Why CEOs invest in Corporate Social Responsibility initiatives: evidence on Shariah compliant firms

The aim of this article is to investigate the motivation of CEOs to invest in Corporate Social Responsibility (CSR) activities. To carry out this analysis, we assess a sample of US conventional and Shariah Compliant (SC) firms, from Dow Jones Indices. As SC firms undergo business and financial screening, they are expected to follow different managerial styles and capital structures as compared to conventional firms. This comparison is important in view of the growing size of the Islamic Financial Services Industry that has surpassed total asset values of USD 2.00 Trillion. Existing literature argues that, for conventional firms, CEOs spend on CSR either to promote their private benefits (agency view) or to reduce conflicts among shareholders (conflict resolution view). Our results provide evidence that across both types of firms, CEOs do not invest in CSR initiatives to pursue selfish motives but to resolve conflicts among stakeholders to maximize firm value. The findings are also robust across different specifications and methods in order to address endogeneity issues. This article contributes to the growing literature on managerial styles, capital structure and Islamic Finance, carrying out important implications for the investment industry and for the long-term value of the firm.