Corporate Social Responsibility and Firm Performance: Investor Preferences and Corporate Strategies

Debates continue to rage between those that argue that managers should maximize the present value of their firm's cash flows in making strategic choices and those that argue that, sometimes, the wealth maximizing interests of a firm's equity holders should be abandoned for the good of a firm's other stakeholders. This debate is addressed by proposing a theoretical model in which the supply of and demand for socially responsible investment opportunities determines whether these activities will improve, reduce, or have no impact on a firm's market value. The theory shows that managers in publicly traded firms might fund socially responsible activities that do not maximize the present value of its future cash flows yet still maximize the market value of their firm.