Foreign takeover protection and corporate social responsibility

Abstract

Research Summary

This study examines the impact of foreign takeover protection on firms' corporate social responsibility (CSR) following the enactment of investment screening laws worldwide. Drawing on research on intertemporal trade-offs in managerial investment decisions, we argue that foreign takeover protection encourages protected firms to improve CSR by expanding managerial investment horizons and increasing the motivation for long-term investments. This effect is stronger in countries with long-term-oriented national cultures and among firms with higher levels of long-term institutional ownership. Using a sample of 5353 firms across 72 countries from 2001 to 2018, we find support for our arguments. Our study provides a behavioral account of foreign takeover protection's impact and highlights its positive implications for firm CSR.

Managerial Summary

Managers are often under pressure to boost their firm's share price or run the risk of a foreign takeover. In this study, we argue that when countries enact foreign takeover protection through investment screening laws, this short-term performance pressure on domestic managers can be alleviated, enabling them to adopt a longer investment horizon. As a result, managers may become more motivated to invest in corporate social responsibility (CSR). We find empirical support for this argument. Furthermore, we show that a country's temporal cultural orientation and the investment horizons of a firm's owners further shape managers' motivation to engage in CSR.