Corporate Social Responsibility, Religion, and Firm Risk

• Author: Hoje Jo,Jinhua Cui,Haejung Na
• DOI: http://doi.org/10.1111/ajfs.12171
• Date: 01 April 2017
• Published date: 01 April 2017

Corporate Social Responsibility, Religion,

and Firm Risk*

Jinhua Cui

Ajou University, Republic of Korea

Hoje Jo

Santa Clara University, United States

Haejung Na**

California State University, Los Angeles, United States

Received 28 August 2016; Accepted 22 December 2016

Abstract

In this article, we examine the empirical influence of the combined effect of Corporate social

responsibility (CSR) and the degree of local community religiosity on firm risk by investigat-

ing their unidirectional and endogenous effects. Employing a large US sample, we find an

inverse association between CSR–religiosity and firm risk after controlling for various firm

characteristics. Also, after mitigating endogeneity bias, we still find a negative association

between CSR–local community religiosity and firm risk. We interpret these results to support

the social license to operate (SLO) explanation: the lower the level of firm risk, the higher

the level of SLO.

Keywords Corporate social responsibility; Local community religiosity; Social license to oper-

ate hypothesis; Firm risk

JEL Classification: G3, M14

1. Introduction

Corporate social responsibility (CSR) is a growing subject for academics, practition-

ers, and regulators alike, but is still quite a contentious topic. Many studies have

suggested various positive aspects of CSR and have found evidence that CSR is

*Jo appreciates sabbatical support from Leavey School of Business at Santa Clara University.

This study was partially performed while Jo was visiting Korea University Business School

(KUBS). Jo appreciates partial financial assistance from the Asian Institute of Corporate

Governance. The authors appreciate valuable comments from the anonymous referee.

**Corresponding author: Haejung Na, Assistant Professor of Finance, California State Univer-

sity, Los Angeles, 5151 State University Drive, Los Angeles, CA 90032-8125, USA. Tel: +323-

343-2871, Fax: +323-343-6439, email: hna5@calstatela.edu.

Asia-Pacific Journal of Financial Studies (2017) 46, 305–340 doi:10.1111/ajfs.12171

©2017 Korean Securities Association 305

beneficial to the firm, such as lower cost of equity, higher analyst following, more

favorable analyst recommendation, higher analyst forecast accuracy, lower informa-

tion asymmetry, increasing financial communication to shareholders, more effective

corporate governance, and higher firm value (among others, see Jo and Harjoto,

2011, 2012; Servaes and Tamayo, 2013; Cui et al., 2016a).

1

Previous CSR literature

has also suggested that CSR engagement generally decreases firm risk (McGuire

et al., 1988; Feldman et al., 1997; Orlitzky and Benjamin, 2001; Husted, 2005; God-

frey et al., 2009; Salama et al., 2011; Oikonomou et al., 2012; Albuquerque et al.,

2014). Risk management can lower a firm’s risk by decreasing the probabilities that

expected financial, social, or environmental crises will occur and adversely influence

the firm’s cash flows (Sharfman and Fernando, 2008) and/or generate moral capital

or goodwill that could provide the firm with “insurance-like” protection and pre-

serve its financial performance (Godfrey, 2005; Godfrey et al., 2009).

2

Previous research further suggests that the presence of religion influences corpo-

rate decision making (Hilary and Hui, 2009; McGuire et al., 2011, 2012; Dyreng

et al., 2012; El Ghoul et al., 2012; Omer et al., 2013; Cui et al., 2015a,b, 2016b).

From the extant literature on the religion–corporate decision-making nexus, we

maintain that we can gain valuable insights regarding the possible association

between the degree of religiosity, CSR activities, and firm risk. While religiosity is a

widely documented construct and the relation between CSR, religion, and firm risk

is an important topic, previous research on the empirical association between reli-

giosity, CSR, and firm risk is quite limited. Two related studies include Hilary and

Hui (2009) and McGuire et al. (2012). Hilary and Hui (2009) investigate the rela-

tion between religion and financial market factors, but are mute on CSR. McGuire

et al. (2012) examin e how religiosity impacts firms’ CSR decisions and they find

that firms headquartered in areas with higher religiosity receive low ratings for CSR

initiatives. They, however, neither extend their analysis to financial markets nor

firm risk. Furthermore, they fail to mitigate the inherent endogeneity problem. We

acknowledge the possibility that moral values can differ not only from religion to

religion, but also between traditions and groups even within a religion. There are,

however, common themes in religious moral systems that can be identified and

1

Others focus on the cost side of CSR engagement, such as the agency problem and immedi-

ate cash outflows, the opportunity cost of spending on CSR, and potential waste of valuable

resources (Barnea and Rubin, 2010; Fieseler, 2011).

2

According to resource dependence theory, CSR activities can generally be viewed as a means

through which a firm can decrease the risks associated with resource acquisition (Haley,

1991; Berman et al., 1999). If CSR activities enhance the public image of an industry, the

industry’s key stakeholders, including the related firm shareholders, employees, customers,

suppliers, and the community, are likely to feel more positive toward the industry and

thereby provide critical resources to the industries that are controlled by these key stakehold-

ers (Frooman, 1999; Backhaus et al., 2002). In addition to helping the industries secure the

acquisition of valuable resources, CSR activities may help them decrease the risk of losing the

resources they already have (Godfrey, 2005; Barnett and Salomon, 2006).

J. Cui et al.

306 ©2017 Korean Securities Association

traced such that we can examine the overall combined impact of religiosity and

CSR activities on firm risk.

In this paper, therefore, we examine the empirical influence of CSR activities

and the Christian religiosity of its local community on firm risk by investigating

their fixed and endogenous effects. We define religiosity, following Vitell et al.

(2009), as the degree to which an individual is a religious person apart from his/her

particular religious beliefs and the way those beliefs are manifested. Given the grow-

ing pivotal role of CSR and religion in financial markets, we specifically investigate

the impact of CSR and religion along with the combined effects of CSR and religion

on firm risk because operating risk is one of the most important financial aspects

that corporations should consider to cope with the dynamically changing atmo-

sphere of the modern business environment. In addition, because both the degree

of local community religiosity and CSR engagement are endogenously determined,

we attempt to mitigate endogeneity as well as serial autocorrelation of CSR ratings

by using the dynamic panel system generalized methods of moment (GMM), which

is known to mitigate both endogeneity and autocorrelation problems reasonably

well (see Wintoki et al., 2012).

3

To the best of our knowledge, we are the first to

examine the link between CSR, religion, and firm risk in the CSR literature.

We maintain that the social license to operate (SLO) perspective is especially

important for the study of CSR, religion, and firm risk. SLO is conventionally

defined as the acceptance or approval by local communities and stakeholders of a

company or projects in a certain area (Wilburn and Wilburn, 2011; Yates and Hor-

vath, 2013; Moffat and Zhang, 2014; Cui et al., 2016b; Demuijnck and Fasterling,

2016). Virtually every study of the SLO asserts or assumes that stakeholder engage-

ment is a key to acquiring the SLO (Wilburn and Wilburn, 2011). Early literature

on the SLO suggests that a firm’s SLO is contingent on how the firm negotiates

acceptance of the various impacts its operations might have on the local community

(Wilburn and Wilburn, 2011). Later conceptual studies expanded this idea to

include the firm’s impacts on other stakeholder groups (Boutilier et al., 2012; Black,

2014). Black (2014), for instance, asserts that when the firm is providing legitimate

benefits to communities, maintaining good relationships with a wide range of well-

connected stakeholders, and playing its part in broader regional development, the

firm may earn the highest level of SLO. Black (2014) further claims that a higher

level of SLO is the result of effectively understanding and responding to social

issues associated with risk. In particular, managing risk and reputation is generally

3

While the concurrent research of McGuire et al. (2012) is remotely related to this study, the

former use a relatively short 2-year sample period of 2007 and 2008. They also ignore inher-

ent financial markets as well as the possible serial-correlation problem of CSR ratings. Fur-

ther, they are silent on serious endogeneity problems that make their findings questionable.

Roberts and Whited (2013) show that ignoring endogeneity leads to biased and inconsistent

estimates, making reliable inference virtually impossible.

CSR, Religion, and Firm Risk

©2017 Korean Securities Association 307