Corporate social responsibility and technical efficiency: A stochastic frontier approach

Abstract

Sustainability has become the new normal for value creation in the long haul, and is on the top of board agendas. We assess the relationship between the social pillar of ESG and a firm’s output gap justified by systematic inefficiency. To do so we apply a stochastic frontier model to a large sample of U.S. listed firms, spanning 2005 to 2019. Focusing on measures of companies’ management commitment and effectiveness towards catering closely to their workforce job conditions and wellbeing, we document an economically sizable and statistically significant positive association between technical efficiency and social responsibility performance. Employee-oriented CSR practices appear to be relevant aspects in explaining the association of socially responsible practices with technical efficiency. Firm inefficiency is explained by firm specific factors and is a decreasing (increasing) function of size and external monitoring (leverage, blockholdings and foreign sales). It is mitigated by CSR practices and external governance mechanisms, as well as market surveillance. The association between CSR and technical efficiency is non-linear and varies across industry sectors. Our results should interest managers and stakeholders in general.