Corporate Legitimacy and Investment-Cash Flow Sensitivity

This study provides novel evidence of the impact of corporate social responsibility (CSR) on investment sensitivity to cash flows. We posit that CSR affects investment-cash flow sensitivity (ICFS) through information asymmetry and agency costs, commonly viewed as the two channels through which investment responds to the availability of internal cash flows. We find that CSR performance leads to a decrease in ICFS. We further find that ICFS decreases (increases) when CSR strengths (concerns) increase. Finally, we find that the effect of CSR on ICFS is driven by the areas Community, Diversity, and Human Rights. In sum, the findings of this study stress the relevance of CSR-in particular, of CSR activities that extend beyond compliance behavior and reflect what is desired by society-in reducing market frictions and improving firms' access to financial capital.