Material and Immaterial Corporate Social Responsibility and Financial Performance: Evidence from IPOs

Abstract

Initial public offering (IPO) firms confront a puzzle on how to balance the need for short-term performance against the long-term performance benefits of corporate social responsibility (CSR). This puzzle arises because IPOs face immense growth expectations and the short-term market demands of shareholders while encountering a liability of newness challenge and a myriad of CSR issues that might be pursued. Consequently, we explore: (1) how they engage in CSR activities relative to industry peers, (2) whether they engage in the CSR issues that are material or immaterial for their industry, (3) what firm characteristics affect an IPO’s investment in CSR, and (4) if those CSR activities have discriminating effects associated with post-IPO corporate financial performance (CFP). Our results show that IPOs generally have lower overall CSR ratings relative to industry peers. However, that is because IPOs discriminately focus their efforts on the CSR topics that are material for their industry. Moreover, IPOs with the most net positive material CSR activities relative to industry peers also exhibit significantly positive post-IPO abnormal returns and experience fewer post-IPO stock delistings. Overall, our study shows that IPOs are strategically managing their CSR investments by emphasizing material rather than immaterial CSR issues.