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Are Corporate Environmental Responsibility Activities an Efficient Investment or an Agency Cost? Evidence from Korea

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  • Sang Koo Kang

    (Department of Business Administration, Kyonggi University, 154-42, Gwanggyosan-ro, Yeongtong-gu, Suwon-si, Gyeonggi-do 16227, Korea)

  • Hee Sub Byun

    (Department of Finance, College of Business, Hallym University, 1 Hallymdaehak-gil, Chuncheon, Gangwon-do 24252, Korea)

Abstract

External conditions such as capital market maturity, investor protection levels, and government control over individual firms vary among countries. We posit that such environmental differences could cause differences in corporate environmental responsibility (CER) activities between countries. However, previous studies have mainly focused on developed countries, while studies conducted in emerging countries are limited. We examine the relationship between CER activities and investment inefficiency in firms listed on the Korea Exchange. Specifically, we analyze the incentive of managers’ ex-ante behavior on CERs and further analyze the relationship between these incentives and external evaluations. Using firm-year panel data, we conducted the pooled ordinary least squares (OLS) regression analysis and found the following results. First, the relationship between CERs and investment inefficiency is significantly positive, especially those based on managers’ incentives for overinvestments. Second, the positive relationship between CERs and investment inefficiency is prominent in the subsamples with large free cash flows or low asset efficiency. Third, active CERs reduced corporate value in the overinvestment subsample. Unlike existing literature that focuses on developed countries, our results imply that CERs may have negative effects due to agency problems in emerging countries with immature capital markets. From this arises the academic implication that the evaluation of CERs should be changed according to different capital market environments.

Suggested Citation

  • Sang Koo Kang & Hee Sub Byun, 2020. "Are Corporate Environmental Responsibility Activities an Efficient Investment or an Agency Cost? Evidence from Korea," Sustainability, MDPI, vol. 12(9), pages 1-22, May.
    • Handle: RePEc:gam:jsusta:v:12:y:2020:i:9:p:3738-:d:354152
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    2. Keigo Fujikura & Akitsu Oe, 2023. "The Influence of Firms’ Pragmatic Legitimacy on Investors’ Perceptions of Their Environmental Protection Activities," Sustainability, MDPI, vol. 15(18), pages 1-18, September.

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