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Can doing good lead to doing poorly? Firm value implications of CSR in the face of CSI

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Abstract

Corporate social responsibility (CSR) activities enhance firm value via strengthened stakeholder relationships. However, many firms are also involved in corporate social irresponsibility (CSI), which could lead stakeholders to judge CSR actions as insincere, subsequently damaging firm value. This study examines the pivotal role of CSI for CSR’s firm value effects. As an initial finding, the results indicate that CSR’s positive firm value effect is significantly attenuated by the presence of CSI. Offering a more fine-grained analysis, the authors elaborate on the effectiveness of CSR that relates to the same (SD-CSR) or other domains (OD-CSR) as CSI. All else equal, the results indicate that only OD-CSR enhances firm value. Depending upon the CSI context, however, SD-CSR destroys or benefits firm value and OD-CSR is more or less beneficial. By adding new aspects to the discussion about how to align doing good with doing well, the results speak to both theorists and practitioners.

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Notes

  1. These numbers refer to the sample described in Study 2.

  2. Given that the main effect of CSR on firm value has received sufficient evidence in prior empirical research (e.g., Margolis and Walsh 2003), we do not formulate a hypothesis for it.

  3. Owing to the substantial measurement modifications KLD undertook after 2009, this time period is the longest researchers have examined so far. In fact, only one study considers a comparable time frame (Kang et al. 2016).

  4. Please note that we are interested in whether the CSR effect differs across firms with or without CSI, not in whether the amount of CSI plays a role. However, we also calculate the total number of concerns as an alternative measure for CSI and replicate the results in the analysis section using this measure.

  5. We winsorize the variable firm value at the 1% level to avoid biased effects due to extreme observations in our data set (Servaes and Tamayo 2013).

  6. We observe a value of 1 for the binary variable CSI for 77% of all observations, which underlines the relevancy to examine CSR in the face of CSI. However, the high number of 1s results in a high correlation between the CSR variable and the CSR-CSI interaction and a relatively high maximum VIF. When we replace the binary CSI measure by a continuous CSI measure that captures the total number of concerns and rerun the analysis, the maximum VIF shrinks to 2.85 while all effects remain stable. Similarly, if we run the model without the CSR-CSI interaction (i.e., Model 1) all other effects remain stable while the maximum VIF is reduced to 1.77.

  7. When we replace the binary CSI occurrence measure by an alternative CSI measure that captures the total number of concerns and rerun the analysis, all effects remain stable, including the interaction effect (β = −.87, p < .05).

  8. For ease of illustration, we assume that neither of the exemplary firms engaged in other CSR or CSI activities.

  9. The task environment is the source of resource exchanges that enable a firm to meet its demands and goals (Mattingly and Berman 2006). The institutional environment is the source of normative expectations that are based on social and cultural systems of meaning. This classification is equivalent to the distinction between primary and secondary stakeholders (Godfrey et al. 2009).

  10. As is the norm (e.g., Godfrey et al. 2009; Luo et al. 2015), we use Mattingly and Berman’s (2006) domain classification and treat the environment, human rights, and community domains as a firm’s institutional environment (i.e., “secondary” domains) and the employee, corporate governance, diversity, and product domains as a firm’s task environment (i.e., “primary” domains).

  11. Major concerns are hazardous waste and regulatory problems in the environment domain; product safety, marketing/contracting concern and antitrust in the product domain; health and safety concern in the employee relations domain; controversies in the diversity domain.

  12. We compare average total assets of firm observations with CSI with average total assets of firm observations without CSI. Significant differences underline the need to correct for sample selection bias.

  13. According to our theoretical arguments, the Heckman selection model reveals significant effects for ROA and firm size as well as many significant industry dummies. The results are available upon request.

  14. Alternatively for CSI intensity, we control for CSI history—a firm’s cumulative CSI incidents in the last three years—to account for the possibility that a firm is a repeat offender. To estimate CSI history, we use a decay measure estimated as follows: \( {\mathrm{CSI}\ \mathrm{history}}_{\mathrm{it}-1} = {\raisebox{1ex}{$1$}\!\left/ \!\raisebox{-1ex}{$1$}\right.\mathrm{CSI}\ \mathrm{intensity}}_{\mathrm{it}-1} + {\raisebox{1ex}{$1$}\!\left/ \!\raisebox{-1ex}{$2$}\right.\mathrm{CSI}\ \mathrm{intensity}}_{\mathrm{it}-2} \) \( + {\raisebox{1ex}{$1$}\!\left/ \!\raisebox{-1ex}{$3$}\right.\mathrm{CSI}\ \mathrm{intensity}}_{\mathrm{it}-3} \) (Shiu 2017). The CSI history variable yields a similar effect as the CSI intensity control (γ = − .21, p < .10). All other effects remain stable. We thank an anonymous reviewer for this suggestion.

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Acknowledgement

This project was funded by the German Research Foundation (Deutsche Forschungsgemeinschaft). The authors thank Editor Robert W. Palmatier, the Associate Editor, three anonymous reviewers, Torsten Bornemann, Yasemin Boztuğ, Till Dannewald, Xueming Luo, Waldemar Toporowski, and numerous participants of the 2012 AMA Summer Educators Conference in Chicago, the 2013 AMA Winter Educators Conference in Las Vegas, and the 2013 Doctoral Colloquium at the Faculty of Economic Sciences, University of Goettingen, for providing helpful comments and suggestions for improvement throughout the stages of this project.

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  1. Faculty of Economic Sciences, University of Goettingen, 37073, Goettingen, Germany

    Isabell Lenz, Hauke A. Wetzel & Maik Hammerschmidt

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Lenz, I., Wetzel, H.A. & Hammerschmidt, M. Can doing good lead to doing poorly? Firm value implications of CSR in the face of CSI. J. of the Acad. Mark. Sci. 45, 677–697 (2017). https://doi.org/10.1007/s11747-016-0510-9

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