Corporate social responsibility in the tourism industry

Current Issues in Tourism

ISSN: 1368-3500 (Print) 1747-7603 (Online) Journal homepage: http://www.tandfonline.com/loi/rcit20

Corporate social responsibility in the tourism industry: evidence from seasoned equity offerings Zhi-Yuan Feng & Yen-Jung Tseng To cite this article: Zhi-Yuan Feng & Yen-Jung Tseng (2017): Corporate social responsibility in the tourism industry: evidence from seasoned equity offerings, Current Issues in Tourism, DOI: 10.1080/13683500.2017.1360846 To link to this article: http://dx.doi.org/10.1080/13683500.2017.1360846

Published online: 07 Aug 2017.

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Date: 07 August 2017, At: 21:22

Current Issues in Tourism, 2017 https://doi.org/10.1080/13683500.2017.1360846

Corporate social responsibility in the tourism industry: evidence from seasoned equity offerings Zhi-Yuan Fenga* and Yen-Jung Tsengb

Downloaded by [National Cheng Kung University] at 21:22 07 August 2017

a

Wenzhou Business College, 1, Chashan University Town, Wenzhou, Zhejiang, People’s Republic of China; bResearch School of Accounting, The Australian National University, Canberra, Australia (Received 26 September 2016; accepted 25 July 2017) This study examines the impact of corporate social responsibility (CSR) in the tourism industry using seasoned equity offerings (SEOs) from 1992 to 2015. We show that tourism SEO issuers engaging in CSR activities experience less negative market reactions to SEO announcements. The findings also reveal that the negative reactions around SEO announcements are significantly lessened for tourism firms with better CSR performance in the context of high information asymmetry, because such activities serve as an ethical commitment to outside investors, and thus align the interests between SEO issuers and outside investors, which eventually mitigates negative market reactions to SEO announcements. Overall, these results indicate that tourism issuers with better CSR performance are able to reduce the agency costs and adverse selection problem for uninformed investors in the process of issuing SEOs. Keywords: corporate social responsibility; seasoned equity offers; announcement returns; information asymmetry; tourism

1.

Introduction

Seasoned equity offerings (SEOs) are a method of external financing by which listed companies raise funds by issuing additional securities, and recently these have been widely conducted by tourism firms across the US. Such firms include Burger King Holdings, Bloomin’ Brands, Cinemark Holdings, Hilton Worldwide Holdings, Host Hotels & Resorts, MGM Resorts International, Starbucks, and Wynn Resorts, indicating that SEOs are becoming a more common way for tourism firms to raise capital when facing funding constraints in relation to new or ongoing projects. However, tourism firms may suffer losses when adopting SEOs because, on average, studies show that SEO announcements generate negative abnormal returns at a discount of approximately 2% at the time of the announcement (e.g. Eckbo, Masulis, & Norli, 2007; Kim, Li, Pan, & Zuo, 2013; Masulis & Korwar, 1986), and issuers even experience stock price declines over the long-run (e.g. Loughran & Ritter, 1995; Spiess & Affleck-Graves, 1995). The adverse selection model developed by Myers and Majluf (1984) indicates that the negative market reactions to SEOs arise from information asymmetry between firm insiders and potential investors. Rational investors who do not know the true value of the firm will anticipate a decision to issue new equity as signalling not ‘good news,’ and thus would not be willing to pay for the overpriced shares. Moreover, information asymmetry is a

*Corresponding author. Email: [email protected] © 2017 Informa UK Limited, trading as Taylor & Francis Group


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Z.-Y. Feng and Y.-J. Tseng

necessary, but not sufficient, condition for agency problems (Beatty & Harris, 1999). If information asymmetry exists, SEO issuers will utilize their proprietary information to conduct self-serving behaviour, benefiting existing shareholders at the expense of the new ones, which in turn results in the agency problem (Kim et al., 2013). In addition, a high level of information asymmetry will translate into a high transaction cost, low liquidity, as well as excessive cash holdings, further raising the cost of capital and lowering the market value of the firm (Armstrong, Core, Taylor, & Verrecchia, 2011; Bartov & Bodnar, 1996; Diamond & Verrecchia, 1991; Drobetz, Grüninger, & Hirschvogl, 2010). Therefore, in this study, we focus on investigating whether the corporate social responsibility (CSR) activities practiced by tourism firms can help reduce information asymmetry and mitigate the negative market reactions around the SEO announcements. CSR activities have been more widely adopted by tourism firms in recent years, which implies that corporations are taking actions in response to the potential negative effects of their activities on the environment, community, culture, and even economy of the areas visited (Bremner, 2009; ETN, 2009). According to an International Air Transport Association report, by 2050 tourism is likely to be generating 40% of global carbon emissions, due to a massive increase in the number of flights made by tourists (Cohen, Higham, Peeters, & Gossling, 2014). As such, managers in all tourism-related businesses need to pay more attention to CSR, as their work has huge impacts on stakeholders, governments, and local communities. The growing attention to CSR activities in the tourism industry has lead academics to explore the impact of CSR on firm value.1 For example, Lee and Park (2009) as well as Kang, Lee, and Huh (2010) find that CSR investments in the US hotels and restaurants are positively associated with financial performance, although this relation does not hold in casino and airline companies. Likewise, Lee, Singal, and Kang (2013) show that operations-related CSR activities, such as product quality and employee relations, are more informative to firm value during recessions, since these activities can arise from cost savings and performance improvements. Moreover, some studies attempt to explore the effects of CSR from the investors’ perspective. Feng, Wang, and Huang (2014) find that, on average, CSR performance is associated with a lower cost of equity for tourism firms in Western countries, but this is not the case for those in Asia. Although many studies have examined the impact of CSR activities on firm value as well as cost of equity in the tourism industry, the prior literature reports mixed results for whether investing in CSR activities is value-enhancing or at the expense of shareholders. Thus, the main purpose of this study is to re-examine the relation between firm value and CSR activities through the announcements of SEO events, and provide further evidence to help clarify the ongoing debate in the CSR-value literature. Analysing SEO issues for US tourism companies from 1992 to 2015, we find SEO announcement returns are positively related to the issuer’s CSR activities. Next, we further explore the relationship between a firm’s negative CSR activities and SEO announcement returns. The result shows that SEO announcement returns are negatively and significantly associated with the issuers’ negative CSR activities, indicating that tourism firm investors have worse price reactions to negative CSR activities. Overall, our findings are consistent the results in the past literature, and suggest that better CSR performance have a positive influence on shareholder wealth, since the interests of SEO issuers are aligned with those of outside investors (Deng, Kang, & Low, 2013; Jawahar & McLaughlin, 2001; Jensen, 2001). Finally, we find that tourism issuers who have a high level of information asymmetry are more likely to see negative market reactions around SEO announcements; however, this negative relationship between SEO announcement returns and information asymmetry is mitigated in tourism issuers with better CSR performance. Our findings suggest that



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investors in tourism-related companies view CSR activities as an important mechanism that constrains management’s opportunistic behaviour by mitigating the adverse selection and agency problems arising from information asymmetry between SEO issuers and investors. This study contributes to tourism economics research in several ways. First, this is the first study to examine the relations between SEOs announcement returns and firm’s CSR activities within the tourism industries. Prior studies find that the SEO announcement returns are determined by firm size, leverage, market to book ratio, and other characteristics of SEOs (Eckbo et al., 2007; Kim et al., 2013; Lee & Masulis, 2009). Our study shows that CSR, an important attribute of corporate actions influencing societies, communities, and the environment, also affects market reactions to SEO announcement. Second, our paper is also related to a growing stream of tourism economics literature. Prior studies regarding CSR activities in the tourism industries focus on the impact of CSR on firms’ financial performance, internal cost savings, and cost of equity (Feng et al., 2014; Kang et al., 2010; Lee et al., 2013; Lee & Park, 2009). Our paper is one of the first to document the relevance of CSR activities from the market perspective of new equity issues by tourism firms. Third, we find that CSR activities decrease the negative market reactions to SEO announcements, and in turn mitigate the agency costs and adverse selection problem arising from the information asymmetry between insiders and outsiders of tourism companies, which adds to the literature that explores the relation between CSR and information asymmetry, such as Cho, Lee, and Pfeiffer (2013) and McWilliams and Siegel (2001). Finally, our empirical evidence can help to clarify the ongoing debate on the impact of CSR on firm value, and suggests that tourism firms engaging in CSR activities can increase shareholder wealth rather than the companies’ expenses. 2.

Literature review and hypotheses development

2.1. The impact of CSR on SEOs announcement returns Stakeholder theory contends that firms investing in CSR could reduce the agency conflicts between insiders and stakeholders, minimize agency costs, and eventually create shareholder wealth (Freeman, 1984; Garriga & Melé, 2004). This is because firms engaging in CSR activities make an implicit commitment to other stakeholders to engage in honest and ethical behaviour in their business processes, so the interests of insiders in firms with better CSR performance are more consistent with the interests of their stakeholders, and thus managers are more likely to utilize resources to support the firms’ operations (Jawahar & McLaughlin, 2001; Jensen, 2001; Jones, 1995; Kim, Park, & Wier, 2012). These propositions have been tested by many previous studies. For example, Moskowitz (1972) is the first work that examines the relation between CSR performance and stock returns, and finds that firms engaging in more CSR activities realize higher returns. However, Alexander and Buchholz (1978) find a different result, that the association between CSR and stock market performance is low and insignificant for a US sample from 1970 to 1974. Subsequently, Godfrey, Merrill, and Hansen (2009) report that CSR activities have an insurance-like benefit, as firms suffering from negative events who engage in CSR activities will see smaller declines in shareholder value than those firms that do not carry out such activities. More recently, and focusing on announcements of mergers and acquisitions (M&A), Deng et al. (2013) find that high CSR acquirers have more likelihood of achieving efficient and profitable M&A deals, which implies CSR activities create value for stakeholders’ wealth, and suggests that acquirers’ CSR performance significantly contributes to M&A performance. In addition, and consistent with stakeholder theory, Gao, Lisic, and Zhang (2014) find that CSR reduces insider trading because it

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aligns executives’ personal interests with those of stakeholders via cultivating shared and committed conventions of business practices over time. Hence, based on stakeholder theory and most of the empirical results of prior studies, we anticipate that tourism firms with higher (lower) CSR performance may realize greater (worse) stock returns while announcing SEOs, as stated in our first hypothesis: H1: The announcement returns of a tourism SEO issuer are significantly and positively (negatively) related to the firm’s (negative) CSR activities.


2.2.

SEOs announcement returns and information asymmetry

A substantial body of empirical literature finds significantly negative market reactions around SEO announcement days, with the typical drop in the range between −2% and −3% (e.g. Booth & Chang, 2011; Eckbo et al., 2007; Masulis & Korwar, 1986). The information asymmetry hypothesis, based on the adverse selection model of Myers and Majluf (1984), is the most common explanation for the price declines surrounding SEO announcements. Myers and Majluf (1984) suggest that managers who carry out SEOs have better information about the true value of both their firms’ assets and potential growth opportunities, and only issue new equities when the shares are overpriced, intentionally causing a wealth transfer from new to existing shareholders. Consequently, rational investors anticipate this opportunistic behaviour and initiate ex-ante price protection on the announcement day. This view of Myers and Majluf (1984) is supported by Dierkens (1991), which examines the association between the degree of information asymmetry and SEO announcement returns, and finds that firms with greater information asymmetry are more likely to undergo significant price drops on the SEO announcement days. SEO firms are able to exploit this information asymmetry, which exaggerates their financial performance (Cohen & Zarowin, 2010; Kim & Park, 2005). Moreover, recent studies find that firms with more accounting conservatism, better accruals quality, as well as more relaxed disclosure restrictions can decrease the level of information asymmetry and the mitigate agency costs between SEOs issuers and outside investors, and thus realize greater SEO announcement returns (Clinton, White, & Woidtke, 2014; Kim et al., 2013; Kim, Lee, & Chung, 2015). Collectively, previous results suggest that the announcement returns of SEOs are negatively associated with the degree of information asymmetry at the focal firm. We apply the information asymmetry hypothesis proposed by Myers and Majluf (1984) to tourism firms and predict that those with greater information asymmetry will be more likely to produce negative returns when announcing SEOs. Therefore, we propose the second hypothesis, as follows, H2: The announcement returns of a tourism SEO issuer are significantly and negatively related to the level of information asymmetry at the firm.

2.3. SEO announcement returns, information asymmetry, and CSR activities As noted in the prior literature, the magnitude of SEO announcement returns can be attributed by the adverse selection and agency problems arising from information asymmetry between firm insiders and potential investors. Nevertheless, CSR activities can offer uninformed investors a mechanism for monitoring insiders, and reduce the information advantage they have. McWilliams and Siegel (2001) provide theoretical support for this view, and argue that firms engaging in CSR activities will attract media attention and offer the public more information with regard to industry attributes and methods of production. They thus suggest that CSR activities can reduce information asymmetry by increasing public information disclosure.



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Furthermore, Cho et al. (2013) empirically support the view proposed by McWilliams and Siegel (2001), and indicate that CSR performance, as measured by KLD Research & Analytics, Inc. (KLD) score, can stimulate voluntary disclosure and raise transparency. These contentions are in line with the findings of Kim et al. (2012), which show that CSR performance is positively related to earnings quality, since CSR activities indicate the high ethical standards of top management, and thus they are seen as more likely to release reliable financial statements. To sum up, based on the theoretical and empirical evidence presented in previous studies, we argue that tourism firms with better CSR performance are more likely to complete a commitment in compliance with ethical behaviour and avoid the adverse selection and agency problems arising from information asymmetry when issuing SEOs. As such, if CSR activities affect SEO announcement returns by reducing the negative impact of information asymmetry, then we expect the negative association between information asymmetry and SEO announcement returns to be weaker for tourism firms with greater engagement in CSR activities. This is stated in our third hypothesis: H3: The negative association between information asymmetry and SEO announcement returns is less pronounced for firms with better CSR performance.

3. Data and method 3.1. Sample selection and description We first collect SEO data from the Securities Data Company’s (SDC) Global New Issues database from 1992 to 2015, because the KLD database has been rating the various categories of CSR activities of US firms since 1992. After matching all equity offerings with different types of CSR activities from the KLD database, we obtain the initial sample for our SEO–CSR analyses. Next, we exclude observations which do not belong to the tourism industry and also delete those with missing stock prices in the Center for Research in Security Prices (CRSP) database, financial data in Compustat, and missing control variables in the SDC database. Finally, our sample includes 106 firm-year observations associated with SEOs in tourism-related firms. Panel A of Table 1 shows that our sample firms are more distributed in the later 12 years, because the KLD database expanded its coverage of public firms in the US after 2003. Panel B of Table 1 presents our sample, which contains firms in the recreational products, entertainment, aircraft, transportation, restaurant, hotel, and motel industries, based on the classification system presented in Fama and French (1997). As seen in Panel B, the observations are most concentrated on the entertainment and transportation industries, and the marketadjusted cumulative returns for the SEOs are mostly negative and possess larger values for recreational products and transportation companies.

3.2.

SEO announcement returns and CSR practices

Following prior studies (Kim et al., 2013; Masulis & Korwar, 1986; Shivakumar, 2000), we employ the following SEOCAR model to examine Hypothesis 1: SEOCARit = b0 + b1 CSRit (or Concernit ) + b2 Sizeit−1 + b3 Leverageit−1 + b4 Mtbit−1 + b5 Relative offer sizeit + b6 Secondary sharesit + b7 Mktrunupit + b8 Runupit + Year + Industry + 1it . (1)

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Table 1. Sample description.


Panel A: Sample distribution by year Number of offers

SEOCAR

Year

N

Mean

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Total

2 1 0 0 1 0 0 0 0 0 2 5 10 10 8 5 2 10 6 11 4 7 11 4 106

−0.198 −0.040 – – −0.052 – – – – – −0.010 −0.011 −0.026 −0.004 −0.005 −0.008 −0.180 0.041 −0.044 −0.009 −0.034 −0.006 −0.029 −0.019 −0.019

Number of offers

SEOCAR

N

Mean

3 30 9 43 21 106

−0.135 −0.009 −0.009 −0.021 −0.017 −0.019

Panel B: Sample distribution by industry

Fama & French 48 Industries Recreational Products Entertainment Aircraft Transportation Restaurants, Hotel, Motel Total

Notes: This table describes the sample selection process and sample distribution. We obtained SEO announcement data, stock return data and financial data from the SDC, CRSP, and Compustat databases. Information on the SEO issuer’s CSR rating is taken from the KLD database. Panel A shows the sample distribution by year, and Panel B presents the industry classifications of our sample, which is based on the classification system used in Fama and French (1997).

All variable definitions are presented in the Appendix. We define the dependent variable, SEOCARit, as the three-day market-adjusted cumulative abnormal stock returns around the filing date.2 Actually, prior studies find that 90% of publicly traded firms make the SEO announcements on the filing dates (Jegadeesh, Weinstein, & Welch, 1993; Purnanandam & Swaminathan, 2006).



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The exogenous variable, CSRit, is the aggregate KLD score for firm i in year t, which equals the total number of strengths minus the total number of concerns, while Concernit is a KLD concerns score for firm i in year t, which sums up the total number of concerns.3 We also control for firm size and leverage ratio, Sizeit–1 and Leverageit–1, which are considered as fundamental determinants of SEO announcement returns (Eckbo et al., 2007; Lee & Masulis, 2009). Market to book ratio, Mtbit–1, is used to control for the issuer’s future growth. We also use pre-announcement individual stock returns and market returns, Runupit and Mktrunupit, to control for ex-ante market assessments for SEOs (Masulis & Korwar, 1986). As in Shivakumar (2000), we include the number of shares issued divided by the number of shares outstanding on the day prior to offer (Relative offer sizeit), and a smaller offering size is expected to be associated with greater stock returns. We also control for the percentage of SEO shares sold by existing shareholders divided by the number of shares offered (Secondary sharesit). Finally, for all models examined in this paper, we control year and industry fixed effects.4 Next, we test Hypotheses 2 and 3, which examine the monitoring mechanism through which CSR activities influence SEO announcement returns, and employ the following regression models: SEOCARit = b0 + b1 CSRit (or Concernit ) + b2 InfoAsmit + b3 Sizeit−1 + b4 Leverageit−1 + b5 Mtbit−1 + b6 Relative offer sizeit + b7 Secondarysharesit + b8 Mktrunupit + b9 Runupit + Year + Industry + 1it ,

(2)

SEOCARit = b0 + b1 CSRit (or Concernit ) + b2 CSRit × InfoAsmit (or Concernit × InfoAsmit ) + b3 Sizeit−1 + b4 Leverageit−1 + b5 Mtbit−1 (3) + b6 Relative offersizeit + b7 Secondary sharesit + b8 Mktrunupit + b9 Runupit + Year + Industry + 1it . Following Bhagat, Marr, and Thompson (1985), Blackwell, Marr, and Spivey (1990), and Krishnaswami, Spindt, and Subramaniam (1999), we define InfoAsmit as the standard deviation of the residuals from the market model in terms of daily returns from the past year.

4. Empirical results Table 2 reports the descriptive statistics. The mean of SEO announcement returns, SEOCARit (−0.019), of the tourism-related sample is in line with Kim et al. (2013), which reports the average value of SEOCARit is −0.017. Moreover, the mean (median) values for CSRit and Concernit are −1.953 (−2.000) and 3.179 (2.000), showing that tourism firms issuing SEOs have inferior CSR performance in contrast to general firms, which have an aggregate KLD score of −0.055 (Kim et al., 2012). As for the other control variables, the mean (median) values of Sizeit−1, Leverageit−1, Mtbit−1, Relative Offer sizeit, and Secondary sharesit are 21.313 (21.503), 0.404 (0.425), 6.049 (2.524), 0.141 (0.110), and 0.603 (1.000). In addition, the average values of Runupit and Mktrunupit are 0.097 and 0.030, which indicate that the pre-announcement returns of SEOs are generally larger than the ex-post SEO returns. Table 3 presents the Pearson correlation coefficients between SEO announcement returns (SEOCARit) and the explanatory variables of the full sample. The correlation

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Table 2. Descriptive statistics.


Panel A: SEOCAR model Continuous Variables

Obs.

Mean

Standard Deviation

25th Percentile

Median

75th Percentile

SEOCARit CSRit Concernit InfoAsmit Sizeit–1 Leverageit–1 Mtbit–1 Relative offer sizeit Secondary sharesit Runupit Mktrunupit

106 106 106 106 106 106 106 106 106 102 102

−0.019 −1.953 3.179 0.053 21.313 0.404 6.049 0.141 0.603 0.097 0.030

0.066 3.047 2.697 0.162 1.343 0.234 9.688 0.095 0.470 0.218 0.067

−0.041 −4.000 1.000 0.020 20.203 0.273 1.226 0.073 0.000 0.004 0.005

−0.015 −2.000 2.000 0.027 21.503 0.425 2.524 0.110 1.000 0.087 0.041

0.005 0.000 4.000 0.045 22.341 0.516 5.172 0.189 1.000 0.253 0.072

Notes: This table presents descriptive statistics for the SEO announcement returns model. The detailed definitions for all variables are in the Appendix.

coefficients show that SEOCARit is significantly associated with some of the test variables and most of the control variables. Specifically, most control variables and SEOCARit have the same relationships as found in prior studies (Corwin, 2003; Kim et al., 2013; Lucas & McDonald, 1990), with SEOCARit positively correlated with the Sizeit−1, Secondary sharesit, Runupit, and Mktrunupit, but negatively correlated with CSRit, Concernit, Leverageit−1, Mtbit-1 and Relative offer sizeit. The correlation coefficients between the explanatory variables are mostly between 0.3 and −0.3, showing that multicollinearity does not exist in our models. Table 4 reports the multiple regression results, and standard errors in all regressions are clustered at the firm and year levels. In this table, we report two regressions with a larger sample which does not control for Runupit and Mktrunupit in columns 1 and 2. Also, following Shivakumar (2000) and Kim et al. (2013), we include the SEO pre-announcement returns of market returns and individual stock returns in columns 3 and 4. First, we find that the coefficient of CSRit is positive and statistically significant with the larger sample in column 1 (two-tailed, p < .05), and column 3 shows that the statistical level of the CSRit coefficient is still significant when controlling for Runupit and Mktrunupit (two-tailed, p < .10). Therefore, we can conclude the SEO tourism issuers with good CSR performance have significantly higher announcement returns than those with bad CSR performance. Next, considering the effect of negative CSR activities on SEO announcement returns, we find that the estimated coefficients between Concernit score and SEOCARit are negatively significant in both columns 2 and 4 (two-tailed, p < .05 and p < .10). The results in Table 4 show that SEOs announcement returns are significantly higher for tourism companies with better CSR performance, and tourism firms engaging in negative CSR activities would incur negative market reactions, supporting Hypothesis 1. Finally, our results in Table 4 suggest that tourism firms engaging in CSR activities can increase shareholder wealth rather than the companies’ expenses. In Table 5, we include InfoAsmit in Equation 1 to test Hypothesis 2. As shown in the odd columns, the coefficients of InfoAsmit are negative and significant at the 5% and 1% levels with two-tailed tests, showing that tourism SEO issuers with greater information asymmetry

Correlations among selected variables.

Variables SEOCAR CSRit Concernit InfoAsmit Sizeit–1 Leverageit–1 Mtbit–1 Relative offer size Secondary shares Runup Mktrunup

SEOCAR

CSRit

Concernit

InfoAsmit

Sizeit–1

Leverageit–1

Mtbit–1

Relative offer size

Secondary shares

Runup

Mktrunup

1.000 −0.047 −0.008 −0.075 0.016 −0.038 −0.224 −0.206 0.223 0.206 0.208

1.000 −0.798 −0.183 0.122 −0.168 0.029 −0.243 0.128 0.152 0.124

1.000 0.450 0.060 0.126 0.032 0.172 −0.219 −0.299 −0.139

1.000 0.138 0.054 −0.015 −0.010 −0.138 −0.121 −0.018

1.000 0.094 0.188 −0.340 −0.007 −0.060 −0.225

1.000 0.109 0.195 −0.155 −0.070 −0.052

1.000 0.015 −0.286 −0.119 −0.094

1.000 −0.202 −0.181 −0.029

1.000 0.135 0.301

1.000 0.365

1.000

Notes: This table shows Pearson pair-wise correlations between selected variables. Correlations are for the full sample of firm-year observations from 1992 to 2015.



Table 3.

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Table 4. Regression results of announcement returns (−1, 1) for SEO firms on KLD CSR scores. SEOCAR Dependent variable CSRit

Baseline regression 0.005** 2.07


Leverageit–1 Mtbit–1 Relative offer size Secondary shares

Baseline regression

−0.001 −0.20 0.005 0.20 −0.002*** −3.42 −0.258*** −3.61 −0.009 −0.59

−0.006** −2.23 0.001 0.18 0.007 0.27 −0.002*** −3.49 −0.259*** −3.64 −0.011 −0.73

−0.039 −0.28 Yes Yes 106 41.38%

−0.085 −0.61 Yes Yes 106 41.86%

Concernit Sizeit–1

SEOCAR

Runup Mktrunup Intercept Year effect Industry effect N Adjusted R2

Baseline regression 0.003* 1.73 −0.003 −0.66 0.045* 1.96 −0.002*** −3.34 −0.263*** −4.22 0.013 0.96 0.090*** 3.21 −0.364*** −3.02 0.064*** −3.76 Yes Yes 102 62.70%

Baseline regression

−0.004* −1.75 −0.002 −0.35 0.045* 1.96 −0.002*** −3.43 −0.269*** −4.35 0.012 0.88 0.080*** 2.83 −0.353*** −2.94 0.039 0.32 Yes Yes 102 62.74%

Notes: This table reports results from ordinary least squares (OLS) regressions of the dependent variable SEOCARit on KLD CSR score and KLD Concern score in current/previous year from 1992 to 2015. SEOCARit, is the cumulative abnormal stock return in the three-day window (−1, 0, 1) around the SEO announcement for firm i in year t based on market-adjusted returns. The other variables are as defined in the Appendix. (***), (**), and (*) indicate significance at the 1%, 5%, and 10% levels with two-tailed tests or better, based on t-statistics, respectively. All standard errors are clustered at the firm-year level.

may face adverse selection and agency problems, thus suffering from greater price drops when announcing SEOs. In addition, the above results also coincide with the findings of Dierkens (1991) and support Hypothesis 2. With regard to the test of Hypothesis 3, we include the interaction term CSRit × InfoAsmit(or Concernit × InfoAsmit) in the model show in Equation (3), and find that the coefficients on CSRit × InfoAsmit become positive and significant in columns 2 and 4, respectively (two-tailed, both p < .01). These results indicate that the negative effect of information asymmetry on SEO announcement returns is mitigated by firms’ CSR activities, and tourism issuers with a high level of information asymmetry, which also engage in CSR activities, will experience less price reductions. As for considering the interactive effect between negative CSR activities and information asymmetry, the coefficients on Concernit × InfoAsmit are negatively significant at the 5% and 1% levels with two-trailed tests in columns 6 and 8, respectively, showing that SEO issuers with a high level of information asymmetry experience enormous price reductions when engaging in negative CSR activities. Overall, our empirical findings in Table 5 support Hypothesis 3, and show that engaging in CSR activities can decrease negative market reactions to SEO announcements,

Table 5. Regression results of announcement returns (−1, 1) for SEO firms on KLD CSR scores: effect of information asymmetry.

Dependent Variable CSRit

Baseline regression 0.001 0.56

SEOCARit



SEOCARit


Concernit InfoAsmit

−0.353** −2.54

CSRit × InfoAsmit Concernit × InfoAsmit Sizeit–1 Leverageit–1 Mtbit–1 Relative offer sizeit Secondary sharesit

−0.607*** −3.51 0.026*** 2.89

−0.001 −0.18 0.010 0.39 −0.002*** −3.76 −0.291*** −4.14 −0.007 −0.49

−0.001 −0.17 0.015 0.59 −0.002*** −3.76 −0.297*** −4.26 −0.015 −1.04

−0.028 −0.21 Yes Yes 106 45.18%

−0.038 −0.28 Yes Yes 106 46.36%

Runupit Mktrunupit Intercept Year effect Industry effect N Adjusted R2

Baseline regression

Baseline regression

Baseline regression

−0.001 −0.30 −0.364** −2.35

−0.002 −0.74

0.001 0.34 −0.683*** −3.43

0.028*** 3.97 −0.004 −0.87 0.055** 2.55 −0.002*** −3.58 −0.258*** −4.45 0.009 0.71 0.084*** 3.22 −0.377*** −3.36 0.134 1.17 Yes Yes 102 67.71%

−0.003 −0.72 0.058*** 2.73 −0.002*** −3.71 −0.286*** −5.02 0.005 0.43 0.099 −0.65 −0.395*** −3.59 0.101 0.91 Yes Yes 102 68.98%

SEOCARit

−0.001 −0.10 0.010 0.37 −0.002** −3.71 −0.292*** −4.14 −0.007 −0.47

−0.009** −2.32 0.000 −0.02 0.014 0.53 −0.002*** −3.51 −0.287*** −4.08 −0.016 −1.09

−0.036 −0.26 Yes Yes 106 45.02%

−0.055 −0.40 Yes Yes 106 44.93%

−0.004 −0.88 0.054** 2.49 −0.002*** −3.37 −0.263*** −4.55 0.011 0.83 0.085*** 3.20 −0.370*** −3.30 0.142 1.21 Yes Yes 102 67.52%

Baseline regression

0.001 0.35

−0.011*** −3.64 −0.003 −0.69 0.055** 2.57 −0.002*** −3.44 −0.300*** −5.18 0.007 0.55 0.099*** 3.69 −0.381*** −3.42 0.101 0.89 Yes Yes 102 68.10%

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Notes: This table reports the results from ordinary least squares (OLS) regressions of the dependent variable SEOCARit on the KLD CSR and KLD Concern scores from 1992 to 2015. The proxy of information asymmetry, InfoAsmit, is the standard deviation of the residuals of the market model regression using daily returns from the previous year. The other variables are as defined in the Appendix. (***), (**), and (*) indicate significance at the 1%, 5%, and 10% levels with two-tailed tests or better, based on t-statistics, respectively. All standard errors are clustered at the firm-year level.



SEOCARit

12


because this alleviates the adverse selection problems and agency costs between insiders and outsider investors.


5.

Conclusion

Sustainable tourism has been an important concept since the UN’s Earth Summit in 1992. This study explores whether tourism SEO issuers with better CSR performance can significantly reduce the adverse selection and agency problems arising from information asymmetry. Using 106 firm-year observations for US tourism companies during the period 1992– 2015, our analyses find that SEO announcement returns are positively related to an issuer’s CSR activities, because the interests of insiders in SEOs issuers with better CSR performance are more consistent with those of outside uninformed investors than those at SEOs issuers with poor CSR performance, and these results are robust to controlling for the returns of the market portfolio and individual stocks in the 90-trading day periods prior to the SEOs. Furthermore, we find that the negative market reactions around SEO announcements are significantly milder for tourism firms with better CSR performance in the context of high information asymmetry, because CSR represents an ethical commitment to outside investors and reduces the adverse selection problems arising from information asymmetry, eventually mitigating negative market reactions to SEO announcements. Collectively, the results of this work show the smaller price declines for tourism issuers with better CSR performance, due to the role that CSR plays in mitigating the negative influence of adverse selection and agency problems between SEOs issuers and outside investors. Our results support the views of stakeholder theory and argue that tourism firms engaging in CSR practices can increase shareholder wealth rather than the companies’ expenses. Therefore, we suggest the potential SEOs investors to consider tourism firms with better CSR practices because there is lower likelihood to produce agency problem and negative market reactions. Based on our findings, this study has some useful implications for tourism firms who may need more financing to produce new or larger businesses. On the one hand, and consistent with prior research which finds that firms attempt to influence investor expectations by varying their disclosure (Bergman & Roychowdhury, 2008), positive CSR practices can be strategically adopted and disclosed with a view to effectively alleviating the market frictions which are driven by agency costs or information asymmetry. On the other hand, for those firms which have already conducted CSR activities, issuing an SEO may be a more efficient or preferred form of external financing than for those without CSR practices. This is because the issuers with positive CSR practices may be rewarded by the market with higher announcement returns to the SEO, with this increase more pronounced when the firms have greater information asymmetry. Therefore, firms with more CSR practices may potentially mitigate the underpricing of SEOs that is positively related to information asymmetry, giving managers more flexibility to set a higher offer price. This study has the following limitations. First, our empirical results are based on data from the US, and this may mean that our empirical results cannot be applied to, for instance, countries that are emerging markets or have a civil-law background, due to various in the cultures and legal institutions between these groups. Moreover, our study focuses on tourism-related industries, and so the results may not be generalized to other sectors. Therefore, future studies can further explore this topic in different countries and in sectors other than these industries. Another interesting question regarding SEO events is to investigate


13

the long-run underperformance of SEO announcements, focusing on tourism-related companies, and future research can examine whether a firm’s CSR activities can mitigate this issue.

Disclosure statement No potential conflict of interest was reported by the authors.

Notes Downloaded by [National Cheng Kung University] at 21:22 07 August 2017

1.

2. 3. 4.

According to the US Travel Association, 79% of adults in the US consider environmental issues when making travel decisions, such as carbon emissions and global warming. Moreover, three of the largest Las Vegas tourism businesses, MGM Resorts International, Caesars Entertainment, and Las Vegas Sands Corp, recently announced comprehensive plans to address such issues (Travel Weekly, 10 October 2012). The market-adjusted returns are defined as the difference between individual stock returns and the returns of a value-weighted market portfolio. The strength scores in the KLD database represent the aggregate score of positive events related to CSR activities in different categories, whereas the concern scores mean the aggregate score of negative events related to CSR activities in different categories. The industry types are classified based on the 48 industries in Fama and French (1997).

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Appendices Appendix 1. Definitions of variables. SEOCARit CSRit

Concernit

Sizeit−1 Leverageit−1 Mtbit−1 Relative offer sizeit Secondary Sharesit Runupit Mktrunupit InfoAsmit

Cumulative abnormal stock return for the time interval (−1, 0, 1) around the SEO announcement for firm i. Aggregated KLD CSR score for firm i in the SEO announcement year, measured as total strengths minus total concerns, based on these social rating categories of KLD ratings data: corporate governance, community activities, diversity, employee relations, environment, human rights and product quality and safety (Kim et al., 2012). Aggregated KLD concern score for firm i in the SEO announcement year, number of total concerns across corporate governance, community activities, diversity, employee relations, environment, human rights and product quality and safety KLD scores. Natural logarithm of the book value of total assets for firm i in the year prior to the SEO announcement. Ratio of the book value of long-term debt over the book value of total assets for firm i in the year prior to the SEO announcement. Market value of equity divided by the book value of equity for firm i in the year prior to the SEO announcement. Number of shares offered divided by total shares outstanding for firm i in the year prior to the SEO announcement. Percentage of SEO shares being sold by existing shareholders to total SEO shares offered for firm i in the SEO announcement year. Individual stock returns over the 90 trading days prior to the SEO announcement for firm i. Market returns over the 90 trading days prior to the SEO announcement for firm i. Standard deviation of the residuals of the market model regression using daily returns from the previous year for firm i.

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Appendix 2. The industry classification of firms in the full sample. Industry category

N

Company name

Toys: Recreational Products Fun: Entertainment

3

Harman International Inds, K2 Inc.

30

Aero: Aircraft Trans: Transportation

9 43

Meals: Restaurants, Hotels, Motels

21

Ameristar Casinos Inc., Boyd Gaming Corp, Corp, Cinemark Holdings Inc., Carmike Cinemas Inc., ClubCorp Holding Inc., Crompton & Knowles Corp, Dreamworks Animation Inc., Empire Resorts Inc., International Speedway Corp, Las Vegas Sands Regal Entertainment Group, Life Time Fitness Inc., Lions Gate Entertainment Corp, Netflix Inc., World Wrestling Entmt Inc., Wynn Resorts Ltd, Spirit Aerosystems Holdings, Textron Inc., Triumph Group Inc. Alaska Air Group Inc., Airtran Holdings Inc., Con-Way Inc., Caladon Group Inc., Chicago and North Western Hldg, Covenant Transportation Grp, Continental Airls Inc., Delta Air Lines Inc., Emergency Medical Svcs Corp, Echo Global Logistics Inc., Forward Air Corp, Genesee & Wyoming Inc., Hornbeck Offshore Svcs Inc., Hub Group Inc., Jetblue Airways Corp, Kinder Morgan Management Llc, North Vruise Line Hldg Ltd, Pacer International Inc., Quality Distribution Inc., Republic Airways Holdings Inc., Roadrunner Trans Svcs Hldgs, Southwest Airlines, USA Truck, Inc., Us Airways Group Inc., Us Xpress Entp, Inc., UPS, Aramark, Biglari Holdings Inc., Bloomin’ Brand Inc., Bristol Hotel, Caribou Coffee, Del Frisco’s Restaurant Group, Extended stay America Inc., Fiesta Restaurant Group, Hilton Hotels, La Quinta Holdings, McCormick & Schmick’s Seafood, Red Robin Gourmet Burgers, Ruth’s Hospitality Group Inc., Texas Roadhouse Inc.