Does engagement in corporate social responsibility provide strategic insurance‐like effects?
| Published date | 01 February 2017 |
| Author | Shou‐Lin Yang,Yung‐Ming Shiu |
| Date | 01 February 2017 |
| DOI | http://doi.org/10.1002/smj.2494 |
Strategic Management Journal
Strat. Mgmt. J.,38: 455–470 (2017)
Published online EarlyView 8 March 2016 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2494
Received 30 June 2012;Final revisionreceived 27 November 2015
DOES ENGAGEMENT IN CORPORATE SOCIAL
RESPONSIBILITY PROVIDE STRATEGIC
INSURANCE-LIKE EFFECTS?
YUNG-MING SHIU1†*and SHOU-LIN YANG2
1Department of Risk Management and Insurance, Risk and Insurance Research
Center, College of Commerce, National Chengchi University, Taipei, Taiwan
2Department of Business Administration, Da-Yeh University, Changhua, Taiwan
Research summary: This study examines whether the stock and bond prices of rms engaging in
corporate social responsibility (CSR) can benet from insurance-like effects during occurrences
of negative events. Our results suggest that in the face of negative events, engagement in CSR on
a continuous, long-term basis provides insurance-like effects on both the stock and bond prices
of rms. Nevertheless, the effects are found to quickly disappear following the occurrence of a
second, or subsequent, negative event. Although our results clearly indicate that rms need to
allocate some of their available resources to long-term strategic CSR activities, managers must
also realize that in a crisis communication, they will probably be able to use their CSR claims on
one occasion only.
Managerial summary: The purpose of this article is to examine whether rms engaging in
corporate social responsibility (CSR) can benet from insurance-like effects during occurrences
of negative events. We nd that on the occurrence of a negative event,long-term CSR engagement
does have insurance-like effects. We also nd that these insurance-like effects may quickly
disappear following the occurrence of a second negative event. Managers of rms with a long
history of CSR activities need to realize that in a crisis communication, they can probably use
their claims of adherence to CSR only once. Copyright © 2015 John Wiley & Sons, Ltd.
INTRODUCTION
The issue of corporate social responsibility (CSR)
has become increasingly important over recent
years, with the motivation for the growing involve-
ment of rms in CSR activities, including altruism,
strategic choices, forestalling the setting of stricter
regulations by governments (Baron and Diermeier,
2007), and acceding to the demands of “nongovern-
mental organizations” (NGOs) in an attempt to
Keywords: corporate social responsibility; insurance-like
effects; risk management; event study; negative events
*Correspondence to: Yung-Ming Shiu, 64, Sec. 2, Zhi-Nan
Road, Wen-Shan District, Taipei 11605, Taiwan. E-mail: yung-
ming@nccu.edu.tw
†Yung-Ming Shiu is the designated contact author of this article.
The authors have equal contributions.
Copyright © 2015 John Wiley & Sons, Ltd.
avoid any potential boycotting (Fisman, Heal, and
Nair, 2007).
However, CSR denitions vary quite consid-
erably within the extant literature; for example,
McWilliams and Siegel (2000) dened CSR as
“corporate actions, not required by law, that attempt
to further some social good and extend beyond the
explicit transactional interests of the rm,” while
the denition subsequently provided by Mackey,
Mackey, and Barney (2007) referred to “voluntary
corporate actions designed to improve social
conditions.” Both denitions are, nevertheless, less
encompassing and inclusive than the denition
provided by Carroll (1979), who argued that, in
descending order of their relative magnitude, the
areas of social responsibility could be classied into
economic, legal, ethical, and discretionary factors.
456 Y.-M. Shiu and S.-L. Yang
Increasing numbers of rms have begun to
exhibit greater social responsibility over recent
years by adopting a policy of regular engagement
in CSR activities, essentially in response to the
call from society for greater corporate citizenship;
and indeed, it was suggested by McWilliams and
Siegel (2001) that when rms set out to formulate
their corporate strategies, CSR activities should be
routinely included. Other related studies have indi-
cated that CSR is an important element of strategic
investment, and as such, it should be regarded
as a form of reputation building or maintenance
(Fombrun and Shanley, 1990; McWilliams, Siegel,
and Wright, 2006).
It has been further argued in several related
studies that CSR engagement may produce
insurance-like effects on the stock price of a rm
(Godfrey, 2005; Godfrey, Merrill, and Hansen,
2009). The term insurance-like effects refers to the
ways in which, on the occurrence of a negative
event relating to the corporate operations of a rm,
CSR engagement can reduce any potential impact
on its stock price; thus, engagement in CSR by a
rm can be regarded as an insurance premium that
the rm pays to avoid, or reduce, any loss of market
value as a result of such negative events.
The question that this study aims to answer is
whether, in the midst of occurrences of negative
events, CSR provides insurance-like protection
for rms through the preservation of shareholder
and bondholder wealth. Although several studies
have adopted a perspective of increasing nancial
performance to examine the empirical relationship
between CSR and corporate nancial performance
(CFP) (Alexander and Buchholz, 1978; Aupperle,
Carroll, and Hateld, 1985; Waddock and Graves,
1997), the argument that participation in CSR
activities can provide an insurance-like benet for
shareholders— by helping to avoid a reduction in
shareholder value on the occurrence of a negative
legal/regulatory event—is pursued in only a few of
these studies (such as Godfrey et al., 2009; Peloza,
2006).
We set out in the present study to ll the current
gap in the literature by placing our research focus
on three specic and important issues. First, as
already noted, there has been precious little focus
on the insurance-like effects of CSR engagement
following occurrences of negative events, and even
less so with regard to any specic focus on bond
prices; we therefore carry out an examination into
whether CSR activities can preserve bondholder
value. Second, the prior studies (such as Godfrey
et al., 2009) consider only the short-term CSR
effects; however, even when expanding the scale
of short-term CSR engagement (Nichols, 1990),
such engagement cannot produce any immediate
effects, since long-term efforts are required in
order to reveal its inuence (Cooper, 1997). The
examination in the present study is therefore
extended to include the inuence of long-term
CSR engagement. Third, we further argue that the
preservation effect on shareholder and bondholder
wealth is likely to be diminished if there is any
repetition of negative events. We therefore examine
whether the insurance-like effects are reduced with
an increase in the number of negative events.
Consistent with our expectations, we nd that on
the occurrence of a negative event, CSR engage-
ment does have insurance-like effects on both the
stock and bond prices of a rm, thereby imply-
ing that CSR engagement can serve as a risk
management tool for the preservation of corporate
stock and bondholder wealth. We also nd that
these insurance-like effects may be reduced with
an increase in the number of negative events; we
refer to this phenomenon in the present study as the
“diminishing marginal insurance-like effect.”
THEORY AND HYPOTHESIS
DEVELOPMENT
CSR and CFP
According to “stakeholder contract costs” theory,
corporate social performance (CSP) contributes to
CFP, as rms with good CSP realize lower costs of
managing stakeholder relationships, and thus, can
potentially earn higher nancial returns than rms
with bad social practices (Jones, 1995). Under “pri-
vate costs” theory, however, CSP merely represents
a cost that the rm bears without any commensurate
return (Friedman, 1970; Preston and O’Bannon,
1997). In this case, CSR has a negative impact on
nancial performance.1
1In addition to the “stakeholder contract costs” and “privatecosts”
theories, there are three other theories linking CSR to CFP, that
is, “good management,” “managerial guile,” and “ affordability”
(Schuler and Cording, 2006). The theory of “good management”
assumes that the same managerial skills and strategies necessary
for good social performance are also prerequisites for good
nancial performance (Alexander and Buchholz, 1978; Anderson
and Frankle, 1980; Waddock and Graves, 1997). “Managerial
guile” theory argues that since it is difcult for owners to
Copyright © 2015 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 455–470 (2017)
DOI: 10.1002/smj
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