The Interplay of CSR and Firm Value: Exploring the relationship of Financial Flexibility and Research and Development

Abstract

Corporate Social Responsibilities (CSR) is increasingly being incorporated into modern business activities, the link between corporate CSR and firm value remains argumentative. This study aims to examine the moderating roles of financial discretion and Research & Development (R&D) intensity in the relationship between CSR disclosures and firm value. Based on a sample of 1,212 matched pairs of firms over the period from 2018 to 2024, the authors establish the mixed of CSR on firm value. On the one hand, CSR programs are associated with an increase in systematic risk, or risk that is related to market – wide economic fluctuations. On the other hand the study establishes that CSR decreases firms ’idiosyncratic risk – risk particular to certain firms – whereby there is a decrease in Tobin’s q, which measures the market value of a firm in relation to its assets. However, the empirical evidence has pointed out that FF and R&D investment moderate the observed effects. While both explain how CSR reduces the cross-effect of Tobin’s q, to different extents. Two sub-directories, financial adaptability, by improving a firm’s position towards financial vulnerabilities, reduces the positive link between CSR and systematic risk. Moreover, CSR cuts down the increasing effect of the R&D investment on the idiosyncratic risk to stabilize the firm-specific performance. Thus, these insights enhance the CSR knowledge regarding its multifaceted effects on firm value for theories and provide useful advice for practice to managers. The current study reveals that by skillful management of their financial freedom and the magnitude of investment in the CSR research and development, the companies are able to maximize on the dividends which are likely to occur due to the sensitive CSR programs that are likely to cause off shots. This perspective of CSR is helpful in the existing debates within the academic and literature on the roles of CSR for organizational performance.