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When do firms invest in corporate social responsibility? A real option framework

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  • Cassimon, Danny
  • Engelen, Peter-Jan
  • Van Liedekerke, Luc

Abstract

In this paper, the process for firms to decide whether or not to invest in corporate social responsibility is treated from a real option perspective. We extend the Husted (2005) framework with an important extra parameter that allows us to understand the timing of CSR investment and explain why some companies drag their feet over CSR investments. Our model explicitly allows for the impact of the opportunity cost of delaying the CSR investment decision, providing firms with tools to determine the optimal moment of exercising the CSR investment option. We illustrate our timing model through a case study and analyze governmental support strategies for CSR from a real options perspective.

Suggested Citation

  • Cassimon, Danny & Engelen, Peter-Jan & Van Liedekerke, Luc, 2014. "When do firms invest in corporate social responsibility? A real option framework," IOB Working Papers 2014.06, Universiteit Antwerpen, Institute of Development Policy (IOB).
    • Handle: RePEc:iob:wpaper:201406
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    References listed on IDEAS

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    1. Peter-Jan Engelen, 2004. "Criminal Behavior: A Real Option Approach With an Application to Restricting Illegal Insider Trading," European Journal of Law and Economics, Springer, vol. 17(3), pages 329-352, May.
    2. Smith, N. Craig & Palazzo, Guido & Bhattacharya, C. B., 2010. "Marketing’s Consequences: Stakeholder Marketing and Supply Chain Corporate Social Responsibility Issues," Business Ethics Quarterly, Cambridge University Press, vol. 20(4), pages 617-641, October.
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    5. Cassimon, Danny & Engelen, Peter-Jan & Reyntjens, Filip, 2013. "Rwanda’s involvement in Eastern DRC: A criminal real options approach," MPRA Paper 46993, University Library of Munich, Germany.
    6. Cassimon, D. & De Backer, M. & Engelen, P.J. & Van Wouwe, M. & Yordanov, V., 2011. "Incorporating technical risk in compound real option models to value a pharmaceutical R&D licensing opportunity," Research Policy, Elsevier, vol. 40(9), pages 1200-1216.
    7. Cassimon, D. & Engelen, P.J. & Thomassen, L. & Van Wouwe, M., 2007. "Closed-form valuation of American call options on stocks paying multiple dividends," Finance Research Letters, Elsevier, vol. 4(1), pages 33-48, March.
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    Keywords

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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