How does corporate social responsibility contribute to investment efficiency?

This paper examines the direct and indirect link between CSR performance and investment efficiency. Our panel dataset consists of 398 European companies listed in the STOXX Europe 600 during 2009-2014. Our first result shows that firms with high CSR performance invest more efficiently. Then, we perform our analysis distinguishing two alternative situations: underinvestment and overinvestment. Focusing on under-investing firms, we highlight that CSR performance enhances their investment levels through mitigating information asymmetry. In contrast, for over-investing firms, CSR performance reduces investment excess through mitigating free cash flow problems. Overall, these findings suggest a role for CSR in indirectly ameliorating firm-level investment efficiency through helping firms address agency problems and information asymmetry problems.