Capital structure as a control mechanism of a CSR entrenchment strategy

In: European business review, Band 30, Heft 3, S. 340-371

Abstract

PurposeThis paper aims to analyse the use of level of debt as an external control mechanism against an entrenchment strategy based on corporate social responsibility (CSR) practices.Design/methodology/approachThe authors use a database of 1,916 international companies for the years 2002 to 2010.FindingsThe evidence obtained confirms in a context of asymmetric information, bounded rationality and divergent interests, the use of debt as a control mechanism of managers' discretionary comportment. In other words, CSR practices can be used by managers as an entrenchment strategy and self-defence with the aim of decreasing the possibility of being identified by those shareholders and stakeholders whose interests have been damaged. In this context, the market demands higher debt levels to solve agency frictions, playing an active role in monitoring the management. Moreover, the demand of higher debt as a control mechanism that minimises the expropriation risk by managers through CSR is lower in contexts of greater investor protection.Originality/valueThe findings reveal that CSR engagement can be explained by the hypothesis of being a strategy of entrenchment and self-defence. Overall, this study differs from previous literature in this field by taking an alternative approach to CSR practices, in contrast to the conventional wisdom of the benefits of CSR practices. The authors contribute by empirically testing the theoretical model proposed by Cespa and Cestone (2007) who suggest the discretionary use of CSR from an agency perspective. They also give empirical relief showing the use of CSR as an entrenchment strategy. Moreover, they demonstrate that the capital market of debt decreases in a context with a greater degree of investor protection, likewise under CSR promoted as an entrenchment tool, the demand for debt as a disciplinary mechanism is less necessary to control managers. In addition, the study is enriched by the database analysis.