1. Introduction
This study investigates whether analyst coverage affects the extent of corporate social performance in the Korean market. In addition, this study examines the potential differentiated effect when the firm belongs to chaebol or non-chaebol groups.
Corporate social performance (Hereafter, CSP) is a necessary strategy to enhance consumer perception of firms’ product quality and companies’ reputations [
1] and thereby lower the companies’ cost of capital [
2,
3]. Researchers have recently focused on, among the many relevant aspects of corporate social responsibility (Hereafter, CSR), corporate charitable contributions might be regarded as a direct measure of CSR [
4,
5,
6,
7]. A growing body of literature investigates why firms engage in charitable giving and how it affects firms’ future financial performance.
Firms make corporate charitable contributions for a diversity of reasons. Prior papers suggest that slack resources [
8]; firm size [
9]; ownership structure [
10]; managerial altruism [
11]; reputational capital [
4]; business awards [
5], and internationalization [
7]. Among them, altruistic theory consistently insists that corporate giving enhances a firm’s informational environment and reputation.
Despite the growing importance of corporate charitable contribution, there are few studies that examine how organizational visibility affects it. Campbell and Slack [
12] show that publicly more visible firms make more charitable contribution on corporate giving. This study aims to fill the void by examining analyst coverage as a one of the proxies for the firms’ organizational visibility of firm facts and corporate charitable contributions in Korea. We extend prior studies, e.g., Zhang et al. [
4] by focusing on Korean firms. There is relatively scarce comprehensive firm/year donation expense data available for the U.S. or the U.K. However, as the Korean government requires that firms disclose individual firm/year donation expense data to the public, a vast amount of donation expense data could be obtained and used as a proxy for CSP. In addition, Korean firms report their contributions in their financial statements [
5,
6].
Thus, there is access to high-quality corporate-giving data as well, which facilitates the obtainment of a large sample on donation expenses in Korea. Therefore, Korea is a good and unique research setting in which to examine the association between analyst coverage and corporate charitable contributions. Also, Korea provides a special setting that is related to chaebol and non-chaebol firms. Chaebol firm is defined as a large business conglomerate which has large firm size and diverse affiliated firms, over 20 to 30 controlled subsidiary companies and operated in multiple countries such as multinational firms. On the other hand, non-chaebol firm is relatively small firm size and one or two subsidiary company, so this is similar to small and medium sized firm (SMEs). Further, non-chaebol firms, which regarded as relatively low reputation firms, have incentive in more CSP to acquire the necessary resources conveniently [
13] and more cheaply [
14]. However, for chaebols, CSP does not function in a similar vein because chaebols already enjoy some privileges, such as government subsidies, many kinds of business licenses [
15,
16]. So, it might be different results between analyst coverage and CSP whether the firm belongs to chaebol or non-chaebol firms.
Using an extensive data set for Korea from 2002 to 2015, we report several empirical results. First, we find that a higher level of analyst coverage is significantly and positively related to greater levels of CSP. So following analyst “investor recognition view”, analyst coverage might be the one of the determinants of firms’ CSP to higher firms’ reputational capital. Second, the positive association between analyst coverage and CSP is more pronounced in non-chaebols. These findings suggest that non-chaebol firms’ top managements face a higher risk of dismissal when firm’ performance is poor. Consequently, CEOs of non-chaebol firms tend to be more concerned about reputation than those of chaebol firms because a high reputation might help to improve their job security more securely. Finally, we conduct a battery of robustness analyses to address various endogeneity issues, using two-stage least square regression (2SLS), three-stage least square regression (3SLS) then our main results remain qualitatively unchanged. Lastly, we conduct alternative proxy for CSP and analyst coverage then alternative proxy show similar result. So, overall robustness tests support our main result in this study.
This paper has several contributions to the literature. First, few studies examine the association between analyst coverage and CSP because of the lack of donation expense data in the U.S. Therefore, this study might be the first attempt to use qualified donation expense data in Korea to investigate the direct association between analyst coverage and CSP. So, extending analysts’ “investor recognition view” [
17,
18], this paper shows that analyst coverage enhances firms’ organizational visibility and this would higher firms’ CSP which might be the pertinent factor for the firm’ sustainability.
Second, this paper shows that analyst coverage and CSP are more pronounced in non-chaebol firms. These results show empirically that non-chaebol firms and chaebol firms react differently to firms’ levels of analyst coverage and the need to lay more emphasis on, or desist from, CSP activities. So, in Korea, non-chaebol firms more need reputation then analyst coverage makes more role for the non-chaebol firms to higher firms’ visibility and likely to enhance investors’ recognition of the firms.
Third, a gap is filled in the mainstream literature on CSR within the context of developed countries, such as the U.S. or the U.K., leaving the empirical question as to whether such results apply to other developing countries. The economic consequences or determinants of CSR may vary according to a country’s information environment and legal origin [
19]; hence, it is important to investigate CSR’s determinants and economic consequences in emerging countries such as Korea. So, using unique corporate giving data, which is direct measure in CSR, this paper investigate analyst coverage might enhance firms’ CSP even in a relatively poor information environment such as Korea.
Fourth, we conduct a battery of endogeneity analysis to reduce related problem. In this study, we use 2SLS 3SLS to reduce endogeneity problem inherent to analyst coverage and CSP then this battery of analysis lead to marginal contribution to the sustainability related study to reduce inherent endogeneity problem.
5. Conclusions
This study shows that analyst coverage is positively associated with CSP activities in Korea and that this positive association is more pronounced in non-chaebol samples. Also, this main result is consistent with interaction analysis, using 2SLS, 3SLS regression and using alternative proxy for analyst coverage and CSP. Hence, in Korea, firms try to utilize donation expense as a tool for upping reputational capital, thus analyst coverage might be one of the key factors enhancing a firm’s reputation capital. So, following altruistic theory, analyst coverage would enhance firm’ corporate giving and this behavior concurrently higher firm’ reputation. Further, this positive association is more pronounced in non-chaebol firms, which are regarded as having relatively low reputation in Korea. Hence, these firms try to use analyst coverage to enhance reputation building.
In the case of the largest conglomerates in most developing countries, it is common that they belong to the business group except for public enterprises [
13]. In the case of Korea, Taiwan, India, Mexico, and Brazil, the business group is a representative type of company. In the case of large-scale businesses in developing countries, diversified business groups, dominated by family members, are the main players. (For example, Tata Group in India, Hon Hai in Taiwan and Formosa Plastic companies are similar to Samsung and Hyundai Group in Korea.) In Korea, the companies that make up a large group of companies like Samsung and Hyundai are called chaebol. Developing countries have been forced to use chaebol-oriented growth policies as a strategy to achieve economic growth with limited resources. The chaebol is already well known for its aggressive support from the government and business diversification, finally reputation is usually higher than non-chaebol firms. So, this study will complement the study of Zhang et al. [
4] using Chaebols and Non-chaebol data in Korea.
Nonetheless, these findings come with some limitation. There might be other omitted factors related to CSP that bias our empirical results. Many factors could influence to firms’ CSP then we try to control variables to reduce omitted variable problem following prior papers. To tackle and reduce this concern, we conduct a battery of robustness tests and there is qualitatively unchanged and consistent result with it. However, it remains an interesting area for the future research which would still be to study whether the analyst coverage and CSP relationships still holds when using an international large panel data. Nevertheless, even as a study with such limitations, this Korean study has its own significance, and as further country-specific studies are done, looking at a broader spectrum of findings may lead to more generalized conclusions.
Further future research would suggest that media coverage could effect on firms’ organizational visibility so we need to study more on these issues. We assume that high media coverage firms’ try to higher CSP to higher reputational capital. There might be limited study has been done regarding media coverage or exposure might influence to firms’ CSP. So, future study would conduct this research to know more about the impact of media coverage on firms’ CSP. In addition, we need to broaden our research topic in international evidence then verify our empirical result is valid in international context. Further, there might be differentiate results according to firm belongs to different information environment by country to country and firm belongs to developed or developing countries. So, it needs more research to figure it out regarding analyst coverage and CSP in the international context.
Besides the result of this paper, the findings also have some practical implications. Managers of non-chaebol firms in developing countries should be actively interact with sell side or buy side analyst to higher firms’ reputational capital by implementing corporate giving.