification (1), standard errors areclustered at the firm level and third-order polynomi-als are used throughout.

3.3. Variable Definitions and SampleCharacteristics

3.3.1. Abnormal Returns. The main dependentvariable used in this paper is the abnormal returnon the day of the shareholder meeting (t = 0). Usingabnormal returns is appealing because they providean estimate of the effect of passing a CSR proposalon firm value, thus capturing all potential chan-nels through which CSR may benefit shareholders.Another advantage of using stock returns is thehigh signal-to-noise ratio: the stock market reactionon the day of the vote is most likely attributableto the vote itself. In contrast, accounting measuresof performance—e.g., the return on assets in thefollowing year—may capture other events that haveoccurred during the year.


Following CGG, I compute abnormal returns usingthe four-factor model of Carhart (1997). The four fac-tors are the market return (the return on the mar-ket portfolio minus the risk-free rate), the size factor(“small minus big”), the book-to-market factor (“highminus low”), and the momentum factor (“up minusdown”). In robustness checks, I show that my resultsare similar if I use the market model instead.

Daily stock return data are obtained from the Cen-ter for Research in Security Prices. The four factors areobtained from Kenneth French’s website (http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html, accessed January 31, 2015). The coef-ficients of the four-factor model are estimated byordinary least squares using an estimation period of200 trading days that starts 20 trading days priorto the shareholder meeting. To be included in thesample, a stock needs to have at least 15 days withnonmissing returns during the 200-day estimationperiod.

Table 3 Summary Statistics

Characteristic N Mean Median SD 10th %ile 90th %ile

Abnormal return on meeting day 11845 00001 00001 00023 −00019 00024Market value ($ million) 11845 37,881 12,673 62,748 1,286 108,424Total assets ($ million) 11838 77,365 16,539 238,890 1,441 138,354ROA 11810 00137 00137 00083 00037 00251ROE 11561 00362 00333 00270 00161 00721NPM 11810 00194 00173 00140 00065 00377Tobin’s Q 11588 10890 10493 10102 00985 30500KLD index 11687 4006 3000 3082 0000 9000G-index 11666 9023 9000 2062 6000 13000Institutional ownership (%) 11750 63027 68040 26099 8038 91034Inside ownership (%) 11761 0064 0000 4014 0000 0097Labor productivity 11824 437 332 328 128 1,090Capital expenditures 11788 00051 00042 00042 00005 00106Sales growth 11781 00071 00062 00132 −00102 00255Leverage 11836 00264 00254 00158 00049 00474Cash 11833 00101 00057 00120 00008 00252Labor intensity (industry-level) 11845 00321 00282 00183 00126 00586B2C industry 11845 00425 00000 00495 00000 10000

Notes. The 2,729 CSR proposals considered in this study correspond to 1,845 firm-year observations. Abnormal returns on the day of the vote are computedusing the four-factor model of Carhart (1997). All Compustat variables are computed in the fiscal year that ends prior to the date of the vote. Market value isthe number of shares outstanding (Compustat item “CSHO”) multiplied by the stock price at the end of the fiscal year (“PRCC_F”). Total assets is the bookvalue of total assets (“AT”). ROA (return on assets) is the ratio of operating income before depreciation (“OIBDP”) to the book value of total assets. ROE (returnon equity) and NPM (net profit margin) are defined similarly except that the denominator for ROE is the book value of equity (“CEQ”) plus deferred taxes andinvestment tax credit (“TXDITC”) and for NPM is sales (“SALE”). Tobin’s Q is the ratio of the market value of total assets to the book value of total assets. Themarket value of total assets is the book value of total assets plus the market value of equity (CSHO × PRCC_F) minus the sum of the book value of equity(CEQ) plus deferred taxes and investment tax credit (TXDITC). Labor productivity is the ratio of sales (SALE) to the number of employees (“EMP”). Capitalexpenditures is the ratio of capital expenditures (“CAPX”) to total assets. Sales growth is the growth in sales (SALE) compared with the previous fiscal year.Leverage is the ratio of debt in current liabilities (“DLC”) and long-term debt (“DLTT”) to total assets. Cash is the ratio of cash and short-term investments(“CHE”) to total assets. The KLD index is the number of CSR strengths (from the Kinder, Lydenberg, and Domini database). The G-index is the governanceindex of Gompers et al. (2003), obtained from RiskMetrics. The KLD index and G-index are measured in the calendar year prior to the vote. Institutionalownership is the percentage of shares owned by institutional investors in the quarter that ends prior to the date of the vote (from the Thomson-ReutersInstitutional Holdings database). Inside ownership is the percentage of shares owned by all executives of the firm in the fiscal year prior to the date of the vote(from ExecuComp). Labor intensity is the median ratio of the sum of staff expense (“XLR”) and pension and retirement expense (“XPR”) to sales (SALE) inthe company’s two-digit SIC industry in the year preceding the vote. B2C industry is a dummy variable equal to 1 if the company operates in the B2C sectoraccording to the classification of Lev et al. (2010, p. 188) based on four-digit SIC codes. All ratios are winsorized at the 5th and 95th percentiles of theirempirical distribution. Note that the number of observations may change as a result of missing values. %ile, percentile.

3.3.2. Summary Statistics. The 2,729 CSR propos-als used in this study correspond to 1,845 firm-yearobservations. Table 3 provides summary statistics forthe abnormal return on the day of the shareholdermeeting (first row) as well as several other char-acteristics, which are constructed from various datasources.

The companies’ financials are computed from Stan-dard & Poor’s Compustat in the fiscal year thatends prior to the shareholder meeting. Market value isthe number of shares outstanding multiplied by thestock price at the end of the fiscal year. Total assetsis the book value of assets. Return on assets (ROA) isthe ratio of operating income before depreciation tothe book value of assets. Return on equity (ROE) andnet profit margin (NPM) are defined similarly exceptthat the denominator is the book value of equity plusdeferred taxes and investment tax credit for ROE andsales for NPM. Tobin’s Q is the ratio of the marketvalue of total assets (book value of assets plus the


market value of equity minus the sum of the bookvalue of equity plus deferred taxes and investmenttax credit) to the book value of assets. Labor produc-tivity is the ratio of sales to the number of employees.Capital expenditures is the ratio of capital expendituresto total assets. Sales growth is the growth in sales com-pared with the previous fiscal year. Leverage is theratio of debt in current liabilities and long-term debtto total assets. Finally, cash is the ratio of cash andshort-term investments to total assets. To mitigate theimpact of outliers, all ratios are winsorized at the 5thand 95th percentiles of their empirical distribution.

In addition to accounting variables, Table 3 alsoincludes governance variables. G-index is the gover-nance index of Gompers et al. (2003) in the calendaryear that ends before the shareholder meeting. It addsone index point for each of 24 (anti)governance provi-sions. G-index is obtained from RiskMetrics. It is avail-able for the years 1990, 1993, 1995, 1998, 2000, 2002,2004, and 2006. To fill in the missing years, I use thelatest available value of the index. Institutional owner-ship is the percentage of shares owned by institutionalinvestors in the quarter that ends prior to the dateof the shareholder meeting. The data on institutionalownership are obtained from the Thomson-ReutersInstitutional Holdings database. Finally, inside owner-ship is the percentage of shares owned by all execu-tives of the firm, which is obtained from ExecuCompin the fiscal year that ends prior to the shareholdermeeting.

Table 3 also includes a measure of CSR: KLD index.This index is obtained from the Kinder, Lydenberg,and Domini (KLD) database. KLD is a social choiceinvestment advisory firm that relies on independentrating experts to assess how well companies addressthe needs of their stakeholders based on multiple datasources including annual questionnaires sent to com-panies’ investor relations offices, firms’ financial state-ments, annual and quarterly reports, general pressreleases, government surveys, and academic publi-cations. The composite KLD index is constructed bysumming up the number of CSR strengths along thefollowing dimensions: employees, customers, the nat-ural environment, and society at large (communityand minorities).6 KLD index is computed in the calen-dar year that ends prior to the shareholder meeting.As can be seen, the average KLD index is 4.06, whichindicates that the average company in my sample hasabout four CSR strengths.

Finally, Table 3 also includes two industry-levelmeasures of “stakeholder sensitivity,” i.e., the extent

6 The KLD database also compiles strengths pertaining to corporategovernance. Since the definition of CSR underlying this study doesnot encompass corporate governance, governance strengths are notincluded in the calculation of KLD index.

to which performance is sensitive to the relation-ship with employees and customers, respectively. Fol-lowing Agrawal and Matsa (2013), I define laborintensity as the median wages-to-sales ratio in thecompany’s two-digit Standard Industrial Classifica-tion (SIC) industry in the year preceding the vote. Thewages-to-sales ratio is computed as the ratio of laborand pension expenses to sales using Compustat data.Since companies in labor-intensive industries relymore heavily on human capital, their performanceis likely more sensitive to their relationship withemployees. The second measure, B2C industry, is anindicator variable equal to 1 if the company oper-ates in a business-to-consumer (B2C) industry, whereindividual consumers are the predominant customers.Lev et al. (2010) show that individual consumers aremore sensitive to companies’ social engagement thanindustrial buyers, which reflects inherent differencesin the purchasing decision-making process (Corey1991).7 To identify the set of B2C industries, I use theclassification of Lev et al. (2010, p. 188) based on four-digit SIC codes.

3.4. Tests for Quasi-Randomized AssignmentThe identifying assumption of the RDD is that,around the majority threshold, passing a CSRproposal is as good as randomly assigned. Thisassumption has testable implications, akin to the testsof effective randomization in experimental data. Inthis section, I provide two standard tests of thisassumption.

3.4.1. Continuity in the Distribution of Share-holder Votes. The first test evaluates whether the dis-tribution of shareholder votes is continuous aroundthe majority threshold. Any discontinuity would besymptomatic of a nonrandom assignment of “pass”versus “fail” around the threshold.

A visual inspection of the histogram in Figure 1suggests that the distribution is indeed smooth andcontinuous around the majority threshold. A moreformal approach is provided in Figure 2, which imple-ments the McCrary (2008) test for smoothness of thedensity function around the threshold. As is shown,there is no evidence for a discontinuous jump. Thenull of continuity of the density function at the thresh-old cannot be rejected (p-value = 00974).8

7 More precisely, “[t]he purchasing decision of an individual con-sumer is affected not only by product attributes, but also by socialgroup forces, psychological factors, and the consumer’s situationalforces. In contrast, in industrial purchasing, the decision-makingprocess is highly formalized, using defined procurement proce-dures, and subject to economic (cost/value) analysis” (Lev et al.2010, p. 186; adapted from Corey 1991).8 Finding a smooth distribution around the majority thresholdis typical of shareholder-sponsored proposals (e.g., CGG, Cuñat


Figure 2 Visualization of the McCrary (2008) Test

0

0.05

0.10

0.15

0 40–40

Notes. This figure presents a visualization of the McCrary (2008) test forthe continuity of the vote share distribution around the majority threshold.The horizontal axis indicates the victory margin (i.e., the vote share minus themajority threshold). The vertical axis indicates the logarithm of the estimateddensity.

3.4.2. Preexisting Differences. The second test-able implication of the randomness assumption is thatcompanies whose voting share is immediately belowor above the majority threshold should be very simi-lar on the basis of ex ante characteristics. Intuitively,if the outcome of close call proposals is as good asrandomized, it should be orthogonal to firm charac-teristics prior to the vote.

In Table 4, I examine whether there are any pre-existing differences between companies that pass andreject CSR proposals. I consider all characteristicslisted in Table 3. In columns (1) and (2), I exam-ine these characteristics in the year preceding theshareholder meeting (t − 1). In columns (3) and (4), Iexamine the change in these characteristics betweenyears t − 2 and t − 1. The exception is the abnormalreturn in the first row of the table, where t − 1 is theday prior to the meeting and the change from t−2 tot−1 refers to the difference in abnormal returns in thetwo days preceding the meeting. Columns (1) and (3)report the differences among all firms in my sample,whereas columns (2) and (4) report the differences atthe majority threshold by including third-order poly-nomials on both sides of the threshold.9

As can be seen in columns (1) and (3), compa-nies that pass a CSR proposal differ significantlyfrom companies that reject it. Importantly, however,

et al. 2013, Listokin 2008). This is in stark contrast to management-sponsored proposals (which are excluded from my analysis). AsListokin (2008, p. 161) shows, for management-sponsored propos-als, the distribution of votes exhibits a sharp discontinuity at themajority threshold. Essentially, these proposals rarely fail as man-agement strategically withdraws those proposals that are expectedto fail.9 See CGG (pp. 1959–1961) for a similar test.

Table 4 Preexisting Differences as a Function of the Vote Outcome

Before meeting Change from(t − 1) (t − 2) to (t − 1)

(1) (2) (3) (4)

Abnormal return −00000 −00002 00001 000034000065 4000065 4000085 4000095

Market value (log) −10519∗∗∗ −00264 00064 000004003915 4006425 4000755 4001615

Total assets (log) −10579∗∗∗ −00375 00003 000094003465 4005885 4000315 4000615

ROA −00045∗∗ −00004 00001 −000084000205 4000305 4000065 4000105

ROE −00088∗∗ 00037 00039 000384000385 4000635 4000455 4000715

NPM −00046 −00026 00005 −000244000435 4000995 4000045 4000365

Tobin’s Q −00027 00005 00026 000094000645 4000845 4000225 4000315

KLD index −20709∗∗∗ −00059 00092 002914005435 4008795 4002805 4004375

G-index 00276 −10057 −00067 000464004705 4007335 4000635 4000605

Institutional ownership (%) 80388∗ −00817 −20567∗∗ −101884409245 4804205 4102415 4204735

Inside ownership (%) −00355∗ 00072 00570 000114002085 4001285 4007825 4007185

Labor productivity (log) −00015 −00006 −00003 −000174001795 4003165 4000325 4000525

Capital expenditures −00009 00004 −00007∗∗ −000074000085 4000135 4000035 4000085

Sales growth 00005 −00004 00027 −000184000285 4000515 4000335 4000595

Leverage −00053 −00093∗ −00001 000204000335 4000535 4000165 4000285

Cash 00051∗∗ −00004 −00007 000004000255 4000395 4000065 4000105

Labor intensity (industry-level) 00021 00000 00023 000064000375 4000495 4000165 4000225

B2C industry 00044 00006 — —4000965 4001525 — —

Polynomial in vote share No Yes No Yes

Notes. This table tests whether the adoption of CSR proposals is system-atically related to firm characteristics prior to the meeting. All characteris-tics are defined in Table 3. In columns (1) and (2), these characteristicsare measured in the year preceding the shareholder meeting (t − 1).Columns (3) and (4) consider the change in these characteristics betweenyears t − 2 and t − 1. The exception is the abnormal return in thefirst row of the table, where t refers to days instead of years (e.g.,t − 1 is the day prior to the meeting). Each row corresponds to a dif-ferent characteristic and each entry comes from a separate regression.Columns (1) and (3) report the differences among all firms, whereascolumns (2) and (4) report the differences at the majority threshold bycontrolling for a third-order polynomial in the vote share on both sides ofthe threshold. Standard errors (in parentheses) are clustered at the firmlevel.

∗, ∗∗, and ∗∗∗ denote significance at the 10%, 5%, and 1% levels,respectively.


columns (2) and (4) show that these differencesdisappear at the majority threshold.10 Overall, thisevidence suggests that there is no significant differ-ence between companies that pass and reject CSRproposals around the majority threshold, which lendssupport to my identification strategy.

4. Results4.1. Main Results

4.1.1. Graphical Analysis. To measure the impactof passing a CSR proposal on shareholder value, Iexamine the stock market reaction on the day of theshareholder meeting. Figure 3 provides a visualiza-tion of the data. Specifically, the figure plots abnormalreturns against the victory margin (i.e., the vote shareminus the majority threshold). Each dot in the figurerepresents the average abnormal return in 2% binsof vote share. The solid line plots predicted valuesof abnormal returns from third-order polynomials invote share estimated separately to the left and rightof the majority threshold.

As can be seen from the figure, abnormal returnsappear to be a continuous and smooth function of thevote share everywhere except at the winning thresh-old, where there is a discontinuous jump. This evi-dence suggests that proposals that are approved by asmall margin of votes lead to an increase in firm valuecompared with proposals that fail by a small marginof votes. Interestingly, abnormal returns seem to con-verge to zero as we move further to the left or rightof the majority threshold. This pattern suggests thatthe outcome of non-close votes is anticipated by themarket, and hence any value implication is alreadyimpounded in stock prices.11

4.1.2. Regression Analysis. The graphical analy-sis in Figure 3 suggests that the adoption of closecall CSR proposals leads to an increase in shareholdervalue. A more formal test of this hypothesis is pro-vided in Table 5, which reports estimates of the dif-ference in abnormal returns between CSR proposalsthat pass and CSR proposals that fail for increasinglysmall intervals around the majority threshold.

Column (1) of Table 5 estimates this difference inthe full sample of 2,729 proposals and shows that it isinsignificant. The lack of significance is driven by thenon-close proposals (i.e., those proposals whose voteshare is more than 10% above or below the majority

10 Leverage in t − 1 is significantly different at the 10% level.However, given the large number of characteristics considered inTable 4, it is expected that some of them would appear significantlydifferent even if the two groups of firms are drawn from the samedistribution.11 This pattern is in line with the theoretical prediction of CGG (seetheir Figure 1 on p. 1951).

threshold). As is shown in column (2), restricting thesample to non-close proposals yields a difference inabnormal returns that is virtually zero. This findinglikely reflects the fact that the outcome of non-closeproposals is highly predictable, and hence their effectis already incorporated in stock prices prior to thevote.

Column (3) restricts the sample to the 122 CSR pro-posals whose vote share is within 10% of the major-ity threshold. The difference in abnormal returns is1.07%, which is significant at the 5% level. This dif-ference is somewhat larger in columns (4)–(6), wherethe sample is restricted to proposals whose voteshare is within 5%, 2.5%, and 1.5%, respectively, ofthe majority threshold (the difference in abnormalreturns lies between 1.09% and 1.36%). It is signifi-cant in columns (4) and (5) and marginally insignifi-cant (t = 1058) in column (6). The weaker significancein column (6) is likely due to the small number ofobservations (only nine proposals have vote shareswithin 1.5% of the threshold). Overall, the evidence incolumns (3)–(6) indicates that CSR proposals that areapproved by a small margin of votes lead to a signif-icant increase in shareholder value compared to CSRproposals that are marginally rejected.

In column (7), I estimate the specification given byEquation (1). This specification controls for two poly-nomials of order 3 in the vote share on both sides ofthe majority threshold. Unlike the nonparametric esti-mates in columns (3)–(6), this approach makes use ofall 2,729 CSR proposals and hence provides a moreefficient estimate of the causal effect of CSR proposalson abnormal returns. As is shown, the coefficient onthe pass dummy is 1.18% and is significant at the 5%level. This coefficient is very similar to the estimate incolumn (6) that relies on proposals whose outcome isclosest to the threshold.12

Finally, in column (8), I reestimate the regressionin column (7) with control variables. The controlsinclude all variables listed in Table 3 measured priorto the vote, as well as year dummies. If the outcomeof the vote is truly random, including these controlsshould not affect the coefficient on the pass dummy—as in randomized experiments—since all predeter-mined characteristics should be orthogonal to theassignment of pass versus fail. Indeed, I find that thecoefficient is very similar to the one in column (7).

4.1.3. Multiple Votes and Multiperiod Analysis.As discussed in §3.2, the analysis in Table 5 does notaccount for the possibility that shareholders may haveto vote on more than one CSR proposal in a given

12 The coefficient on the pass dummy is very similar if instead ofthird-order polynomials in the vote share, I use second- or fourth-order polynomials. The corresponding coefficients are 1.20% (t =

2028) and 1.12% (t = 1089), respectively.


Figure 3 Abnormal Returns on the Day of the Vote

–0.010

–0.005

0.000

0.005

0.010

0.015

0.020

–50 –45 –40 –35 –30 –25 –20 –15 –10 –5 0 5 10 15 20 25 30 35 40 45 50

Abn

orm

al r

etur

n on

the

day

of th

e vo

te

Victory margin (2% bins)

Notes. The vertical axis indicates abnormal returns on the day of the vote. Abnormal returns are computed using the four-factor model of Carhart (1997). Thehorizontal axis indicates the victory margin (i.e., the vote share minus the majority threshold). Each dot in the figure represents the average abnormal returnin 2% bins of victory margin. The solid line plots predicted values of abnormal returns from third-order polynomials in victory margin estimated separately tothe left and right of the majority threshold.

meeting. Nor does it account for the possibility thatthe effect of the shareholder vote may affect returnsbeyond the day of the meeting.

To address these caveats, I estimate the specifica-tion given by Equation (2), i.e., the multiperiod spec-ification in which multiple CSR proposals in a givenmeeting are “aggregated.” This regression estimatesthe effect of passing a CSR proposal on abnormalreturns on the meeting date (t), the day after 4t + 15,and over the period from t+2 to t+7 (the cumulativeabnormal returns over this period). The results arepresented in column (1) of Table 6. As is shown, I only

Table 5 Abnormal Returns Around the Majority Threshold

Vote shareFull model

All votes Non-close ±10% ±5% ±205% ±105% Full model with controls(1) (2) (3) (4) (5) (6) (7) (8)

Pass 000064 −000008 000107∗∗ 000136∗∗ 000109∗∗∗ 000117 000118∗∗ 000107∗∗

40000405 40000445 40000465 40000585 40000385 40000745 40000535 40000525R-squared 00001 00000 00056 00099 00255 00204 00007 00044Observations 2,729 2,607 122 61 23 9 2,729 1,780

Notes. This table presents regressions of the abnormal returns on the day of the vote on the pass dummy, i.e., a dummy variable that equals 1 if the proposal isadopted and 0 otherwise. Abnormal returns are computed using the four-factor model of Carhart (1997). In column (1), the sample consists of all 2,729 CSRproposals. Column (2) restricts the sample to non-close CSR proposals (i.e., those proposals whose vote share is more than 10% above or below the majoritythreshold). Columns (3)–(6) restrict the sample to CSR proposals whose vote share is within 10%, 5%, 2.5%, and 1.5%, respectively, of the majority threshold.Column (7) estimates the specification given by Equation (1) in the full sample (see §3.2). This specification controls for two polynomials of order 3 in thevote share on both sides of the majority threshold. Column (8) is a variant of the specification in column (7), except that the regression also includes controlvariables. The control variables include all variables listed in Table 3 measured prior to the vote, as well as year dummies. Standard errors (in parentheses) areclustered at the firm level.

∗, ∗∗, and ∗∗∗ denote significance at the 10%, 5%, and 1% levels, respectively.

find a significant effect on the day of the meeting(0.92% abnormal returns, t = 2056), and the magnitudeof this effect is similar to the full model estimates inTable 5. In the days following the meeting, the abnor-mal returns are small and insignificant. This patternindicates that shareholders react on the day of thevote, when the surprise around the threshold occurs.In the remainder of this paper, I will refer to the spec-ification used in column (1) of Table 6 as my base-line specification since it is more conservative than thespecifications used in Table 5.


Table 6 Abnormal Returns of Passing CSR Proposals

Confounding effect of governance proposals?Robustness Companies with low vs. high CSR

No governance No governanceMarket Positive proposal proposal Low Highmodel returns ±10% ±20% KLD index KLD index

(1) (2) (3) (4) (5) (6) (7)

Day of vote (t) 000092∗∗ 000093∗∗ 002685∗∗∗ 000101∗∗ 000109∗∗∗ 000102∗∗ 000054∗

40000365 40000375 40008715 40000415 40000465 40000475 40000315One day later (t + 1) −000009 −000004 000973 000005 000004 000011 −000039

40000235 40000255 40006355 40000275 40000275 40000315 40000295Days t + 2 to t + 7 −000043 −000019 000540 −000050 −000044 −000061 −000004

40000925 40000995 40007415 40001025 40001045 4000125 40000925R-squared 00043 00042 00016 00009 00007 00021 00088Observations 9,225 9,225 9,225 7,615 6,640 4,215 4,220Number of firm-meetings 1,845 1,845 1,845 1,523 1,328 843 844

Notes. The regression in column (1) estimates the effect of passing a CSR proposal on the four-factor abnormal returns on the day of the vote (t), the followingday (t + 1), and over the period from t + 2 to t + 7 (the cumulative abnormal returns over this period). Columns (2)–(7) present variants of the regression incolumn (1). In column (2), abnormal returns are computed using the market model instead of the four-factor model. In column (3), the dependent variable isa dummy variable that equals 1 if the (four-factor) abnormal return is positive and 0 otherwise. In columns (4) and (5), the sample excludes all shareholdermeetings in which a governance proposal received a vote share within 10% and 20%, respectively, of the majority threshold. In columns (6) and (7), thesample is restricted to companies whose KLD index in the year preceding the vote lies below and above, respectively, the median across all firms in the sametwo-digit SIC industry. The regression specification used in all columns is the multiperiod specification given by Equation (2), in which multiple CSR proposalsin a given meeting are aggregated (see §3.2). All regressions include firm-meeting fixed effects, distance-to-the-election fixed effects, as well as year fixedeffects. Standard errors (in parentheses) are clustered at the firm level.


4.1.4. Robustness. Columns (2) and (3) of Table 6present two robustness checks. These robustnesschecks are variants of the baseline specification usedin column (1).

In column (2), I compute abnormal returns usingthe market model instead of the four-factor model. Ascan be seen, all coefficients are very similar to before:the effect on the day of the vote is 0.93%, whereasthere is no significant effect in the following days.

Given the small number of close call CSR proposals,a potential concern is that my results may be drivenby a few large abnormal returns around the majoritythreshold. To address this concern, I reestimate mybaseline specification replacing the abnormal returnsby a dummy variable that equals 1 if the abnormalreturn is positive and 0 otherwise. Since this dummyignores the magnitude of the abnormal return, itis not sensitive to outliers. (See CGG for a similarrobustness check.) As is shown in column (3), the pat-tern is similar to before. In particular, on the day ofthe vote, CSR proposals that pass by a small marginof votes are 27% more likely to have positive abnor-mal returns compared with CSR proposals that failmarginally.

4.1.5. Confounding Effect of Governance Pro-posals? Another potential concern is that sharehold-ers may not only vote on CSR proposals but alsoon governance proposals during the same meeting.As CGG show, governance proposals are very fre-quent, and the adoption of close call governance

proposals generates substantial abnormal returns. If,for some reason, shareholders tend to vote in a sim-ilar way on all proposals, it could be that CSR pro-posals that pass by a small margin of votes tendto occur in meetings in which governance proposalsalso pass by a small margin. In this case, my resultsmay be capturing some of the effect of governanceproposals. To address this concern, I reestimate mybaseline specification after excluding all shareholdermeetings in which a governance proposal receiveda vote share within 10% of the majority threshold.Arguably, a governance vote that easily passes or iseasily defeated has little uncertainty surrounding it,and hence it should not affect the stock price reac-tion. By contrast, close call governance proposals arelikely to affect stock prices. As is shown in column (4)of Table 6, my results are robust to this exclusion. Incolumn (5), I further verify that my results hold if Iexclude shareholder meetings in which a governanceproposal received a vote within 20% of the majoritythreshold.

4.1.6. Level of CSR. The results presented so farsuggest that the passing of close call CSR propos-als improves CFP, which is consistent with the viewthat CSR is a valuable resource for firms. That beingsaid, the “stock” of CSR resources that is already inplace may influence the benefits from implementingan additional CSR program; i.e., the CSR–CFP rela-tionship may not be linear. Arguments can be madefor either a concave or convex relationship.


An argument in the spirit of neoclassical economictheory can motivate a concave relationship. Neoclas-sical models of the firm typically assume decreas-ing marginal returns of the production factors (e.g.,capital and labor). By the same reasoning, CSR asa resource may exhibit decreasing marginal returns.Intuitively, in early stages of designing CSR policies,it may be fairly easy and inexpensive for companiesto implement social programs that yield substantialmonetary benefits. However, once the low-hangingfruits of CSR have been harvested, it may becomeincreasingly difficult to adopt social policies that fur-ther improve the company’s financial performance(for a related argument in the context of green initia-tives, see Flammer 2013).

On the other hand, it could also be that CSR onlyaffects CFP once a “critical mass” of CSR resourcesis in place, in which case the relationship is convex.Edmans (2011, 2012) provides evidence along theselines: he shows that there are benefits to being in thevery top level of employee satisfaction (the top 100,rather than merely above average).

Accordingly, establishing the precise shape of theCSR–CFP relationship is an empirical question. Theempirical framework used in this paper is helpful inaddressing this question. Specifically, in columns (6)and (7) of Table 6, I reestimate my baseline speci-fication separately for companies whose KLD indexis below or above the median across all firms inthe same two-digit SIC industry (in the year thatends prior to the vote). As is shown, the effect isabout twice as strong for companies with a lowerKLD index. This implies that companies with strongersocial performance benefit less from the passing of anadditional CSR resolution, thus pointing at a concaverelationship between CSR and CFP.

4.2. Magnitude of the EffectIn my baseline specification, the abnormal return ofpassing a close call CSR proposal is 0.92%. Sinceshareholder proposals are not binding, this estimateonly measures the effect of approving a CSR proposalas opposed to the effect of implementing a CSR pro-posal. The latter can be approximated by rescalingthe estimated coefficient by the probability of imple-menting the proposal. In §4.3.1, I show that CSR pro-posals have a 52% probability of being implemented.Accordingly, the approximate effect of implement-ing a close call CSR proposal is 0092/0052 = 1077% inabnormal returns.13

13 CGG propose an alternative way of computing the (imple-mentation-adjusted) effect of a close call proposal on abnor-mal returns that takes into account not only the probabilityof the proposal being implemented (pI 5 but also the additionaleffect on the submission and implementation of future proposals.

It is helpful to compare this effect with the effectof other shareholder proposals that have been stud-ied in the literature. In their study of governance pro-posals, CGG find that adopting close call governanceproposals leads to an increase in shareholder valueby 2.8%. In a related study, Cuñat et al. (2013) showthat the adoption of close call “say-on-pay” proposalsincreases shareholder value by 4.6%. This comparisonindicates that, although CSR proposals are beneficialto shareholders, the benefits are not as substantial asthose from governance-type proposals.

Although the value gains from CSR proposals mayseem small compared with other proposals, they arenevertheless economically significant. This can beseen by benchmarking my results against the findingsfrom other CSR studies. In particular, Klassen andMcLaughlin (1996) find abnormal returns of 0.82%around the announcement of environmental awards.Similarly, Flammer (2013) finds abnormal returns of0.84% around the announcement of green initiatives.Finally, Edmans (2012) shows that companies listedin the “100 Best Companies to Work For in America”generated 2.3% to 3.8% higher abnormal returns peryear from 1984 through 2011. Overall, my estimate of1.77% lies within the ballpark of what these studieshave found.

4.3. Long-Run Effects of CSRIn this section, I evaluate the effect of adopting aclose call CSR proposal on long-term firm outcomes(as opposed to the short-term stock market reaction).The specification used throughout is the specificationgiven by Equation (2) at annual frequency. This speci-fication estimates the effect of passing a close call CSRproposal on a given outcome variable in the year ofthe proposal (t), the following year (t + 1), and thesubsequent three years (the average of the outcomevariable from t + 2 to t + 4). All results are presentedin Table 7.

4.3.1. Implementation. As mentioned in §4.2,shareholder proposals are not binding. Althoughdata on whether each proposal was implementedare not publicly available, I do observe whether theKLD index (i.e., the number of CSR strengths) has

Specifically, instead of computing the ratio �/pI , one would com-pute �/4pI +

∑�

i=1 �ip

pt+i5, where � is the discount rate and p

pt+i is the

change in the probability of passing and subsequently implement-ing another CSR proposal i periods from now. Using a discountrate of 5% and the forward-looking implementation probabilitiesprovided in column (1) of Table 7, I find that the correspondingabnormal return is 1.76%, which is almost identical to the 1.77%estimate provided above (see pp. 1969–1970 of CGG for a similarcalculation).


Table 7 Long-Run Effects of CSR Proposals

Implementation Governance Performance Mechanism

Proposal Sales Labor CapitalKLD index passed ROA NPM ROE Tobin’s Q growth productivity expenditures

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Year of the meeting (t) 00521∗∗ 000326 000018 000017 000052 000195∗∗ 000089 000141 −0000024002135 40002385 40000195 40000265 40000695 40000795 40000835 40001765 40000255

One year later (t + 1) 00541∗∗ −000023 000043∗ 000046∗ 000091 000215∗∗ 000155∗ 000437∗∗∗ 0000084002205 40001875 40000235 40000265 40000775 40000855 40000895 40001565 40000265

Years t + 2 to t + 4 00429∗∗ −000007 000050∗∗ 000052∗ 000115 000158∗∗ 000132∗ 000373∗ 0000014002075 40005415 40000245 40000305 40000825 40000785 40000805 40001945 40000245

R-squared 00413 00429 00845 00915 00559 00859 00360 00948 00849Observations 7,653 9,225 8,291 8,291 7,322 7,283 8,388 8,364 8,266Number of firm-meetings 1,689 1,845 1,815 1,815 1,651 1,675 1,803 1,837 1,819

Notes. The regressions presented in this table estimate the effect of passing a CSR proposal on several firm outcomes in the year of the vote (t), the followingyear (t + 1), and the subsequent three years (average of the outcome variable from t + 2 to t + 4). The dependent variables in columns (1)–(9) are KLDindex, a dummy variable equal to 1 if a shareholder proposal on governance is passed (proposal passed), ROA, NPM, ROE, Tobin’s Q, sales growth, laborproductivity (in logarithm), and capital expenditures, respectively. All variables are defined in Table 3. The regression specification used in all columns is themultiperiod specification given by Equation (2). All regressions include firm-meeting fixed effects, distance-to-the-election fixed effects, as well as year fixedeffects. Standard errors (in parentheses) are clustered at the firm level.


increased after the shareholder meeting. Thus, study-ing the changes in the KLD index provides a roughestimate of the implementation probability.14

The results with the KLD index as dependent vari-able are presented in column (1). As is shown, theKLD index increases by 0.52 CSR strengths in the yearof the proposal (i.e., the year that ends after the meet-ing date), which can be interpreted as a 52% imple-mentation likelihood. The KLD index remains aroundthat level in the subsequent years.15

4.3.2. Corporate Governance. An alternative in-terpretation of my findings is that the passing ofCSR proposals may encourage the adoption of subse-quent governance proposals, and it is these proposalsthat lead to improvements in financial performance.To address this alternative interpretation, I examinewhether the passage of CSR proposals affects the like-lihood of adopting governance proposals. Specifically,I use as the dependent variable an indicator variableequal to 1 if a governance resolution is adopted. Asis shown in column (2), the likelihood of passing agovernance proposal does not increase significantly in

14 See CGG (p. 1968) for a similar approach. In their analysis of gov-ernance proposals, CGG look at changes in the G-index of Gomperset al. (2003)—the number of antitakeover provisions in place—toevaluate whether a governance proposal was implemented or not.15 The 52% implementation likelihood is in the ballpark of whatprior studies have found for other types of shareholder propos-als. CGG and Ertimur et al. (2010) find that governance proposalsthat pass have an implementation likelihood of 31.3% and 31.1%,respectively. Cuñat et al. (2013) find that say-on-pay proposals thatare approved have a 52.5% probability of being implemented.

the four years following the passage of close call CSRproposals.16

4.3.3. Operating Performance and Firm Value.Next, I examine the effect of passing a close callCSR proposal on operating performance. I considerthree measures of operating performance: ROA, NPM,and ROE.

The results for ROA are provided in column (3).As can be seen, ROA increases in the year of themeeting. However, the increase is small and insignif-icant. In the first year after the meeting, the increasein ROA is larger and statistically significant. It is alsoeconomically significant: the reported coefficient of0.0043 corresponds to an increase in ROA by 3.1%,which represents 5% of the standard deviation of ROA(mean and standard deviation of ROA are 0.137 and0.083, respectively; see Table 3). In years t+ 2 to t+ 4,the effect remains stable. Overall, the dynamic pat-tern indicates that it takes 12–24 months for the CSRprogram to materialize into higher profitability, andthis effect appears to be long-lasting. The pattern isqualitatively similar when I look at NPM and ROE incolumns (4) and (5), although the coefficients in theROE regression are not significant.

Finding a long-lasting improvement in operatingperformance indicates that the increase in shareholdervalue—which represents the sum of all discountedfuture cash flows—may be permanent as well. Toexamine whether this is the case, I use Tobin’s Q as

16 Ideally, I would use the G-index as the dependent variable since itreflects actual changes in governance. However, the latest availableyear of the G-index is 2006, and most close call CSR proposals occuras of that year (see panel A of Table 2).


the dependent variable in column (6). As is shown,Tobin’s Q increases already in the year of the meeting(which is likely driven by the stock market reactionaround the day of the vote). In the subsequent years,it remains at a similar level. This pattern indicatesthat the value gains from close call CSR proposals arelong-lasting.

4.3.4. How Does CSR Benefit Companies? Theevidence reported so far suggests that CSR benefitsshareholder value through an increase in operatingperformance. In the following, I discuss several plau-sible channels through which CSR may improve oper-ating performance.

First, implementing CSR programs may be a way tocater to customers that are responsive to sustainablepractices (e.g., Baron 2008, McWilliams and Siegel2001, Reinhardt 1998). In this case, one might expectan increase in sales growth following the adoptionof CSR proposals, as they would allow companies toextend their customer base.

Second, it could be that CSR programs increaseemployee satisfaction. Several articles in the man-agement literature argue that by nurturing the rela-tionship to its employees, a company can attract,motivate, and retain the most talented employeesin the industry (e.g., Albinger and Freeman 2000,Greening and Turban 2000, Peterson 2004, Pfeffer1994, Turban and Greening 1996, Vogel 2005). Relat-edly, Edmans (2011, 2012) shows that companies withhigher job satisfaction earn higher abnormal returnscompared with their peers. Accordingly, if employeesatisfaction is the underlying mechanism behind theincrease in profitability, I should observe an increasein labor productivity following the passage of closecall CSR proposals.

Third, CSR initiatives may foster the use ofmore efficient technologies or production processes(e.g., environment-friendly technologies). In partic-ular, Porter (1991) views pollution as a waste ofresources (e.g., energy and material) and arguesthat efforts to reduce pollution might not onlyreduce a company’s environmental footprint but alsostrengthen its competitiveness. A growing literatureextends Porter’s view (for reviews, see Ambec andLanoie 2008, Berchicci and King 2007, Etzion 2007).For instance, the literature on sustainability in busi-ness examines ways in which companies can becomemore environmentally friendly and how these green-ing initiatives influence financial performance. In par-ticular, companies can become more sustainable byleveraging the low-hanging fruits of efficiency andwaste management and hence achieve significantfinancial benefits (e.g., Clelland et al. 2000, Rusinko2007, Russo and Harrison 2005). Accordingly, if theincrease in performance comes from improved pro-duction processes and technologies, I should observe

an increase in capital investment after the passing ofclose call CSR proposals.

I examine these three channels in Table 7, col-umns (7)–(9). As is shown in column (7), sales growthincreases after the adoption of close call CSR pro-posals, which is consistent with the demand chan-nel. As for the supply-side mechanisms, the estimatesin column (8) show that labor productivity increasessignificantly in the years following the vote, whichlends support to the employee satisfaction channel.By contrast, the estimates in column (9) show no evi-dence for a significant increase in physical invest-ment. The latter finding does not necessarily rejectthe investment channel. For example, it could be thatcompanies’ efforts to reduce emissions translate in adecrease in investment (e.g., the closure of pollutingfacilities) so that the net effect is ambiguous. A morethorough analysis of this mechanism would requiredetailed facility-level data.17

5. External Validity5.1. How Representative Is the Sample?Are the companies in my sample representative of theaverage public firm in the U.S. economy? To assesswhether this is the case, I benchmark my sample withthe Compustat universe. The comparison is providedin panel A of Table 8. The column under the head-ing “Mean CSR proposals” restates the means fromTable 3, and the column under the heading “MeanCompustat” provides the corresponding means basedon all firm-year observations in Compustat duringthe sample period (1997–2012). The column next to itreports the p-value of the difference-in-means test.

As can be seen, the two samples differ on thebasis of several characteristics. Two main differencesare worth emphasizing. First, companies in my sam-ple are significantly larger.18 This pattern is similarto the Cuñat et al. (2013) finding that companieswhose shareholders submit say-on-pay proposals areon average larger than S&P 1500 companies. Sec-ond, companies in my sample display higher levelsof CSR: their number of KLD strengths is about four

17 In untabulated regressions, I also examine whether companiesincrease their marketing expenses after the passage of close callCSR proposals, e.g., as a way to communicate their CSR efforts totheir customer base. Specifically, I consider advertising expenses(defined as the ratio of advertising expenses to total assets fromCompustat) as the dependent variable. I find no significant changein this variable after the vote.18 To the extent that the main sampling frame of SharkRepellentand RiskMetrics are the Russell 3000 and the S&P 1500 indices,respectively, this difference is partly mechanical. However, it doessubsist if instead of the Compustat universe I use the Russell 3000universe as the benchmark.


Table 8 External Validity

CSR proposals Compustat vs. CSR proposals Close call CSR proposals vs. CSR proposals

Mean CSR proposals Mean Compustat p-value Mean close call p-value

Panel A: Firm characteristicsMarket value ($ million) 37,881 3,266 00000 28,639 00126Total assets ($ million) 77,365 8,868 00000 63,686 00267ROA 00137 00049 00000 00128 00147ROE 00362 00144 00000 00346 00596NPM 00194 00045 00000 00182 00522Tobin’s Q 10890 10905 00904 10801 00363KLD index 4006 1026 00000 3065 00373G-index 9023 8099 00159 9091 00294Institutional ownership (%) 63027 36049 00000 75061 00016Inside ownership (%) 0064 1039 00000 0081 00589Labor productivity 437 323 00000 526 00424Capital expenditures 00051 00133 00000 00050 00826Sales growth 00071 00022 00000 00091 00441Leverage 00264 00214 00000 00246 00757Cash 00101 00181 00000 00109 00697Labor intensity (industry level) 00321 00258 00000 00399 00036B2C industry 00425 00347 00000 00541 00047

Panel B: Proposal characteristicsLabor and environment issues 00404 — — 00656 00000Related to performance 00224 — — 00557 00000

Notes. This table compares the sample of CSR proposals (“CSR proposals”) with the Compustat universe (“Compustat”) and the subset of CSR proposalswhose vote outcome is within 5% of the majority threshold (“Close call CSR proposals”). Means for the CSR proposal sample are restated from Table 3. Meansfor the Compustat sample are computed across all available firm-year observations during the sample period (1997–2012). Means for the close call CSRproposal sample are computed as in Table 3, but with respect to the close call CSR proposals. The p-values refer to the difference-in-means test. The variablesin panel A are defined in Table 3. Labor and environment issues is an indicator variable equal to 1 if the proposal is on labor or environment issues (see panel Bof Table 2). Related to performance is an indicator variable equal to 1 if the proposal’s support statement contains performance keywords (see §5.2).

times higher. This difference is intuitive: companieswhose shareholders are more inclined toward CSRhave higher levels of CSR and at the same time aremore likely to submit CSR proposals. Although thesedifferences do not bias my estimate of the treatmenteffect, they do indicate that my findings may not nec-essarily apply to the average U.S. public firm.

5.2. How Representative Are Close CallCSR Proposals?

A limitation of my research design is that the effect isidentified by the subset of CSR proposals whose voteoutcome is close to the majority threshold. Althoughthis limitation is inherent to any RDD, it is especiallyimportant in my setting given the relatively smallnumber of close call CSR proposals. As discussed in§3.1, only 61 out of the 2,729 proposals have vote out-comes within 5% of the majority threshold; i.e., about2.2% of the proposals identify the effect at work.19

19 As discussed in §4.2, shareholder proposals are typically notbinding; i.e., even if a proposal is formally approved, it may notbe implemented. Accordingly, another potential caveat is that onlythose proposals that are eventually implemented (the “compliers,”using the terminology of Imbens and Lemieux 2008) may con-tribute to the identification. This caveat is mitigated in my mainanalysis, since I focus on the stock market reaction on the day of the

Moreover, the vast majority of CSR proposals receivelittle support at shareholder meetings (the averagevote outcome is merely 13.5%; see §3.1). This is insharp contrast to close call proposals, which garnersufficient support to achieve a vote outcome close to50%. Hence, close call CSR proposals appear to be“special” and hence may not be representative of theaverage CSR proposal. In the following, I characterizethe set of close call CSR proposals and discuss howthey differ from non-close proposals.

First, I examine which types of proposals (basedon the nine CSR subcategories listed in panel B ofTable 2) are more frequently found among the 61close call proposals. The subcategory that is most fre-quently represented is labor issues (23 proposals). Thetwo subcategories pertaining to environment issues(environmental issues and sustainability report)account for 17 proposals. The remaining 21 proposalsare scattered among the other six subcategories (addminorities/women to board, animal rights, health

vote. On that day, shareholders do not know with certainty whetheran approved proposal will be implemented or not. Accordingly, aslong as the implementation probability is strictly positive, even the(eventual) “noncompliers” contribute to the stock market reaction(see Section I.B of CGG for a similar argument).


issues, human rights, other social issues related,and political issues). Accordingly, about two-thirds(65.6%) of the close call proposals concentrate amongthree subcategories pertaining to labor and environ-ment issues. To further zoom into these three subcate-gories, I review the proposal description in the proxystatements (SEC Form DEF 14A). Virtually all propos-als on labor issues are employee satisfaction initiativesin the form of nondiscrimination and fairness poli-cies. As for the proposals on environment issues, mostof them pertain to the mitigation of environmentalhazards.

That 65.6% of the close call CSR proposals clusteramong labor and environment issues is not a typicalfeature of CSR proposals. Across all CSR proposals,the share of labor and environment proposals is only40.4%. As can be seen from panel B of Table 8, thisdifference is highly significant (p-value = 00000).

Next, I examine whether close call CSR proposalsare more likely to be perceived as value-enhancingby shareholders. To address this question, I con-duct a textual analysis of the support statement pro-vided in the proxy statement of the proposals.20

A caveat of this analysis is that it is inherently sub-jective, yet it helps shed some light on sharehold-ers’ motives behind these proposals. Specifically, Isearch for keywords related to performance. Thesekeywords include “profits,” “performance,” “produc-tivity,” “value,” and “competitive” as well as varia-tions thereof (e.g., for the word “profits,” I also searchfor “profitability,” “profitable,” etc.). To ensure thateach keyword is used in the (financial) performancecontext, I review each match manually. As can beseen in panel B of Table 8, I find that 55.7% of theclose call proposals contain performance keywords.(This percentage is very similar on either side of themajority threshold.) In contrast, only 22.4% of all CSRproposals include such keywords. The difference ishighly significant (p-value = 00000). This analysis indi-cates that close call CSR proposals are more likelyto have performance implications than are non-closeproposals.21

20 For example, in the support statement of a proposal to implementa nondiscrimination policy, shareholders of Gardner Denver, Inc.,argue as follows: “Employment discrimination on the basis of sex-ual orientation and gender identity diminishes employee moraleand productivity. Because state and local laws are inconsistent withrespect to employment discrimination, our company would benefitfrom a consistent, corporate-wide policy to enhance efforts to pre-vent discrimination, resolve complaints internally, access employ-ees from the broadest talent pool, and ensure a respectful andsupportive atmosphere for all employees. Gardner Denver willenhance its competitive edge by joining the growing ranks of com-panies guaranteeing equal opportunity for all employees” (GardnerDenver 2010, p. 27). The expressions “productivity” and “competi-tive edge” point at the performance implications of this proposal.21 Performance keywords are found more frequently in proposalson labor and environment issues, which may explain why close call

To further characterize the set of close call CSRproposals, I examine whether companies around thediscontinuity differ systematically from companiesfar from the discontinuity. This comparison is pro-vided in panel A of Table 8. As can be seen, com-panies close to the threshold are significantly morelikely to operate in labor-intensive and B2C indus-tries (p-values of 0.036 and 0.047, respectively)—thatis, in industries where performance is likely moresensitive to the relationship with employees and cus-tomers, respectively. This echoes the previous find-ing that close call CSR proposals are tied moreclosely to financial performance than are non-closeproposals.22

In sum, the analysis presented in this section sug-gests that close call CSR proposals are not represen-tative of the average CSR proposal. Accordingly, onemust be careful with extrapolation—my results do notnecessarily generalize to CSR proposals far from thediscontinuity. In particular, the link to performance,which appears to be more prevalent among closecall CSR proposals, may explain why these proposals(1) receive larger shareholder support and (2) lead topositive announcement returns and superior account-ing performance when adopted.

6. ConclusionIn this paper, I present evidence on the causal effect ofCSR on financial performance. To obtain exogenousvariation in CSR, I exploit the passage of shareholderproposals on CSR that pass or fail by a small mar-gin of votes. The outcome of such close call proposalsis as good as random and hence provides a ran-domized assignment of CSR to companies. Using anRDD methodology, I find that the adoption of closecall CSR proposals leads to a significant increase inshareholder value by 1.77%. This finding is consis-tent with the view that CSR is a valuable resource,which is in line with, e.g., the resource-based viewof the firm (e.g., Hart 1995, Russo and Fouts 1997),

CSR proposals cluster among these categories. Specifically, perfor-mance keywords appear in 59% of all labor proposals, 33% of allenvironment proposals, and 8% of all other proposals; for close callproposals, these ratios increase to 91%, 65%, and 9%, respectively.Given this pattern, one may expect my results to be stronger forlabor and environment proposals. When I reestimate my baselinespecification separately for the three different groups, I find thatthe stock market reaction is indeed larger for proposals on laborand environment issues. Given the relatively small number of closecall proposals in each group, such an analysis is only suggestive,though.22 There is no significant difference along the other characteristicsconsidered in Table 8, with the exception of institutional ownership,which is higher for companies close to the threshold. This differ-ence is related to the Karpoff et al. (1996) finding that institutionalownership affects the submission of shareholder proposals.


instrumental stakeholder theory (e.g., Jones 1995), andPorter and Kramer’s (2006, 2011) shared value argu-ment. I also find that the value gains are strongerfor firms with relatively low levels of CSR prior tothe vote. This suggests that CSR is a resource withdecreasing marginal returns; i.e., the CSR–CFP rela-tionship is concave.

I then examine the mechanisms through which CSRincreases shareholder value. I find that the passingof close call CSR proposals has a positive impact onoperating performance (return on assets, net profitmargin, and return on equity). When I further exam-ine what explains the increase in operating perfor-mance, I find that the adoption of close call CSRproposals has a positive impact on labor productiv-ity and sales growth. This evidence suggests thatthese proposals improve employee satisfaction andhelp companies cater to customers that are sensitiveto sustainable practices.

To the best of my knowledge, this study is the firstto provide empirical evidence on the causal effect ofCSR on CFP. Although a large empirical literaturepoints toward a positive correlation between CSR andCFP (for detailed reviews of this literature, see Margo-lis and Walsh 2001, 2003; Margolis et al. 2007; Orlitzkyet al. 2003; Roman et al. 1999), this correlation doesnot warrant a causal interpretation. The papers thatare closest to making causal statements are Dowellet al. (2000), Lev et al. (2010), Preston and O’Bannon(1997), Waddock and Graves (1997), and Edmans(2011, 2012). The first four articles rely on so-calledGranger causality tests (i.e., the comparison of leadsand lags of CSR and CFP). However, as Lev et al.emphasize, although this methodology has its merits,it does not establish causality.23 Accordingly, it doesnot substitute for the need to look for (quasi-)naturalexperiments such as the one I consider in this study.Edmans (2011, 2012) uses a different approach. Heconstructs a value-weighted portfolio of the “100 BestCompanies to Work For in America” and showsthat this portfolio significantly outperforms industrybenchmarks. An appealing feature of his approach isthat the effect of observable variables that are corre-lated with employee satisfaction is likely to be alreadyimpounded into the stock prices, which helps addresscausality. That being said, employee satisfaction maycorrelate with unobservable firm characteristics that

23 As Leamer (1985) points out, Granger causality does not imply“causality” but rather “precedence” in a lead–lag relationship. Inthe CSR–CFP context, finding that CSR precedes (i.e., predictsfuture values of) CFP does not necessarily imply that CSR causesCFP. For example, it could be that companies engage in CSRbecause they expect their future profitability to be higher. In thisscenario, CSR predicts future CFP, yet there is no causal relation-ship between the two.

investors have not fully incorporated into stockprices.

Finally, a limitation of my research design is thatthe identifying variation comes from a relativelysmall number of proposals—the ones close to thethreshold—and those proposals may not be repre-sentative of the average CSR proposal. In particu-lar, the large majority of CSR proposals receive littlesupport at annual meetings, suggesting that share-holders see little value in them. By contrast, the sub-set of CSR proposals that make it close to the 50%threshold receive an unusually high support. Thisindicates that close call CSR proposals are somewhatspecial.

When I characterize close call CSR proposals, Ifind that—compared with proposals away from thethreshold—they are more likely to address employeesatisfaction and the mitigation of environmentalhazards. Also, a textual analysis of their supportstatement shows that they more frequently con-tain performance-related arguments. Finally, close callproposals are more frequently found among com-panies operating in “stakeholder-sensitive” indus-tries, i.e., industries in which performance dependsgreatly on the relationship with employees and cus-tomers. These differences indicate that close callCSR proposals are more closely tied to perfor-mance, which may explain why they are value-enhancing. Accordingly, one has to be careful inextrapolating my results—although the value gainsdocumented in this paper apply to close call CSRproposals, they may not apply to CSR proposalsin general. Extending the external validity of thisstudy by identifying natural experiments that applyto a broader universe of firms and CSR initiativesis an exciting and challenging avenue for futureresearch.

Supplemental MaterialSupplemental material to this paper is available at http://dx.doi.org/10.1287/mnsc.2014.2038.

AcknowledgmentsThe author thanks Wei Jiang (the department editor), ananonymous associate editor, two anonymous reviewers,Alex Edmans, Xavier Giroud, Maria Guadalupe, AndrewHoffman, Aleksandra Kacperczyk, Lloyd Kurtz, JamesNaughton, Felix Oberholzer-Gee, and Brian Richter; as wellas seminar participants at Ivey Business School, the Alliancefor Research on Corporate Sustainability Conference at theUniversity of California at Berkeley (2013), and the SRIConference on Sustainable, Responsible, Impact Investing(Colorado Springs, Colorado) for helpful comments andsuggestions. The author also thanks Hannarae Annie Namfor excellent research assistance. Financial support fromMIT’s Undergraduate Research Opportunities Program isgratefully acknowledged.


Appendix. Types of CSR Proposals

Proposal type Proposal description

Panel A: Environment issuesEnvironmental issues Shareholder-sponsored proposals to request that the board issue a report detailing the

company’s impact on the environment or to request that the board adopt policies tominimize the company’s negative impact on the environment. If a proposal combineshealth and environmental issues, SharkRepellent will generally classify it in the“health issues” category. If a proposal focuses on preparing a sustainability reportregarding environmental practices, SharkRepellent will generally classify it in the“sustainability report” category.

Sustainability report Shareholder-sponsored proposals to request that the board issue a report describing thecompany’s strategies to ensure sustainability, usually focusing on actions to addressgreenhouse gas emissions and other environmental and social considerations.

Panel B: Social issuesAdd minorities/women to board Shareholder-sponsored proposals to request that the board take steps to ensure that

women and minority candidates are in the pool from which board nominees arechosen.

Animal rights Shareholder-sponsored proposals to encourage the company to consider animalinterests throughout its production and business processes or to request that theboard adopt an animal welfare policy. People for the Ethical Treatment of Animalshas submitted the majority of these proposals.

Health issues Shareholder sponsored proposals to request that the board institute policies to protecthuman health or that the board issue a report regarding the company’s stance oncertain health-related issues.

Human rights Shareholder-sponsored proposals to request that the board institute policies to protectand/or promote human rights. Such actions could include respecting human rightsthroughout the company’s production process or refusing to do business withcountries or businesses that contribute to human rights abuses.

Labor issues Shareholder-sponsored proposal to request that the board institute certain labor-relatedpolicies. Such labor policies may include prohibiting discrimination based on sexualorientation and gender identity or abiding by certain fairness principles.

Other social issues related Shareholder-sponsored proposal to request that the board provide a report regardingcertain social issues. Common topics may include the examination of the company’seffect on national security, the safety of the company’s operations from terroristsattacks, and the company’s lending practices.

Political issues Shareholder-sponsored proposals to request that the board provide a report detailingthe company’s policies regarding political contributions.

Note. This table provides a description of the nine CSR subcategories from the SharkRepellent database (source: SharkRepellent).

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