CSR as Insurance: Its Limitations and Risk of Backfiring

• In Event: 5.01 Corporate Social Responsibilities

Abstract

This study extends earlier research regarding the effect that disclosing a corporate social responsibility (CSR) related focus has on a firm’s investment attractiveness. We first test the generalizability of the CSR “insurance effect” that has been documented in prior studies. We predict that the insurance effect is limited to protecting CSR-focused firms from the effects of an ordinary (non-CSR) failure, and will provide no protection when a failure is related to corporate social responsibility. Second, we test for a potential “backfire effect,” hypothesizing that in the case of a CSR-related failure, investors will react more negatively to a CSR-focused firm than to a traditional firm that has not disclosed a commitment to CSR. Our results support the hypothesized limitation of the insurance effect, but not the proposed backfire effect. Specifically, we find evidence of the insurance effect for CSR-focused firms experiencing an ordinary failure, but not in the case of a CSR-related failure. Unlike firms with a more traditional focus, CSR-focused firms have lower investment intention ratings following CSR-related failures than after non-CSR failures. Thus, the insurance-like protection found for firms having a CSR focus does not generalize to CSR-related product failures. As predicted by the backfire effect, investors’ assessments are lower for CSR firms than non-CSR firms in the case of a CSR-related failure; however the difference is not statistically significant. Finally, we document two mechanisms through which the limited insurance effect occurs: investors’ perceptions of the firm’s reputation and of its management’s reputation. Our results suggest that the insurance effect is not a panacea for dampening the penalties associated with business missteps, as well as add to our understanding of the mechanisms through which disclosed CSR commitment influences a firm’s attractiveness to investors.

Authors

• Leila Emily Hickman, University of New Mexico

• Bernard Wong-On-Wing, Washington State University