UC Irvine

Although there are a vast number of studies on the link between corporate social responsibility (CSR) and corporate financial performance (CFP), there is still inconsistency among past literature. In the management and strategy area, some have documented a positive relationship, some have reported a negative relationship, and others have even found no relationship between CSR and financial CFP. Unlike previous marketing literature, which examined the marketing outcomes of CSR activity, we consider the effects of CSR on financial outcomes by examining a firm's time-series stock return. Most of the previous literature that explored the effects of CSR did not distinguish corporate social irresponsibility (CSiR) from CSR. Since CSiR and CSR are a divergent construct, we treat them as separate constructs and examine the effects of responsible corporate social behavior (CSR strength) and irresponsible corporate social behaviors (CSR weakness) separately. To further explore why all firms do not benefit equally from CSR initiatives, we consider time-specific and firm-specific conditions.

In this study, we investigate 4 questions to figure out boundary conditions under which CSR initiatives can positively or negatively affect CFP: 1) Are the effects of CSR initiatives different across time?; 2) Are the effects different for CSR strength vs. CSR Weakness?; 3) Are the effects different in the short-term vs. long-term?; and 4) Are the effects different between firms with high marketing intensity vs. firms with low marketing intensity? Using company data on CSR performance from the KLD database in conjunction with COMPUSTAT and CRSP data from 1990 to 2010, we examine the effects of CSR strength and CSR weakness on stock market returns. The empirical results indicate the positive effect of a firm's CSR strength in recent years. This phenomenon can be explained by the evolution of legitimacy theory. When we further look into the 4 questions, the results indicate that firms with high marketing intensity get punished when they have CSR weakness while firms with low marketing intensity get rewarded when they have CSR strength. These asymmetric effects could be explained by the visibility theory and shareholder expectation. Theoretical contribution and managerial implications are discussed.