The Effect of Social Ties between Outside Directors and Inside Directors on the Association between Corporate Social Responsibility and Firm Value

The purpose of this paper is to examine how Corporate Social Responsibility (CSR) activities and firm value are associated and whether social ties between outside directors and inside directors within the board (social ties) affect the association between CSR activities and firm value. We analyzed a sample of non-financial, December fiscal year-end firms listed in the Korea Stock Exchange market for the period, 2012-2017. We measure the intensity of social ties based on region and school using a density concept of social network analysis. Using the Environment, Social, Governance (ESG) scores from Korea Corporate Governance Service to measure CSR activities, our results suggest that firms can increase firm value through CSR activities on average in Korea. In addition, in firms with strong social ties, the positive association between firm’s CSR activities and firm value is weakened, indicating that the boards with strong social ties are ineffective in monitoring the CSR activities. Although the government has made great efforts to improve corporate governance with a focus on the independence of outside directors, there is a room for firms to improve substantive independence of boards in a society where nepotism is influential.