Firms behaving badly? Investor reactions to corporate social irresponsibility

AuthorVamsi K. Kanuri,Michelle Andrews,Reza Houston
Date01 March 2020
Published date01 March 2020
Bus Soc Rev. 2020;125:41–70.
Received: 3 February 2020
Accepted: 4 February 2020
DOI: 10.1111/basr.12193
Firms behaving badly? Investor reactions to
corporate social irresponsibility
Vamsi K.Kanuri1
© 2020 W. Michael Hoffman Center for Business Ethics at Bentley University. Published by Wiley Periodicals, Inc., 350 Main Street, Malden,
MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.
Vamsi K. Kanuri, Reza Houston and Michelle Andrews contributed equally.
1Mendoza College of Business, University
of Notre Dame, Notre Dame, IN, USA
2Ball State University, Muncie, IN, USA
3Goizueta Business School, Emory
University, Atlanta, GA, USA
Reza Houston, Ball State University,
Muncie, IN 47303, USA.
Corporate social irresponsibility (CSI) and other question-
able business incidents that appear to harm stakeholders fre-
quently afflict firms yet draw disparate investor reactions.
We address this disparity by investigating the association
between firm legal orientation and investor reactions to
CSI. We hypothesize the proportion of board members and
top management team (TMT) executives with law degrees
affects investor perceptions of firm foresight, and in turn,
their judgment of blame and consequent punishment. Based
on abnormal returns to 629 announcements of CSI and
308 publicly traded S&P 500 firms, we find that both too
small and too large a proportion of board of directors and
TMT members with law degrees lead investors to mete out
harsher punishment. This inverted u-shaped link is further
affected by firm size, firm risk, and industry competition.
Our investigation sheds light on the link between executive
education and financial performance in the context of CSI
and investor perceptions of foresight.
corporate social irresponsibility, event study, executive education,
investors, stock returns
In early 2009, aircraft manufacturer Boeing Co. announced plans to reduce its workforce by 4,500, rep-
resenting cuts of more than 5% (Gates, 2009). Weeks later, construction equipment maker Caterpillar
Inc. revealed plans to cut 20,000 workers, a slash equaling a tenth of its workforce (Goldman, 2009).
In the days following these announcements, Boeing incurred −3.8% cumulative abnormal returns
(CARs), while Caterpillar Inc. accumulated +1.9%. Varied investor reactions to reports of similar cor-
porate events are not limited to internal business concerns (events that occur within a firm), but man-
ifest for external environmental concerns (events that occur outside of a firm) as well. For instance,
revelations in 2008 that confectioner Hershey Co. allegedly violated environmental regulations drew
−1.2% CARs, yet news that automotive parts manufacturer Johnson Controls Inc. paid environmental
regulation fines yielded +4.8% CARs.
Why would reports of similar business concerns draw investor reactions that vary in both direction
and magnitude? Research on corporate social irresponsibility (CSI), defined as any business incident
that appears to harm the social good (Kang, Germann, & Grewal, 2016), suggests investor decisions
to punish afflicted firms are guided by their perceptions of blame (Strike, Gao, & Bansal, 2006). How
investors may develop these perceptions has yet to be explained. While studies have examined perfor-
mance implications of specific CSI events and the contextual factors that affect firm outcomes of CSI
(e.g., Godfrey, Merrill, & Hansen, 2009; Groening & Kanuri 2018; Hamilton, 1995; Kang et al., 2016;
Kashmiri, Nicol, & Hsu, 2017), internal organizational features such as the composition of a firm's
senior leadership that may govern how investors react to CSI has received limited scholarly attention.
Understanding how investors react to instances of CSI is critical to discerning the role shareholder
relationships play in stakeholder exchanges (Day & Fahey, 1988). In fact, because shareholder value
can be created through corporate social responsibility (Godfrey et al., 2009; Luo & Donthu, 2006),
in some instances such value can be destroyed through CSI. British Petroleum's Deepwater Horizon
oil spill in 2010 exemplifies a CSI incident that slashed shareholder value. Since a firm must manage
problems related to stakeholder relationships (Sen, Bhattacharya, & Korschun, 2006), firm perfor-
mance relies not only on maximizing shareholder value but also on maintaining and protecting it from
negative events.
To understand the drivers of investor reactions to CSI, we investigate an organizational feature that
may guide investor responses to afflicted firms.1
We propose that when assessing corporate culpa-
bility, investors will develop perceptions of blame (Lange & Washburn, 2012). This is because, after
reports of CSI break, the root causes are unlikely to immediately surface due to the complexity of
unraveling interactions between components, the noise of media speculations, and the reluctance of
firms to provide explanations (Bettis, 1983; Marcus & Goodman, 1991). To cope with their uncer-
tainty regarding the cause of the CSI, we contend that investors will rely on signals of the firm's ability
to have adequately prevented the event from occurring (Dutta, Biswas, & Grewal, 2007; Mazodier &
Rezaee, 2013; Xiong & Bharadwaj, 2013). A relevant and unbiased signal of a firm's ability to an-
ticipate CSI is how much influence key decision makers have on firm strategy (Greening & Johnson,
1997; Vaughan, 1983). For instance, the influence of IT and marketing personnel in top manage-
ment teams (TMTs) has been shown to help shield intra-industry firms from spillover effects of CSI
(Kashmiri et al., 2017). A key indicator of prevention may thus be the presence of strategic decision
makers who are trained to foresee the potential negative repercussions of firm decisions (Hambrick,
Misangyi, & Park, 2015; Sarpong & Maclean, 2014).
To determine whether firms had adequate foresight of the negative outcomes, we argue that in-
vestors pay particular attention to the proportion of board of directors (BOD) and TMTss members

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