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Do firms adjust their payout policy to public perception of their social irresponsibility?
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Companies are under increasing pressure to manage their reputation on environmental, social, and governance (ESG) issues. Auditors are a potential source of ESG risk management expertise and assurance due to a deep understanding of their client’s ESG-related reputation risk (“ESG risk”) and their assurance reporting expertise. However, provision of nonaudit services by the external auditor is controversial and public accountants are still defining their role in ESG risk control and reporting. We explore whether auditors help companies manage heightened ESG risk in times of reputation crisis, using abnormal negative ESG-related media coverage as a measure of “tainted reputation.” Findings show a positive association between tainted reputation and nonaudit services and between the interaction of tainted reputation and nonaudit services with future firm value. The positive interaction persists when we consider a proxy for other ESG risk management activities in our analyses and for other measures of ESG risk management effectiveness (future stock returns and future tainted reputation). Subsample analyses indicate that results are driven by companies audited by ESG industry specialist auditors, that the association between tainted reputation and nonaudit services is driven by companies owned by institutional shareholders, and that inferences from our results may not hold when ESG risk is dominated by its social component. Using restatements as a proxy, we find no evidence to suggest that the interaction of tainted reputation and nonaudit services is associated with impaired audit quality. Findings demonstrate an empirical linkage between tainted reputation and nonaudit services that is positively associated with future firm value measures.
This study empirically investigates the dismissal of U.S. CEOs following negative media coverage of environmental, social, and governance (ESG) practices. Extending related literature on the media, ESG, and CEO dismissal, I develop a theoretical framework that considers the media as an influential third party that forms and reflects public opinion about ESG issues. In this role, the media reduces information asymmetry by providing cues on their relative salience and prompting corporate directors to attribute firm-level ESG issues to the CEO, regardless of their involvement in the misconduct. Findings confirm this framework and particularly suggest that coverage of issues in prominent media sources is more likely to result in CEO dismissal. Further, companies that have made public commitments to ESG oversight and those with stronger monitoring are more likely to dismiss the CEO following negative coverage of ESG issues. Overall, this study builds an understanding of how contemporary boards approach the uncertain CEO dismissal decision amidst media coverage of ESG- related misconduct and reflects a shifting norm towards ESG integration at the board-level.
Past research on recruitment has shown that employer image predicts job seekers’ perceptions of organizational attractiveness. We contribute to this body of work by examining job seekers’ reactions to a market-dominant employer that has suffered from a case of corporate social irresponsibility (CSI). We show that job seekers’ reaction is buffered in the case of dominant employers’ wrongdoing. This effect is stronger for job seekers who are very interested in working in the dominant employers’ industry. Market dominance, however, reduces the negative impact of CSI only under certain circumstances. We find that market dominance provides a buffer against the negative effect of CSI only when (1) CSI is directly relevant to the domain of performance of the organization and (2) job seekers feel very certain about their attitudes toward the organization. In two experiments with participants actively looking for employment at the time of study, we tested a model of moderated mediation examining how market dominance and CSI influence perceived employer ethicality and perceived employer competence. These two variables, in turn, explain how job seekers form perceptions of organizational attractiveness. This is the first study to explore how job seekers react to potential employers that are dominant in a market but have suffered from a CSI incident. The study identifies the boundary conditions that explain why sometimes market-dominant employers can emerge relatively unscathed in the eyes of job seekers following CSI. The research opens important managerial implications concerning the recruitment efforts of organizations that have suffered from CSI.
This paper examines how corporate social responsibility (CSR) affects the level of financial distress risk (FDR). Using a sample of 1201 US-listed firms during 1991–2012, our results indicate that firms with higher CSR levels have lower FDR, suggesting that a better CSR performance makes firms more creditworthy and have better access to financing, which is rewarded with less financial defaults. This finding is robust to using alternative proxies of FDR, to controlling for potential endogeneity, and is mainly driven by the community, diversity, employee relations, and environmental dimensions of CSR. Moreover, this relationship is more prevalent in firms with strong governance mechanisms and high product market competition. It is also more exacerbated for less distressed firms and during non-crisis periods. Overall, our findings suggest that the adoption of CSR practices comes with less distress and default risks, likely leading to a more attractive corporate environment, better financial stability and more crisis-resilient economies.
Companies are increasingly held accountable for their corporate social irresponsibility (CSI). However, the extent to which a CSI event damages the firm largely depends on the coverage of this event in high-reach news media. Using the theory of news value developed in communications research, the authors explain the amount of media coverage by introducing a set of variables related to the event, the involved brand, and media outlet. The authors analyze a sample of 1,054 CSI events that were reported in 77 leading media outlets in five countries in the period 2008–2014. Estimation results reveal many drivers. For example, the number of media covering the story may be 39% higher for salient and strong brands. 80% more media report the event if a foreign brand is involved in a domestic CSI event. When a brand advertises heavily or exclusively in a news medium, this reduces the likelihood of the news medium to cover negative stories about the brand. The average financial loss at the U.S. stock market due to a CSI event amounts to US$321 million. However, the market reacts to the event only if 4 or more U.S. high-reach media outlets report on the event.
Society increasingly demands corporations to be accountable for their past misbehaviours. Some corporations engage in forgetting work with the aim of avoiding responsibility for their wrongdoings. We argue that whenever social actors have their past actions called into question and engage in forgetting work, an ethics of remembering takes place. A collective project of social forgetting is contingent on the emergence of coordinated actions among players of an industry. Similarly, sustained efforts of forgetting work depend on the continuity of the project through various generations of employees, which presumes the existence of frameworks of remembering in place. We analyzed this paradox through a historical case study of the U.S. tobacco industry. We conclude that forgetting work may be a double-edged sword. It might be beneficial in the short run, to the extent that corporations can successfully maintain the public ignorance about their deceitful pasts. In the long run, however, it creates additional layers of historical irresponsibility and may turn into a compounded liability in the event the memory of the collective strategy of social forgetting becomes public.
While academic research has made remarkable progress in understanding corporate social responsibility (CSR), we have scant understanding of corporate social irresponsibility (CSiR). This paper adopts a stakeholder‐agency perspective towards CSiR to ask two related questions: (1) What board‐level structures can monitor management to reduce CSiR? and (2) What are the conditions that render board monitoring more effective? Employing a unique objective measure of CSiR and a sophisticated system generalized method of moments with dynamic panel model on a sample of publicly listed firms in the USA between 2002 and 2015, this paper demonstrates how firms with a specific board‐level governance bundle (i.e. a large, more independent board, with a board CSR committee, a higher proportion of women within boards with frequent director activity) are better equipped to reduce irresponsible behaviours, both in terms of number of irresponsible incidents as well as in terms of their economic costs to the firm. Moreover, the effectiveness of this governance bundle sustains under conditions of high institutional ownership and high board remuneration. This paper has implications for CSR and corporate governance literatures, as well as for managers and policymakers.
This paper presents an industry equilibrium model where firms have a choice to engage in corporate social responsibility (CSR) activities. We model CSR as an investment to increase product differentiation that allows firms to benefit from higher profit margins. The model predicts that CSR decreases systematic risk and increases firm value and that these effects are stronger for firms with high product differentiation. We find supporting evidence for our predictions. We address a potential endogeneity problem by instrumenting CSR using data on the political affiliation of the firm’s home state.
This paper was accepted by Gustavo Manso, finance.
Scholars hypothesize that retaliations against corporate social irresponsibility (CSI) are more likely when observers share the social identity of the victims. We present a model that explains in-group bias against irresponsibility and identify collective narcissism as a moderator of this effect. Experiment 1 demonstrates that the effect of identity on retaliations is mediated by the perceived similarity of the victims which reinforces feelings of sympathy towards the victims and anger towards the corporation. These emotions drive stakeholders' attitudes and retaliations. Our study shows that appraisals of the victims of CSI are an important antecedent of stakeholders' emotions and behavioural intentions. Our evidence also demonstrates that sympathy, an emotion neglected by past research in this area, has a unique effect on individuals' reactions. Experiment 2 demonstrates that social identity biases in individual punitive intentions are moderated by individuals' level of collective narcissism. Collective narcissists see out-group victims as very dissimilar from the self, whereas individuals with low levels of collective narcissism do not differentiate between victims of CSI on the basis of their identity. We extend knowledge on stakeholders' reactions to CSI and offer insights to organizations promoting campaigns against irresponsible behaviour or managing the fallout from cases of corporate irresponsibility.
Banking scandals, accounting fraud, product recalls, and environmental disasters, their associated reputational effects as well as company response strategies have been well reported in the literature. Reported crises and scandals typically involve one focal company for example BP and the 2010 Deepwater Horizon accident. As business practices change and company supply chains become more complex and interlinked, there is a greater risk of collective crises where multiple companies are associated with the same scandal. We argue that companies are likely to behave differently in a group setting compared to when faced with a crisis individually. Using an inductive approach, we examine the case of the Rana Plaza building collapse. We find that organizations with a history of similar crises adopt defensive strategies and communicate much later compared to organizations which adopt accommodative strategies. Contrary to the individual case, in a collective crisis accommodative strategies result in more negative reputational damage and a higher burden of responsibility. We propose that the relationship between crisis response strategy and organization reputation is moderated by the crisis setting. We extend the logic of crisis management and corporate reputation to incorporate the case of a collective crisis.
Keywords
Collective crisis Corporate social responsibility Corporate reputation Crisis management Rana Plaza Situational crisis communication theory
We examine the impact of political risk on firms’ payout policy. Using a large international sample across 35 countries over the period from 1990 to 2008, we find that global political crises raise the market perceived uncertainty and cost of external financing. Using crisis events as a proxy for political risk, we document that past dividend payers are more likely to terminate dividends and that non-payers are less likely to initiate dividends during periods of high political risk. These findings suggest a precautionary incentive of managers in response to political shocks. Further analysis shows that the effect of political risk on payout policy is stronger for multinational corporations, but can be attenuated by country-specific institutional settings, such as more stable political systems and stronger investor legal protection.
This research addresses consumers' willingness-to-punish the corporate brand for corporate social irresponsibility (CSI). It is supported by the extant literature on consumer stakeholders, corporate brands, brand personality, regulatory fit, and psychological contract, as well as by punishment in psychology and philosophy, which are new to the marketing literature. Using an experimental design with a control group, this research examines consumers' willingness-to-reward and its converse willingness-to-punish a corporate brand under three treatment conditions of socially responsible, socially irresponsible, and environmentally friendly. Data were collected on four outcome variables of willingness-to-punish, willingness-to-reward, brand attitude, and purchase intention for each treatment group. MANOVA results indicated that there were systematic differences in the levels of outcomes among the four groups. Discriminant function analysis found the socially irresponsible group was statistically significantly different from the other three experimental groups for all four outcome variables. Consumers dealing with socially irresponsible corporate brands were more likely to punish and less likely to reward than consumers in the other three treatment conditions. This study illustrates the latent negative impact from CSI activities on four important dimensions of consumer response. The findings indicate there is a pragmatic need for corporate brand strategists to recognize consumers' willingness-to-punish the corporate brand and the subsequent necessity to avoid activities that consumers may perceive to be socially irresponsible.
A unique theoretical framework for explaining consumer word of mouth and protest behaviors against corporate irresponsibility is developed and tested. Through field surveys with adult consumers, this study demonstrates how consumers’ negative moral emotional responses to corporate infractions instigate, in combination with other-regarding virtues, negative word of mouth and protest toward the corporation. Negative moral emotions include contempt, anger, and disgust; whereas other-regarding virtues entail justice, beneficence, and communal cooperation. The results provide scholars and managers with means of improving their understanding and handling of consumers’ reactions to corporate irresponsibility.
This paper explores the strategies organizations use to demonstrate their accountability for biodiversity and legitimize their impact in this area through the use of techniques of neutralization. Neutralization aims to manage stakeholder impressions on very socially sensitive issues. Based on the content analysis of 148 sustainability reports from mining organizations, the study sheds light on the successful use of rhetoric in reports on non-measurable and potentially unaccountable issues. Specifically, the study shows that mining organizations use four main techniques of neutralization when they explain their impact on biodiversity. When they address stakeholders, they defend their social legitimacy and environmental responsiveness using one of the four techniques: they claim of a net positive or neutral impact on biodiversity, they deny that they have a significant impact, they distance themselves from the impact of their actions, and they play down their responsibilities. The study contributes to the literature on corporate sustainability and accounting for stakeholders. It focuses on under-researched issues such as the management of biodiversity and the tactics used to rationalize negative impacts. The study also bridges the gap between theories about organizational legitimacy, impression management, and techniques of neutralization. /An abstract-video of the article is available at the following address: https://www.youtube.com/watch?v=rVUSox_RYGA&t=21s
This collection is the first comprehensive selection of readings focusing on corporate bankruptcy. Its main purpose is to explore the nature and efficiency of corporate reorganisation using interdisciplinary approaches drawn from law, economics, business, and finance. Substantive areas covered include the role of credit, creditors' implicit bargains, non-bargaining features of bankruptcy, workouts of agreements, alternatives to bankruptcy, and proceedings in countries other than the United States, including the United Kingdom, Europe, and Japan.
Firms modify their payout policy in anticipation of future litigation costs. We examine a comprehensive sample of U.S. corporate lawsuits and find that firms facing significant litigation risk pay lower dividends, and in some cases omit dividends while distributing more cash through share repurchases. Litigation risk changes the distribution of payouts but not the total payout yield as the increase in share repurchases offsets the decrease in dividends. Cash-poor firms cut share repurchases when settlement costs are incurred. The results suggest that firms at a higher risk of litigation increase their payout flexibility.
This study examines the impact of environmental, social, and governance (ESG) reputational risk on a sample of listed firms’ market longevity. Using a novel panel dataset consisting of US firms over the period 2007–2019, we perform dynamic empirical analysis to quantify the underlying relationships between firms’ ESG reputational risk and market longevity. We argue that ESG reputational risk has a negative impact on firm growth opportunities, mitigating thus market longevity. The empirical findings survive several robustness checks, providing useful managerial implications for stakeholders and market participants..
We investigate how reputational risk arising from traditional and online media coverage of Corporate Social Irresponsibility (CSI) conducts affects the cost of borrowing and what are the factors that can mitigate or amplify this effect. First, we find that negative media attention increases bank loan costs and show that this result is robust to endogeneity concerns and alternative measures of key variables. Next, we find that the impact of negative media attention on bank loan costs is more severe if the misconduct involves borrowers with prior high Corporate Social Responsibility (CSR) reputations, while it is smaller when prior lending relationships exist between the lead arranger and the borrower.
This paper offers an integrative review of the past work on consumers’ reactions to corporate social irresponsibility (CSI). The study summarises and integrates the existing research into two conceptual models: a punitive response to CSI and a nonpunitive response to CSI. In each model, the study reviews relevant antecedents, mediators, and moderators. The paper also identifies gaps in the literature and problematizes several key research assumptions that have gone unquestioned in earlier accounts of consumers’ reactions to CSI. The paper contributes to the existing research by offering a parsimonious and yet comprehensive conceptualization of which, when, why and how consumers punish (or do not punish) firms following CSI. The analysis further leads to the identification of a research agenda to continue advancing our understanding of how consumers respond to CSI.
This study shows that skilled-labor-intensive firms have lower dividend payouts. A one-standard-deviation increase in skilled labor intensity on average results in a 0.74 percentage point decline in the propensity to pay dividends and a 0.72 percentage point decrease in dividend payout ratio. Our evidence suggests that greater labor adjustment costs (LACs) of skilled labor increase future cash flow uncertainty, which discourages managers from paying dividends. Consistently, we find that an exogenous increase (decrease) in LACs following the shock of 2017 H-1B policy changes (the shock of 2005 Hurricane Katrina) leads treated firms to lower (heighten) their dividend payouts. Collectively, these findings indicate a strong dampening effect of LACs on corporate dividend payouts.
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We investigate the extent to which corporate reputation risk influences cash holdings for US listed firms over the period 2007–2018. Our results show that firms having a high reputation risk hold significantly more cash. This documented relationship persists even after controlling for other determinants of cash holdings, including corporate social responsibility performance, explicitly. Using a series of analyses, we show that this relationship is not driven by endogeneity problems. Further, we find that the positive relationship between reputation risk and cash holdings is more pronounced for firms with more financing constraints and agency problems, and for growth, mature and shake-out firms. In an additional test, we show that firms having a low reputation risk are associated with a higher marginal value of cash than are their high reputation risk counterparts. Overall, we provide robust evidence that reputation risk matters for corporate cash holdings.
We examine whether and how payout policy affects credit risk using evidence from the credit default swap (CDS) market. CDS spreads increase substantially in response to announcements of dividend cuts, especially during recessions and among firms experiencing financial distress. CDS spreads also react more strongly to permanent and less anticipated dividend cuts. The size of the CDS reaction is more pronounced for financial firms, which are inherently more opaque. In contrast, CDS spreads react weakly to dividend raises and share repurchases. The results show that the information effect of dividend changes dominates the wealth-transfer effect.
This paper was accepted by Kay Giesecke, finance.
Extensive research on the financial costs and risks associated with firms targeted for litigation assumes that being sued negatively impacts firm reputation. Yet, research on the consequences of corporate litigation has focused almost exclusively on the financial ramifications associated with being defendants, solely equating reputational costs with financial costs. I challenge this overly narrow view of reputation and utilize two unique datasets-one for legal actions and the other one comprising affective content analysis across 2000 media sources-for the S&P 500 firms, across 16 years of data, to explore the media reputation effects of corporate litigation. The novel findings of this study show how the affective tone of media reporting can reflect negative normative evaluations of alleged corporate illegality that can last a long time; I find that when firms are identified as corporate defendants, overall sentiment and optimism towards these firms suffer, while affective conflict about the focal firm is increased, for at least 1 year and even beyond. These findings strongly inform research on corporate wrongdoing and litigation as well as impression management research and raise the need to expand the view of the costs of corporate litigation, beyond financial implications.
Environmental regulation is a polarizing issue. In 2014, a bill came to a vote in the U.S.
House of Representatives that would limit the powers of the Environmental Protection
Agency. This empirical note identifies the characteristics that influenced the voting
behavior of House Representatives on this bill. Political party, educational background,
the location quotient of the mining industry in the representative’s state, and the amount
of emissions in the Representative’s state are considered. A member’s political party is
the primary factor influencing voting behavior but the location quotient of the mining
industry also plays an important role.
Contrary to signaling models’ central predictions, changes in the level of cash flows do not empirically follow changes in dividends. We use the Campbell (1991) decomposition to construct cash-flow and discount-rate news from returns and find the following: (1) both dividend changes and repurchase announcements signal changes in cash-flow volatility (in opposite directions); (2) larger cash-flow volatility changes come with larger announcement returns; and (3) neither discount-rate news, nor the level of cash-flow news, nor total stock return volatility change following dividend changes. We conclude cash-flow news—and not discount-rate news—drive payout policy, and payout policy conveys information about future cash-flow volatility.
Costs are sticky on average, i.e., they fall less for sales decreases than they rise for equivalent sales increases. We examine the effect of this asymmetric cost behavior on a firm's dividend policy. Given investors’ aversion to dividend cuts, we predict that firms with higher resource adjustment costs and stickier costs pay lower dividends than their peers because they are less able to sustain any higher level of dividend payouts in the future. We find evidence consistent with this prediction. Further, using a regression discontinuity design that exploits variation in labor adjustment costs generated by close‐call union elections, we provide evidence suggesting that the negative relation between cost stickiness and dividend payouts is driven by resource adjustment costs. Our paper sheds new light on the determinants of dividend policy and demonstrates the role of cost behavior in corporate decisions.
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Product failures often lead consumers to engage in vindictive behaviors. Dissatisfied consumers can easily share their negative product/service experiences with others online and often deliberately express their frustration in ways that harm companies (e.g., brand sabotage). Hence, minimizing such behaviors after a product failure is critical to maintaining long-term customer relationships for companies. The present research demonstrates how a company’s corporate social responsibility (CSR) engagement mitigates vindictive consumer behaviors in response to a product failure from the company. We suggest that the buffering effect of CSR engagement is driven by consumers’ feelings of gratitude for a priori pro-social effort and its impact on the perceived trustworthiness of the company. We also propose failure attribution (i.e., internal vs. external) as a boundary condition that moderates the buffering effect through consumer gratitude and trustworthiness.
We examine the cognitive and motivational process underlying the effect of consumers’ conservatism on their corporate social responsibility (CSR) perceptions of irresponsible versus responsible companies. Building on political psychology and system justification theory, we identify and test market system justification (MSJ) as a motivated social cognition underlying ideological differences in CSR perceptions and reactions. Using four empirical studies, we find that the relatively high MSJ of conservatives (compared to that of liberals) results in less critical CSR perceptions of irresponsible companies and, thus, in less penalizing reactions. Moreover, we find that conservatism influences CSR perceptions of irresponsible companies more strongly than of responsible companies because MSJ affects only perceptions of market behaviors that threaten notions of fair markets (i.e., low CSR). The results improve predictions of consumers’ perceptions and reactions to responsible and irresponsible companies.
In recent years, investors have begun to value companies’ reputations through their environmental, social, and governance (ESG) practices. ESG risk can affect business processes and controls and can heighten financial risk and threaten a firm’s survival. This study examines whether and how the severity of media coverage of a firm’s negative ESG issues (tainted ESG reputation) is associated with audit effort and audit quality. I find that auditors manage the higher expected engagement risk conveyed by tainted ESG reputation by applying higher audit effort. Next, I observe that the increased effort is associated with auditors likely detecting and requiring adjustments for material misstatements and that tainted ESG reputation is associated with fewer misstatements (i.e., reduces poor audit quality). The association between tainted ESG reputation and audit quality is driven primarily by increased audit report lag, not by increased audit fees. Further, I find that tainted ESG reputation is positively associated with audit effort and reduces poor audit quality for up to three years. The results also show that the audit effort and audit quality effect vary across the three components of ESG.
Yes. We show that dividend changes contain information about highly persistent changes in future economic income. Three methodological differences lead us to different conclusions from the extant literature: (i) we use an “event window approach” to cleanly delineate earnings after dividend changes from those before, (ii) we use alternative earnings measures to control for endogenous investment and asset write-downs surrounding dividend changes, and (iii) we control for the nonlinear relation between dividend changes and market reactions. Our results suggest dividend announcement returns reflect information about the level of permanent earnings, though the timing of the information content is difficult to reconcile with traditional signaling models.
SYNOPSIS
We use new data to examine auditor response to negative media coverage of client environmental, social, and governance (ESG) practices. This coverage can be indicative of an increased risk of material misstatement, which is an important assessment in client retention and pricing decisions. Specifically, media criticism can threaten a client's financial condition, as well as reveal management effectiveness and integrity issues that are further compounded by negative attention and related financial problems. We therefore predict that auditors will notice and incorporate media-provided ESG information in their risk response, which has not been examined by prior research. Supporting this prediction, we find that ESG-related negative media coverage of an audit client is associated with a higher likelihood of auditor resignation and increased audit fees. This response is incremental to the issues that underlie this media coverage. Overall, these findings identify an additional economic incentive for companies to avoid poor ESG practices.
The current research examines the effects of individualizing moral foundations (i.e., fairness and care) on consumer boycotts against the U.S. company that is entangled in an alleged sweatshop issue at a supplier’s factory in a developing country. On the basis of moral foundations theory, the current study tests six hypotheses that demonstrate the theoretical mechanism by which individualizing moral foundations have an impact on consumer boycott intentions through blame attributions and anger. Using a representative U.S. sample of 1,124 people, a national survey was conducted to test the proposed structural equation model. As predicted, results of mediation analysis showed that individualizing foundations, consisted of the fairness/care values, led to boycott intentions fully mediated by blame attribution and anger.
We examine the role of carbon risk in dividend policy, and how its effect varies between imputation (paying franked dividends) and classical (paying unfranked dividends) tax environments in the unique experimental setting in Australia. We find that the probability of paying dividend and dividend payout ratio is lower for firms in the highest-emitting industries (polluters) relative to non-polluters, subsequent to ratification of the Kyoto Protocol. While the post-Kyoto reduction in the likelihood of paying dividend is not significantly different, the reduction in payout ratio is smaller in the imputation environment than classical tax system, highlighting the significance of imputation tax environment only on the impact of carbon risk on dividend payout rather than decision to pay. We further document that the post-Kyoto reduction in dividend payout of polluters is driven by their relative increase in earnings uncertainty. The evidence suggests a causal influence of carbon risk on firm dividend policy.
Using a sample of 22,839 US firm-year observations over the 1991–2012 period, we find that high CSR firms pay more dividends than low CSR firms. The analysis of individual components of CSR provides strong support for this main finding: five of the six individual dimensions are also associated with high dividend payout. When analyzing the stability of dividend payout, our results show that socially irresponsible firms adjust dividends more rapidly than socially responsible firms do: dividend payout is more stable in high CSR firms. These findings are robust to alternative assumptions and model specifications, alternative measures of dividend, additional control, and several approaches to address endogeneity. Overall, our results are consistent with the expectation that high CSR firms may use dividend policy to manage the agency problems related to overinvestment in CSR.
This paper investigates the complex relationship between the financial risk of firms and their engagement in corporate social responsibility (CSR), measured by Thomson Reuters ASSET4 environmental, social, and governance scores. Financial risk is estimated by the usual proxies: systematic, firm-specific, and total risks. Analyzing an international sample of 23,194 firm-year observations from 2003 to 2012 by using a panel vector autoregressive (VAR) model with generalized method of moments (GMM) estimations, we demonstrate a virtuous circle between corporate social performance (CSP) and risk (specific and total). More specifically, we show that a firm's good social and governance performance reduces its financial risk and thereby reinforces its commitment to good governance and environmental practices.
Research on firm performance and corporate social performance (CSP) has recently broadened to concurrently evaluate corporate social irresponsibility (CSI) with corporate social responsibility (CSR). However, little is known about the underlying mechanisms that impact the performance relationship, particularly the duration of the influence of CSR initiatives and CSI incidents and the impact of the interaction of CSR and CSI on firm performance. This research expands understanding by examining the combined impact of “doing good” and “doing bad” to allow a more robust examination of a firm's regime in pursuing a better strategic position through social performance. We examine the effects of CSR and CSI and their combined effects using a moderating high-low matrix. The empirical findings provide two uniquely interesting findings: CSI incidents have a longer enduring effect than CSR initiatives and those firms doing little CSR and little CSI perform better than firms engaging in high levels of both.
Research summary: This article explores the relationship between corporate social irresponsibility (CSI) and financial risk. We posit that media coverage of CSI generates risk by providing conditions that increase the potential for stakeholder sanctions. Through analyzing an international panel of 539 firms during 2008–2013, we find that firms receiving higher CSI coverage face higher financial risk. We show that the reach of the reporting media outlet is a critical condition for this relationship. Once the outlet has a high reach, the severity of CSI coverage is a boundary condition that further reinforces the effect. Our findings complement existing theory about the risk‐mitigating effect of corporate social responsibility by illuminating the risk‐generating effect of CSI coverage. For executives, these insights suggest complementary strategies for corporate risk management.
Managerial summary: This article examines the effect of negative news on financial risk. It shows that negative media articles regarding environmental, social, and governance (ESG) issues increase a firm's credit risk. It also provides a detailed analysis of the impact of an article's reach and severity, i.e., how many readers are exposed to the article and how harshly it criticizes the firm. The results allow to quantitatively assess the risk that emanates from negative ESG news. For executives, three strategies are derived for limiting a firm's exposure to this risk: balancing corporate social responsibility programs with operational safety programs, reporting suboptimal environmental and social performance transparently and proactively, and avoiding acquisition targets and markets with a legacy of negative news. Copyright © 2017 John Wiley & Sons, Ltd.
Using a novel sample of 83,260 lawsuits filed in US Federal District courts, we extend the results of prior studies investigating market value and reputational losses due to corporate misconduct. We examine alternative explanations for the loss in market value, such as media coverage, the expectation of subsequent litigation, and the defendant's willingness to settle, in addition to previously documented factors. Our results suggest that with the exception of securities litigation, this loss in market value can be attributed to these alternative explanations rather than to reputational consequences. This finding is confirmed by several indirect measures of reputation loss.
During the 2008-2009 financial crisis, firms with high social capital, measured as corporate social responsibility (CSR) intensity, had stock returns that were four to seven percentage points higher than firms with low social capital. High-CSR firms also experienced higher profitability, growth, and sales per employee relative to low-CSR firms, and they raised more debt. This evidence suggests that the trust between the firm and both its stakeholders and investors, built through investments in social capital, pays off when the overall level of trust in corporations and markets suffers a negative shock.
This study outlines and tests two corporate social responsibility (CSR) views of dividends. The first view argues that firms are likely to pay fewer dividends because CSR activities lower the cost of equity, encouraging firms to invest or hoard cash rather than to pay dividends. The second view suggests that CSR activities are positive NPV projects that increases earnings and hence dividend payouts. The first (second) view predicts that firms with a stronger involvement in CSR activities should be associated with a lower (higher) dividend payouts. The finding supports the second view and is robust.
Abstract This study investigates whether banks use dividends to signal asset quality and liquidity to their debtholders. We exploit an exogenous shock to the asset opaqueness and perception of risks of Brazilian banks caused by the global financial turmoil of 2008. Our empirical identification takes advantage of the cross-sectional heterogeneity of types of depositors in Brazilian banks and the existence of several owner-managed banks (for which shareholder-targeted signaling is implausible) to identify that information-sensitive depositors (institutional investors) are targets of dividend signaling by banks. These costly signaling efforts are particularly strong during financial crises when asset opaqueness, informational asymmetry and depositors’ concerns regarding bank liquidity are exacerbated. From a policy perspective, our results favor the imposition of limits on bank dividends during financial crises, because the banks’ need to signal their financial health through dividends during crises intensifies the pro-cyclical effects of bank capital on lending.
I investigate the effects of firms' proportion of fixed and variable costs on their payout policy and find that firms with higher fixed costs have significantly higher volatility in their future cash flows and more variable future operating incomes. These firms pay a lower fraction of their operating income in dividends and share repurchases. Finally, these firms return higher fractions of their payouts via share repurchases because this method offers greater flexibility. The results are robust to several alternate specifications and firm-level controls, and show that firms' cost structures play a significant role in payout policy choices.
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.
We investigate the effect of corporate sustainability on organizational processes and performance. Using a matched sample of 180 U.S. companies, we find that corporations that voluntarily adopted sustainability policies by 1993—termed as high sustainability companies—exhibit by 2009 distinct organizational processes compared to a matched sample of companies that adopted almost none of these policies—termed as low sustainability companies. The boards of directors of high sustainability companies are more likely to be formally responsible for sustainability, and top executive compensation incentives are more likely to be a function of sustainability metrics. High sustainability companies are more likely to have established processes for stakeholder engagement, to be more long-term oriented, and to exhibit higher measurement and disclosure of nonfinancial information. Finally, high sustainability companies significantly outperform their counterparts over the long term, both in terms of stock market and accounting performance.
This paper was accepted by Bruno Cassiman, business strategy.
Product-harm crises (recalls) carry negative product information that adversely affects brand preference and advertising effectiveness. This negative impact of product-harm crises may differ across recall events depending on media coverage of the event, crisis severity, and consumers’ prior beliefs about product quality. We develop a state space model to capture the dynamics in brand preference, advertising effectiveness, and consumer response to product recalls; integrate it with a random coefficient demand model; and estimate it using a unique data set containing 35 automobile brands, 193 auto sub-brands, and 359 recalls during 1997–2002. Our results reveal that consumers respond more negatively to product recalls with greater media attention, more severe consequences, and higher perceived product quality. Furthermore, they show that sub-brand advertising effectiveness declines by a greater amount than parent-brand advertising and the decline in effectiveness of the recalled sub-brand’s advertising spills over to other sub-brands under the same parent brand.
This paper was accepted by Pradeep Chintagunta, marketing.
Notwithstanding the significance to organizations of external reactions to bad behavior, the corporate social responsibility literature tends to focus on the meaning of and expectations for responsible behavior, rather than on the meaning of irresponsible behavior. Here we develop a theoretical perspective that explicitly focuses on irresponsibility and that particularly helps explain attributions of social irresponsibility in the minds of the firm's observers. In contrast to approaches in the corporate social responsibility literature that tend to deemphasize the role of the individual perceiver of firm behavior in favor of emphasizing such broader social structures as value systems, institutions, and stakeholder relations, our focus is on how the social reality of external expectations for social responsibility is rooted in the perceptions of the beholder. We draw on attribution theory to describe how attributions of irresponsibility stem from the observer's subjective assessments of effect undesirability, corporate culpability, and affected party noncomplicity. We describe how those assessments affect each other and how they are influenced by the observer's perceptions of effect and firm characteristics and by the observer's social identification with the affected party or the implicated corporation. We conclude by describing the important role of frames on irresponsibility attributions.
Corporate social responsibility (CSR) is a prominent topic. Researchers frequently understand CSR as the requirement for corporations to make additional contributions to the well-being of society. Accordingly, CSR is linked with the idea of "doing good." However, beyond "doing good," corporations also have the responsibility for "avoiding bad" in order to prevent corporate social irresponsibility (CSI), such as cheating customers, violating human rights, or damaging the environment. Thus, CSR entails both "doing good" and "avoiding bad." Nonetheless, the issue of CSI and, accordingly, the responsibility for "avoiding bad" are not sufficiently addressed in the discussion of CSR. The article argues that the negligence of the issue of CSI constitutes a serious shortcoming of the current debate. The study here elaborates on the relevance of "avoiding bad" for the perceived social responsibility of corporations and provides a framework which captures the relationship between CSR ("doing good" and "avoiding bad"), CSI, and perceived CSR (pCSR).