Corporate Goodness as a Signaling Device? Evidence from a Quasi-natural Experiment

• In Event: Determinants of disclosure

Abstract

We study firms’ incentives to engage in corporate social responsibility (“CSR”) activities by using the quasi-natural experiment of Regulation SHO, which relaxes short sale constraints for a group of randomly selected firms. We find that firms experiencing an exogenous increase in their exposure to short sales and the corresponding negative price pressure significantly raise their CSR. The results are stronger for firms that are more profitable, less financially constrained, with higher information uncertainty, and those more likely to attract arbitrageurs for non-fundamental-related reasons. Our evidence suggests that CSR activities are a signaling device used by managers to reduce information asymmetry.

Authors

• Lei Gao, Iowa State University

• Jie (Jack) He, University of Georgia

• Juan (Julie) Wu, University of Georgia