Corporate social responsibility programmes have ripple effects on other businesses, study says

By Sim Shuzhen

SMU Office of Research & Tech Transfer – The decision to adopt a corporate social responsibility (CSR) programme can impact not only a firm’s own fortunes, but also those of its business rivals, say researchers in a new study published in Management Science.

The study, titled ‘Peer Effects of Corporate Social Responsibility’, was carried out by an international team of researchers from Singapore Management University, Singapore; the Chinese University of Hong Kong, Hong Kong; and Erasmus University Rotterdam, the Netherlands.  

CSR programmes are now mainstream business activities, with most large public companies on major equity indices such as the S&P500 regularly engaging in CSR efforts and publishing CSR reports. But while many studies have documented the effect of CSR policies on firms’ own profitability and valuations, little is known about whether or not these policies can also influence firms’ peers.

To study potential CSR spillover effects, the researchers examined a sample of more than 3,000 public firms in the US, focusing on instances where shareholders had passed or halted a CSR proposal by a narrow margin of votes – so-called ‘close-call’ CSR proposals. Peers of a firm that passes a CSR proposal with 51 percent of the votes would not be expected to differ systematically from those of a firm in which a similar proposal fails with 49 percent of the votes, write the researchers. Considering only close-calls thus allowed the researchers to treat the passage of a CSR proposal as a randomly assigned variable, and thus to attribute their observations to changes in CSR policies rather than to other pre-existing differences in firm characteristics.

The researchers found that the passage of a close-call CSR proposal and its subsequent implementation are indeed followed by the adoption of similar CSR proposals by the firm’s peers. Further, when a firm passes a close-call CSR proposal, its peers experience a negative stock market reaction, in the form of a drop in three-day cumulative abnormal returns around the time of the vote.

“This suggests that the passage of a CSR proposal is bad news for rival firms, because it forms a competitive threat to them,” says study author Assistant Professor Liang Hao of the SMU Lee Kong Chian School of Business.

The study has important implications for policy makers who hope to promote socially responsible behaviour across the market, say the researchers. “Specifically, there is a ‘multiplier’ effect: increasing one company’s CSR efforts will trigger a ripple of CSR increase in the product market,” says Professor Liang.

“Our findings also have strong implications for corporate executives, as we show that a firm’s CSR adoption can create a competitive threat to its rival firms. Therefore, when implementing a CSR strategy, managers should consider its competitive advantage as well as how their firms’ performance can be affected by other firms’ CSR adoptions,” adds Professor Liang.

For more information, please contact:

Goh Lijie (Ms)
Office of Research & Tech Transfer
DID: 6828 9698
Email: ljgoh [at] smu.edu.sg

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