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Market-Based Solutions to Vital Economic Issues
Research
Mar 1, 2016

Washing Away Your Sins? Corporate Social Responsibility, Corporate Social Irresponsibility, and Firm Performance

Abstract

The authors address the questions of whether and how corporate social responsibility (CSR) relates to firm performance and, in so doing, identify four mechanisms pertaining to this relationship: (1) slack resources lead to CSR (i.e., slack resources mechanism) (2) CSR improves performance (i.e., good management mechanism), (3) CSR makes amends for past corporate social irresponsibility (CSI) (i.e., penance mechanism), and (4) CSR insures against subsequent CSI (i.e., insurance mechanism). Using an integrative approach, the authors incorporate the four mechanisms in their empirical model specification. Specifically, to model the interplay among CSR, CSI, and firm performance and to test the four mechanisms simultaneously, they propose a structural panel vector autoregression specification. In support of the good management mechanism, results from an unbalanced panel data set of more than 4,500 firms and up to 19 years suggest that firms that engage in CSR are likely to benefit financially from their CSR investments. Moreover, the authors do not find support for the slack resources or the insurance mechanism. In contrast, and in support of the penance mechanism, often firms’ CSR seems to trail their CSI. However, the results also suggest that the penance mechanism is ineffective in offsetting negative performance effects due to CSI.

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