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The Local Roots of Corporate Social Responsibility

Abstract

We provide new evidence that the prosocial attitudes of local residents play a significant role in determining a firm’s corporate social responsibility (CSR) engagement. We show that firms are more likely to engage in CSR initiatives when they are headquartered in areas with large senior citizen populations and where a large fraction of the population makes charitable donations. In contrast, we find that firms are less likely to engage in CSR initiatives when they are headquartered in areas with large religiously affiliated groups. After establishing the local demographic roots of CSR demand, we then examine the relationship between the firm’s CSR activities and its market valuation. Our results suggest that CSR initiatives create value when they are properly aligned with local residents’ prosocial attitudes. Overall, our study stresses the role of local residents’ CSR preferences in mediating the relationship between CSR and market valuations.

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Notes

  1. Frederick (1995), Starks (2009), and El Ghoul et al. (2011) show that investors perceive socially irresponsible firms as having a higher level of risk than other firms. Further, Hong and Kacperczyk (2009) argue that ‘sin’ firms (e.g., tobacco, alcohol, and gaming firms) face higher litigation risk than other firms. Thus, seniors may invest in high CSR firms because they provide insurance against the potential risk of socially irresponsible behavior.

  2. Margolis and Walsh (2003) show that 56 of 109 reviewed studies do not find a distinguishable relationship between CSR and financial performance, whereas 54 (7) document a positive (negative) relationship. The meta-analytic findings of Orlitzky et al. (2003), however, suggest a positive correlation between CSR and financial performance.

  3. This is, to some degree, contained in the argument of increased stakeholders’ social awareness, which is supported by the findings of the Ipsos MORI (2003) survey that “more than half of American consumers say that a company’s social reputation influenced purchase decisions, and 70 % of U.K. consumers state that they are willing to pay more for a product that they perceive as ethically superior” (Kitzmueller and Shimshack 2012, p. 52).

  4. Husted et al. (2014) provide fresh insights that CSR engagement interacts with geographic location in shaping a firm’s cost of equity financing.

  5. In this regard, Servaes and Tamayo (2013) find a positive effect of CSR on financial performance only for firms with high customer awareness. Supportive evidence is also provided by Sen and Bhattacharya (2001) who show that the extent to which consumers perceive congruence between the firm CSR and their own characters mediates the positive effect of CSR initiatives on consumers’ behavior (e.g., purchase of company’s products).

  6. We are indebted to an anonymous referee for this discussion.

  7. Becker et al.’s (2011) analysis of the local dividend clientele is based on a sample of pooled cross-sections for 1980, 1990, and 2000.

  8. Our research question (i.e., the impact of the firm’s local stakeholder demand on CSR) is unlikely to suffer from endogeneity because firms do not choose their headquarters locations in order to engage in CSR initiatives.

  9. CHRN is measured by the value-weighted average of the fraction of institutional investors’ portfolios that are invested in the firm’s industry. CHRN is equivalent to Gaspar et al.’s (2005) proxy of institutional investors’ churn rate: \( CHRN_{k,t} = \frac{{\mathop \sum \nolimits_{i = 1}^{{N_{k,t} }} \left| {S_{k,i,t} P_{i,t} - S_{k,i,t - 1} P_{i,t - 1} - S_{k,i,t - 1}\Delta P_{i,t} } \right|}}{{\mathop \sum \nolimits_{i = 1}^{{N_{k,t} }} \frac{{S_{k,i,t} P_{i,t} - S_{k,i,t - 1} P_{i,t - 1} }}{2}}}, \)where N k,t is the number of firms included in institutional investor k’s portfolio in quarter t; S is the number of firm I's shares held by institutional investor k in quarter t; and P i,t is firm i's share price in quarter t. A higher churn rate indicates a shorter investment horizon. We use the CDA/Spectrum database, which compiles the 13F filings, to compute investment horizon of institutional investors.

  10. We collect data on industry unionization data from the Union Membership and Coverage Database (www.unionstats.com). This database was constructed by Hirsch and Macpherson (2003) and has been used by Klasa et al. (2009) and Hilary (2006), among others.

  11. Data on companies’ zip codes are obtained from Compustat North America. The distance between two points is computed using their latitudes and longitudes and the standard great circle distance formula to compute the distance d (see Table 7).

  12. Rubin (2008) and Di Giuli and Kostovetsky (2013) find that firms with high (low) CSR ratings tend to be located in states with Democratic (Republican) majorities.

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Correspondence to Najah Attig.

Appendix

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Table 7 Variables description

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Attig, N., Brockman, P. The Local Roots of Corporate Social Responsibility. J Bus Ethics 142, 479–496 (2017). https://doi.org/10.1007/s10551-015-2757-3

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Keywords

  • Social conformity
  • Corporate social responsibility (CSR)
  • Corporate valuation
  • Local residents
  • Philanthropy