Firm Misvaluation and Corporate Social Responsibility*

Abstract

This paper shows that overvalued firms have better performance in corporate social responsibility. Using hypothetical mutual fund outflow pressure, I establish causality from misvaluation to corporate social responsibility performance. Further analysis reveals that the effect of firm misvaluation on corporate social responsibility performance is stronger for firms with greater financial strengths, higher socially responsible investor ownership, higher long-term institutional investor ownership, and during high corporate social responsibility sentiment periods. Overall, the results reveal the incentives of firms to engage in corporate social responsibility activities in overvaluation to cater to investors who prefer better corporate social responsibility performance.