Corporate social responsibility and capital allocation efficiency

We investigate the relationship between corporate social responsibility (CSR) and firm-level capital allocation efficiency. Using seminal investment-Q framework, we provide evidence that CSR distorts investment sensitivity to Q. We further determine that this effect of CSR is moderated by the assumed level of agency conflict, stakeholder engagement, as well as financial slack. We also document that CSR negatively affects the sensitivity of external finance to Q and aggravates investment sensitivity to cash flow. In addition, we find that the distortion in the firm-level capital allocation efficiency is reflected in firm performance. Our findings are robust to alternative variable measurement as well as tests for endogeneity.