Abstract
Existing research on the financial implications of corporate social responsibility (CSR) for firms has predominantly focused on positive aspects of CSR, overlooking that firms also undertake actions and initiatives that qualify as negative CSR. Moreover, studies in this area have not investigated how both positive and negative CSR affect the financial risk of firms. As such, in this research, the authors provide a framework linking both positive and negative CSR to idiosyncratic risk of firms. While investigating these relationships, the authors also analyze the moderating role of financial leverage of firms. Overall, analysis of secondary information for firms from multiple industries over the years 2000–2009 shows that CSR has a significant effect on the idiosyncratic risk of firms, with positive CSR reducing risk and negative CSR increasing it. Results also show that the reduction in risk from positive CSR is not guaranteed, with firms having high levels of financial leverage witnessing lower idiosyncratic risk reduction.
Similar content being viewed by others
Notes
Our modeling approach (see Eqs. 2a–c) allows for lagged effects of independent variables on the positive and negative CSR-dependent variables. As such, our balanced panel has 1,728 firm-year observations instead of 1,920 firm-year observations that would be expected if we had used contemporaneous relationships in our estimations.
Table 8 in the Appendix provides the details of the items used to construct the PCSR and NCSR measures. Additionally, KLD also provides ratings on controversial business issues including: Alcohol, Gambling, Tobacco, Firearms, Military, and Nuclear Power. Since these are only rated as concerns and are not applicable to many firms, we excluded them from analysis, which is in line with existing research (e.g., Bird et al. 2007).
Human Rights include strengths and concerns related to controversies faced in operations in South Africa, Northern Ireland, Burma, Mexico, Labor Rights, Indigenous People Relations, and others. Since not all companies have operations in these locations, this information is often missing in the KLD database, and therefore we exclude it from our analysis.
We thank an anonymous reviewer for suggesting this analysis.
References
Aguilera, R. V., Rupp, D. E., Williams, C. A., & Ganapathi, J. (2007). Putting the S back in corporate social responsibility: A multilevel theory of social change in organizations. Academy of Management Review, 32(3), 836–863.
Ang, A., Hodrick, R. J., Xing, Y., & Zhang, X. (2006). The cross-section of volatility and expected returns. Journal of Finance, 61(1), 259–299.
Aupperle, K. E., Carroll, A. B., & Hatfield, J. D. (1985). An empirical examination of the relationship between corporate social responsibility and profitability. Academy of Management Journal, 28(2), 446–463.
Bae, K., Kang, J., & Wang, J. (2011). Employee treatment and firm leverage: A test of stakeholder theory of capital structure. Journal of Financial Economics, 100, 130–153.
Banerjee, S., Dasgupta, S., & Kim, Y. (2008). Buyer–supplier relationships and the stakeholder theory of capital structure. Journal of Finance, 63, 2507–2552.
Bansal, P., & Clelland, L. (2004). Talking trash legitimacy, impression management, and unsystematic risk in the context of the natural environment. Academy of Management Journal, 56(April), 57–71.
Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 771–792.
Berens, G., van Riel, C. B. M., & van Bruggen, G. H. (2005). Corporate associations and consumer product responses: The moderating role of corporate brand dominance. Journal of Marketing, 69(July), 35–48.
Bharadwaj, S. G., Tuli, K. R., & Bonfrer, A. (2011). The impact of brand quality on shareholder wealth. Journal of Marketing, 75(September), 88–104.
Bird, R., Hall, A. D., Momente, F., & Reggianni, F. (2007). What corporate social responsibility activities are valued by the market? Journal of Business Ethics, 76(2), 189–206.
Brammer, S., & Millington, A. (2008). Does it pay to be different? An analysis of the relationship between corporate social and financial performance. Strategic Management Journal, 29(12), 1325–1343.
Brown, T. J. (1998). Corporate associations in marketing: Antecedents and consequences. Corporate Reputation Review, 1(3), 215–233.
Brown, T. J., & Dacin, P. A. (1997). The company and the product: Corporate associations and consumer product responses. Journal of Marketing, 61(1), 68–84.
Carhart, M. M. (1997). On persistence in mutual fund performance. Journal of Finance, 52(March), 57–82.
Carter, C. R. (2000). Ethical issues in international buyer–supplier relationships: A dyadic examination. Journal of Operations Management, 18, 191–208.
Chatterjee, S., Lubatkin, M. H., & Schulze, W. S. (1999). Toward a strategic theory of risk premium: Moving beyond CAPM. Academy of Management Review, 24(3), 556–567.
Clarkson, M. B. E. (1995). A stakeholder framework for analyzing and evaluating corporate social performance. The Academy of Management Review, 20(1), 92–117.
Colquitt, J. A., Conlon, D. E., Wesson, M. J., Porter, C. O. L. H., & Ng, K. Y. (2001). Justice at the millennium: A metaanalytic review of 25 years of organizational justice research. Journal of Applied Psychology, 86, 425–445.
Cormier, D., & Magnan, M. (2007). The revised contribution of environmental reporting to investors’ valuation of a firm’s earnings: An international perspective. Ecological Economics, 62(3/4), 613–626.
Curran, M. M., & Moran, D. (2007). Impact of the FTSE4Global Index on firm price: An event study. Journal of Environmental Management, 82, 529–537.
Doh, J. P., Howton, S. D., Howton, S. W., & Siegel, D. S. (2010). Does the market respond to an endorsement of social responsibility? The role of institutions, information, and legitimacy. Journal of Management, 36(6), 1461–1485.
Donaldson, T., & Preston, L. E. (1995). The stakeholder theory of the corporation: Concepts, evidence, and implications. The Academy of Management Review, 20(1), 65–91.
Du, S., Bhattacharya, C. B., & Sen, S. (2011). Corporate social responsibility and competitive advantage: Overcoming the trust barrier. Management Science, 57(9), 1528–1545.
Fairfield, P. M., Sweeney, R. J., & Yohn, T. L. (1996). Accounting classification and the predictive content of earnings. Accounting Review, 71(July), 337–355.
Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25(2), 383–417.
Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33, 3–56.
Fama, E. F., & French, K. R. (2006). The value premium and the CAPM. Journal of Finance, 61(5), 2163–2185.
Fornell, C., Mithas, S., Morgeson, F. V., I. I. I., & Krishnan, M. S. (2006). Customer satisfaction and stock prices: High returns, low risk. Journal of Marketing, 70(January), 3–14.
Freeman, R. (1984). Strategic management: A stakeholder perspective. Boston, MA: Piman.
Friedman, M. (1970, September 13). The social responsibility of business is to increase profit. New York Times Magazine, pp. 32–33.
Garcia-Castro, R., Arino, M. A., & Canela, M. A. (2010). Does social performance really lead to financial performance? Accounting for endogeneity. Journal of Business Ethics, 92, 107–126.
Gaspar, J., & Massa, M. (2006). Idiosyncratic volatility and product market competition. Journal of Business, 79(6), 3125–3152.
Godfrey, P. C. (2005). The relationship between corporate philanthropy and shareholder wealth: A risk management perspective. Academy of Management Review, 30(4), 777–798.
Godfrey, P. C., Merrill, C. B., & Hansen, J. M. (2009). The relationship between corporate social responsibility and shareholder value: An empirical test of the risk management hypothesis. Strategic Management Journal, 30, 425–445.
Golub, G. H., & Van Loan, C. F. (1996). Matrix computations. Baltimore: Johns Hopkins University Press.
Goyal, A., & Santa-Clara, P. (2003). Idiosyncratic risk matters! Journal of Finance, 58(3), 975–1008.
Greene, W. H. (2008). Econometric analysis (6th ed.). Upper Saddle River, NJ: Pearson Education, Inc.
Greening, D. W., & Turban, D. B. (2000). Corporate social performance as a competitive advantage in attracting a quality workforce. Business & Society, 39(3), 254–280.
Gruca, T. S., & Rego, L. L. (2005). Customer satisfaction, cash flow, and shareholder value. Journal of Marketing, 69(July), 115–130.
Hendricks, K. B., & Singhal, V. R. (2003). The effect of supply chain glitches on shareholder value. Journal of Operations Management, 21(5), 501–522.
Henriques, D., & Sadorsky, P. (2000). The relationship between environmental commitment and managerial perceptions of stakeholder importance. Academy of Management Journal, 42(1), 89–99.
Hull, C. E., & Rothenberg, S. (2008). Firm performance: The interactions of corporate social performance with innovation and industry differentiation. Strategic Management Journal, 29, 781–789.
Ioannou, I., & Serafeim, G. (2010). The impact of corporate social responsibility on investment recommendations. Harvard Business School working paper, 11-017.
Jensen, M. C. (2002). Value maximization, stakeholder theory, and the corporate objective function. Business Ethics Quarterly, 12(2), 235–256.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.
Kale, J., & Shahrur, H. (2007). Corporate capital structure and the characteristics of supplier and customer markets. Journal of Financial Economics, 83, 321–365.
Keller, K. L. (1993). Conceptualizing, measuring, and managing customer-based brand equity. Journal of Marketing, 57(January), 1–22.
Klein, J. G., Smith, N. C., & John, A. (2004). Why we boycott: Consumer motivations for boycott participation. Journal of Marketing, 68(July), 92–109.
Kotler, P., & Lee, N. (2005). Corporate social responsibility: Doing the most good for your company and your cause. Hoboken, NJ: Wiley.
Krasnikov, A., Mishra, S., & Orozco, D. A. (2009). Evaluating the financial impact of branding using trademarks: A framework and empirical evidence. Journal of Marketing, 73(November), 154–166.
Lang, L., & Stulz, R. (1992). Contagion and competitive intra-industry effects on bankruptcy announcements: An empirical analysis. Journal of Financial Economics, 32(1), 45–60.
Liao, H. (2007). Do it right this time: The role of employee service recovery performance in customer-perceived justice and customer loyalty after service failures. Journal of Applied Psychology, 92(2), 475–489.
Lopez, M. V., Garcia, A., & Rodriguez, L. (2007). Sustainable development and corporate performance: A study based on the Dow Jones Sustainability Index. Journal of Business Ethics, 75, 285–300.
Lourenco, I. C., Branco, M. C., Curto, J. D., & Eugenio, T. (2011). How does the market value corporate sustainability performance? Journal of Business Ethics, 108(4), 417–428.
Luo, X., & Bhattacharya, C. B. (2006). Corporate social responsibility, customer satisfaction, and market value. Journal of Marketing, 70(October), 1–18.
Luo, X., & Bhattacharya, C. B. (2009). The debate over doing good: Corporate social performance, strategic marketing levers, and firm-idiosyncratic risk. Journal of Marketing, 73(November), 198–213.
Maignan, I., & Ferrell, O. C. (2004). Corporate social responsibility and marketing: An integrative framework. Journal of the Academy of Marketing Science, 32(1), 3–19.
Margolis, J. D., & Elfenbein, H. A. (2008). Do well by doing good? Don’t count on it. Harvard Business Review, 86(1), 19–20.
Mattingly, J. E., & Berman, S. L. (2006). Measurement of corporate social action: Discovering taxonomy in the Kinder Lydenberg Domini ratings data. Business and Society, 45(1), 20–46.
McGuire, J., Sundgren, A., & Schneeweis, T. (1988). Corporate social responsibility and firm financial performance. Academy of Management Journal, 31(4), 854–872.
McWilliams, A., & Siegel, D. (2000). Corporate social responsibility and financial performance: Correlation or misspecification? Strategic Management Journal, 21, 603–609.
Merton, R. C. (1987). A simple model of capital market equilibrium with incomplete information. Journal of Finance, 42(July), 483–509.
Modi, S. B., & Mishra, S. (2011). What drives financial performance—Resource efficiency or resource slack? Evidence from U.S. based manufacturing firms from 1991–2006. Journal of Operations Management, 29(3), 254–273.
Mohr, L. A., & Bitner, M. J. (1995). The role of employee effort in satisfaction with service transactions. Journal of Business Research, 32(3), 239–252.
Morgan, N. A., & Rego, L. L. (2009). Brand portfolio strategy and firm performance. Journal of Marketing, 73(January), 59–74.
O’Brien, J. P. (2003). The capital structure implications of pursuing a strategy of innovation. Strategic Management Journal, 24, 415–431.
Orlitzky, M., Schmidt, F. L., & Rynes, S. L. (2003). Corporate social and financial performance: A meta-analysis. Organization Studies, 24(3), 403–441.
Peloza, J., & Shang, J. (2011). How can corporate social responsibility activities create value for stakeholders? A systematic review. Journal of the Academy of Marketing Science, 39, 117–135.
Peng, D. X., Schroeder, R. G., & Shah, R. (2008). Linking routines to operations capabilities: A new perspective. Journal of Operations Management, 26, 730–748.
Porter, M. E., & Kramer, M. R. (2006). Strategy and society: The link between competitive advantage and corporate social responsibility. Harvard Business Review, 84(12), 78–92.
Rappaport, A. (1986). Creating shareholder value. New York: The Free Press.
Roberts, P., & Dowling, G. (2002). Corporate reputation and sustained superior financial performance. Strategic Management Journal, 23(12), 1077–1093.
Roman, R. M., Hayibor, S., & Agle, B. R. (1999). The relationship between social and financial performance. Business and Society, 38(1), 109–125.
Ruf, B. M., Muralidhar, K., Brown, R. M., Janney, J. J., & Paul, K. (2001). An empirical investigation of the relationship between change in corporate social performance and financial performance: A stakeholder theory perspective. Journal of Business Ethics, 32, 143–156.
Russo, M. V., & Fouts, P. A. (1997). A resource-based perspective on corporate environmental performance and profitability. Academy of Management Journal, 40(3), 534–559.
Sen, S., & Bhattacharya, C. B. (2001). Does doing good always lead to doing better? Consumer reactions to corporate social responsibility. Journal of Marketing Research, 38(2), 225–243.
Shin, H., & Stulz, R. M. (2000). Firm value, risk, and growth opportunities. NBER working paper no. 7808.
Sorescu, A. B., & Spanjol, J. (2008). Innovation’s effect on firm value and risk: Insights from consumer packaged goods. Journal of Marketing, 72(March), 114–132.
Srivastava, R. K., Shervani, T. A., & Fahey, L. (1998). Market-based assets and shareholder value: A framework for analysis. Journal of Marketing, 62(1), 2–18.
Surroca, J., Tribo, J. A., & Waddock, S. (2010). Corporate responsibility and financial performance: The role of intangible resources. Strategic Management Journal, 31, 463–490.
Titman, S. (1984). The effect of capital structure on a firm’s liquidation decision. Journal of Financial Economics, 13, 137–151.
Tuli, K., & Bharadwaj, S. G. (2009). Customer satisfaction and stock returns risk. Journal of Marketing, 73(November), 184–197.
Turban, D. B., & Greening, D. W. (1997). Corporate social performance and organizational attractiveness to prospective employees. Academy of Management Journal, 40(3), 658–672.
Ullmann, A. A. (1985). Data in search of a theory: A critical examination of the relationships among social performance, social disclosure, and economic performance of U.S. firms. Academy of Management Review, 10(3), 540–557.
Waddock, S. A., & Graves, S. B. (1997). The corporate social performance-financial performance link. Strategic Management Journal, 18(4), 303–319.
Wood, D. J., & Jones, R. E. (1995). Stakeholder mismatching: A theoretical problem in empirical research on corporate social performance. International Journal of Organizational Analysis, 3, 229–267.
Acknowledgments
The first author acknowledges the financial support provided by the Social Sciences and Humanities Research Council of Canada to conduct this research.
Author information
Authors and Affiliations
Corresponding author
Additional information
Saurabh Mishra and Sachin B. Modi contributed equally to the paper and are listed alphabetically.
Appendix
Appendix
See Table 8.
Rights and permissions
About this article
Cite this article
Mishra, S., Modi, S.B. Positive and Negative Corporate Social Responsibility, Financial Leverage, and Idiosyncratic Risk. J Bus Ethics 117, 431–448 (2013). https://doi.org/10.1007/s10551-012-1526-9
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10551-012-1526-9