Abstract
This study investigates corporate social responsibility (CSR) of sinful firms, which refer to ones that are operating in controversial industries, including the production and distribution of alcohol, tobacco, gambling, adult entertainment, firearm, military, and nuclear power. We attempt to answer two questions in this study: (1) Do these sinful firms actively advertise their CSR engagements compared to non-sinful firms? And (2) do their advertising efforts really yield increased financial performance? Positing that advertising not only can make sinful firms’ good deeds visible, but also can highlight the contradiction between these firms’ stigma and their prosocial activities, we claim that sinful firms are likely to advertise their CSR engagement to overcome their stigmatized firm image, but these advertising activities will make the firms’ performance vulnerable by inducing skepticism from stakeholders. Using KLD database in conjunction with COMPUSTAT and Center for Research in Security Prices from 1991 to 2010, where 337 firms are involved in the controversial sinful industries, namely tobacco, alcohol, gaming, firearms, military, and nuclear power, we examine the effect of advertising spending of sinful firms’ CSR engagement on performance vulnerability, which is instantiated with idiosyncratic risk. The empirical results indicate that sinful firms increase their advertising expenditure when they engage in CSR programs, but these efforts for advertising CSR tend to increase idiosyncratic risk. This finding indicates that even though sinful firms can benefit from engaging in socially responsible initiatives, advertising their CSR efforts may backfire.
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Notes
Idiosyncratic risk is a measure of volatility of stock prices and Carhart’s (1997) four-factor model is used to calculate this risk as the variance of the residuals from the factor model. Historical series of factor portfolios are obtained from Kenneth French’s website: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.
Details about the construct of CSR dimensions of KLD data are provided in the “Appendix 1: Strengths and Concern Items in Seven Dimensions of KLD” section.
Advertising expenditure is data item 45 and total asset is data item 6 from COMPUSTAT annual database. The measure also reflects firms’ efforts for releasing press-related information.
This probability of being reported in KLD database is estimated from Probit regression model running binary dependent variable (=1 if reported in KLD or 0 otherwise) on firm’s sales, size, and leverage using all firms in the universe of COMPUSTAT database.
We also test the industry fixed effects to account for any possible differentiated effects of each sinful industry. We find qualitatively similar results to our main findings, which is the adverse effect of CSR-related advertising on performance vulnerability.
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Appendices
Appendix 1: Strengths and Concern Items in Seven Dimensions of KLD
Panel A: CSR strengths |
Community |
Charitable giving |
Innovative giving |
Housing support |
Education support |
Non-US charitable giving |
Volunteer programs |
Community engagement |
Other |
Corporate governance |
Limited compensation |
Ownership |
Transparency |
Political accountability |
Public policy |
Other |
Diversity |
CEO |
Promotion |
Board of directors |
Work/life benefits |
Women and minority contracting |
Employment disabled |
Gay and lesbian policies |
Unemployment of underrepresented groups |
Other |
Employee relations |
Union relations |
No-layoff policy |
Cash profit sharing |
Employee involvement |
Retirement benefits |
Health and safety |
Supply chain policies, programs, and initiatives |
Other |
Environment |
Beneficial products and services |
Pollution prevention |
Recycling |
Clean energy |
Property, plant, and equipment management systems |
Other |
Human rights |
South Africa |
Indigenous peoples relations strength |
Labor rights |
Other |
Product |
Quality |
R&D/innovation |
Economically disadvantaged |
Access to capital |
Other |
Panel B: CSR concerns |
Community |
Investment controversies |
Negative economic impact |
Tax disputes |
Other |
Corporate governance |
High compensation |
Ownership |
Accounting transparency |
Political accountability |
Public policy |
Governance structures controversies |
Other |
Diversity |
Controversies |
Non-representation |
Board diversity |
Other |
Employee relations |
Union relations |
Health and safety |
Workforce reductions |
Retirement benefits |
Supply chain controversies |
Other |
Environment |
Hazardous waste |
Regulatory |
Ozone depleting chemicals |
Substantial emissions |
Agricultural chemicals |
Climate change |
Negative impact of products and services |
Land use and biodiversity |
Non carbon releases |
Other |
Human rights |
South Africa |
Northern Ireland |
Burma |
Mexico |
Labor rights |
Indigenous peoples relations |
Operations in Sudan |
Other |
Product |
Safety |
Marketing/contracting |
Antitrust |
Other |
Appendix 2: Definitions of Controversial (SIN) Industries in KLD
Alcohol | |
Licensing | The company licenses its company or brand name to alcohol products |
Manufacturers | Companies that are involved in the manufacture of alcoholic beverages including beer, distilled spirits, or wine |
Manufacturers of products necessary for production of alcoholic beverages | Companies that derive 15 % or more of total revenues from the supply of raw materials and other products necessary for the production of alcoholic beverages |
Retailers | Companies that derive 15 % or more of total revenues from the distribution (wholesale or retail) of alcoholic beverages |
Ownership by an alcohol company | The company is more than 50 % owned by a company with alcohol involvement |
Ownership of an alcohol company | The company owns more than 20 % of another company with alcohol involvement (when a company owns more than 50 % of company with alcohol involvement, KLD treats the alcohol company as a consolidated subsidiary) |
Gambling | |
Licensing | The company licenses its company or brand name to gambling products |
Manufacturers | Companies that produce goods used exclusively for gambling, such as slot machines, roulette wheels, or lottery terminals |
Owners and operators | Companies that own and/or operate casinos, racetracks, bingo parlors, or other betting establishments, including casinos; horse, dog, or other race tracks that permit wagering; lottery operations; on-line gambling; pari-mutuel wagering facilities; bingo; Jai-alai; and other sporting events that permit wagering |
Supporting products or services | Companies that provide services in casinos that are fundamental to gambling operations, such as credit lines, consulting services, or gambling technology and technology support |
Ownership by a gambling company | The company is more than 50 % owned by a company with gambling involvement |
Ownership of a gambling company | The company owns more than 20 % of another company with gambling involvement (when a company owns more than 50 % of company with gambling involvement, KLD treats the gambling company as a consolidated subsidiary) |
Tobacco | |
Licensing | The company licenses its company name or brand name to tobacco products |
Manufacturers | The company produces tobacco products, including cigarettes, cigars, pipe tobacco, and smokeless tobacco products |
Manufacturers of products necessary for production of tobacco products | The company derives 15 % or more of total revenues from the production and supply of raw materials and other products necessary for the production of tobacco products |
Retailers | The company derives 15 % or more of total revenues from the distribution (wholesale or retail) of tobacco products |
Ownership by a tobacco company | The company is more than 50 % owned by a company with tobacco involvement |
Ownership of a tobacco company | The company owns more than 20 % of another company with tobacco involvement (when a company owns more than 50 % of company with tobacco involvement, KLD treats the tobacco company as a consolidated subsidiary) |
Firearms | |
Manufacturers | The company is engaged in the production of small arms ammunition or firearms, including, pistols, revolvers, rifles, shotguns, or sub-machine guns |
Retailers | The company derives 15 % or more of total revenues from the distribution (wholesale or retail) of firearms and small arms ammunition |
Ownership by a firearms company | The company is more than 50 % owned by a company with firearms involvement |
Ownership of a firearms company | The company owns more than 20 % of another company with firearms involvement (when a company owns more than 50 % of company with firearms involvement, KLD treats the firearms company as a consolidated subsidiary) |
Military | |
Manufacturers of weapons or weapons systems | Companies that derive more than 2 % of revenues from the sale of conventional weapons or weapons systems, or earned $50 million or more from the sale of conventional weapons or weapons systems, or earned $10 million or more from the sale of nuclear weapons or weapons systems |
Manufacturers of components for weapons or weapons systems | Companies that derive more than 2 % of revenues from the sale of customized components for conventional weapons or weapons systems, or earned $50 million or more from the sale of customized components for conventional weapons or weapons systems, or earned $10 million or more from the sale of customized components for nuclear weapons or weapons systems |
Ownership by a military company | The company is more than 50 % owned by a company with military involvement |
Ownership of a military company | The company owns more than 20 % of another company with military involvement (when a company owns more than 50 % of company with military involvement, KLD treats the military company as a consolidated subsidiary) |
Nuclear power | |
Construction and design of nuclear power plants | The company designs, engineers, and constructs nuclear power plants and nuclear reactors for use in nuclear power plants, including companies that design nuclear reactors and engineer and/or construct nuclear power plants |
Nuclear power fuel and key parts | The company supplies nuclear fuel material and key parts used in nuclear plants and reactors. Fuel includes mining of uranium and conversion, enrichment, and fabrication of uranium. Key parts include manufacture or sale of specialized parts for use in nuclear power plants including but not exclusive to steam generators, control rod drive mechanisms, reactor vessels, cooling systems, containment structures, fuel assemblies, and digital instrumentation and controls |
Nuclear power service provider | The company is involved in the transport of nuclear power materials and nuclear plant maintenance |
Ownership of nuclear power plants | The company has an ownership interest or operates nuclear power plant(s). It does not include publicly traded companies that are an owner or operator of a nuclear plant that has shut down and is being decommissioned |
Ownership by a nuclear power company | The company is more than 50 % owned by a company with nuclear power involvement |
Ownership of a nuclear power company | The company owns more than 20 % or another company with nuclear power involvement. If a company ownership of company with nuclear power involvement is greater than 50 %, KLD treats subsidiary as a consolidated subsidiary |
Construction and design of nuclear power plants | The company derives identifiable revenues from the design of nuclear power plants. This category does not include companies providing construction or maintenance services for nuclear power plants. This was instated in 2005 |
Nuclear power fuel and key parts | The company mines, processes, or enriches uranium, or is otherwise involved in the nuclear fuel cycle. Or, the company derives substantial revenues from the sale of key parts or equipment for generating power through using nuclear fuels. This was instated in 2005 |
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Oh, H., Bae, J. & Kim, SJ. Can Sinful Firms Benefit from Advertising Their CSR Efforts? Adverse Effect of Advertising Sinful Firms’ CSR Engagements on Firm Performance. J Bus Ethics 143, 643–663 (2017). https://doi.org/10.1007/s10551-016-3072-3
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DOI: https://doi.org/10.1007/s10551-016-3072-3