Does the Market Respond to an Endorsement of Social Responsibility? The Role of Institutions, Information, and Legitimacy

TLDR

A consensus has emerged that virtuous firms are often rewarded by the marketplace, yet the mechanisms of these rewards remain unclear and managers and investors struggle to assess true CSR engagement, so many rely on institutional assessments to judge a firm’s CSR reputation. The study investigates how institutional endorsements or repudiations of CSR affect firm financial performance. The authors apply institutional theory and reputation/legitimacy research to examine this relationship. Empirical results show that institutional intermediaries influence market assessments of CSR and that operating performance can serve as an advanced indicator of social performance, while different social performance assessments interact to temper market reactions.

Abstract

A consensus has emerged in the burgeoning literature on corporate social responsibility (CSR) that “virtuous” firms are often rewarded by the marketplace. Unfortunately, the mechanisms through which those rewards materialize are not well understood. Furthermore, it is difficult for managers and investors to know whether a company is actually engaged in responsible behavior. Thus, many stakeholders rely on institutional assessments of a firm’s social practices to inform their own judgments about that company’s CSR reputation. In this article, we draw on institutional theory and research on reputation and legitimacy to investigate the relationship between institutional endorsements (and repudiation) of CSR and firm financial performance. Our empirical results indicate that institutional intermediaries influence market assessments of a firm’s social responsibility and highlight the importance of the legitimacy-conferring function of expert bodies in understanding the relationship between social and financial performance. Our findings also illustrate the delicate interplay among different social performance assessments, reputation, and measures of financial and operating performance such that operating performance may serve as an advanced indicator of social performance and one type of social performance assessment may temper market reactions to another.