How Media Coverage of Corporate Social Irresponsibility Increases Financial Risk

• DOI: http://doi.org/10.1002/smj.2647
• Author: Julian F. Kölbel,Leonhardt M. Jancso,Timo Busch
• Date: 01 November 2017
• Published date: 01 November 2017

Strategic Management Journal

Strat. Mgmt. J.,38: 2266–2284 (2017)

Published online EarlyView 23 March 2017 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2647

Received 23 July 2014;Final revisionreceived 9 August 2016

How Media Coverage of Corporate Social

Irresponsibility Increases Financial Risk

Julian F. Kölbel,1,2Timo Busch,3*and Leonhardt M. Jancso1

1Department of Management, Technology, and Economics, ETH Zurich, Zurich,

Switzerland

2Sloan School of Management, Massachusetts Institute of Technology, Cambridge,

Massachusetts

3Faculty of Business, Economics and Social Sciences, University of Hamburg,

Hamburg, Germany

Research summary: This article explores the relationship between corporate social irresponsi-

bility (CSI) and nancial risk. We posit that media coverage of CSI generates risk by providing

conditions that increase the potential for stakeholder sanctions. Through analyzing an interna-

tional panel of 539 rms during 2008– 2013, we nd that rms receiving higher CSI coverageface

higher nancial risk. We show that the reach of the reporting media outlet is a critical condition

for this relationship. Once the outlet has a high reach, the severity of CSI coverage is a bound-

ary condition that further reinforces the effect.Our ndings complement existing theory about the

risk-mitigating effect of corporate social responsibility by illuminating the risk-generating effect

of CSI coverage. For executives, these insights suggest complementary strategies for corporate

risk management.

Managerial summary: This article examines the effect of negative news on nancial risk. It

shows that negative media articles regarding environmental,social, and governance (ESG) issues

increase a rm’s creditrisk. It also provides a detailed analysis of the impact of an article’s reach

and severity, i.e., how many readers are exposed to the article and how harshly it criticizes the

rm. The results allow to quantitatively assess the risk that emanates from negative ESG news.

For executives, three strategies are derived for limiting a rm’s exposure to this risk: balancing

corporate social responsibility programswith operational safety programs, reporting suboptimal

environmental and social performance transparently and proactively, and avoiding acquisition

targets and markets with a legacy of negativenews. Copyright © 2017 John Wiley & Sons, Ltd.

Introduction

A recent stream of literature has explored the

strategic value of corporate social responsibility

(CSR) in the context of risk management. Drawing

on instrumental stakeholder theory (Donaldson &

Keywords: corporate social responsibility; media; credit

risk; stakeholder theory; attribution theory

*Correspondence to: Timo Busch, Faculty of Business,

Economics and Social Sciences, University of Hamburg,

Von-Melle-Park 9, 20146 Hamburg, Germany. E-mail:

timo.busch@wiso.uni-hamburg.de

Copyright © 2017 John Wiley & Sons, Ltd.

Preston, 1995; Jones, 1995), the central proposi-

tion is that CSR offers insurance-like protection

against stakeholder sanctions (Godfrey, 2005; God-

frey,Merrill, & Hansen, 2009). CSR earns the good-

will of stakeholders, which decreases the impact

of stakeholder sanctions in response to negative

events, thus reducing nancial risk. The insurance

analogy offers an elegant explanation for how CSR

affects nancial performance, and empirical analy-

ses consistently show that CSR has a risk-mitigating

effect (Chava, 2014; Cheng, Ioannou, & Serafeim,

2014; Henisz, Dorobantu, & Nartey, 2013; Koh,

Media Coverage of Corporate Social Irresponsibility 2267

Qian, & Wang,2013; Sharfman & Fernando, 2008).

Yet, from a broader risk-management perspec-

tive, the insurance hypothesis lacks an important

theoretical counterpart. Strategic risk management

entails two steps: rst understanding the process

that generates risk, and second choosing an appro-

priate response strategy (Andersen & Bettis, 2015;

Mikes & Kaplan, 2015; Miller, 1992). The insur-

ance hypothesis informs the second step by demon-

strating that CSR reduces the impact of stakeholder

sanctions. Yet,it falls short of the rst step, because

it does not investigatethe antecedents of stakeholder

sanctions. The root of this shortcoming is that many

studies do not differentiate CSR from its negative

counterpart, corporate social irresponsibility (CSI).

CSI is a distinct theoretical construct (Lange &

Washburn, 2012; Strike,Gao, & Bansal, 2006), and

empirical studies that distinguish between the two

constructs reveal that CSI exacerbates risk more

strongly than CSR reduces it (Chava, 2014; Goss &

Roberts, 2011; Oikonomou & Pavelin, 2014). This

suggests that the insurance hypothesis should be

extended with an explanation of how risk emerges

from CSI.

This article explores how CSI generates nancial

risk. While information about CSR is commonly

self-disclosed in a rm’s annual report, informa-

tion about CSI is usually revealed by the media.

We argue that through CSI coverage the media pro-

vides several conditions that increase the poten-

tial for stakeholder sanctions. CSI coverage draws

stakeholder attention to CSI (Barnett, 2014), it

coordinates the attention of stakeholders through

agenda-setting (Z. Tang & Tang, 2016), and it

inuences stakeholder’s cognitive response to CSI

through framing (Lange & Washburn, 2012). We

hypothesize that through these mechanisms CSI

coverage increases the potential for stakeholder

sanctions, resulting in increased nancial risk.

Our results are based on quarterly observations

of an international sample of 539 rms between

2008 and 2013. We measure CSI coverage with a

dataset provided by RepRisk, which contains over

100,000 news articles reporting rm-specic CSI

in the environmental, social, labor, and governance

domains. We nd that, generally, CSI coverage

in the media has a positive effect on nancial

risk. Specically, we nd that CSI coverage with

high reach– i.e., articles appearing in the world’s

leading newspapers– strongly affects nancial risk.

The severity of the criticism also has a positive

effect on nancial risk, but only when reported

in a media outlet with high reach. We perform

several robustness checks as well as an instrumental

variable regression to consolidate our ndings.

This article makes two central contributions.

First, we complement established theory about the

insurance effect of CSR (Godfrey, 2005; Godfrey

et al., 2009; Koh etal., 2013) with novel theory

about the risk-generating effect of CSI. Our insights

into the risk-generating effect of CSI coverage pro-

vide an improved theoretical understanding of the

origins of nancial risk in the context of stake-

holder management and suggest a range of addi-

tional response strategies beyond investing in CSR

as insurance. Second, this study evaluates theoret-

ical predictions about stakeholder sanctions at the

individual level (Barnett, 2014; Lange & Washburn,

2012) and the stakeholder-network level (Z. Tang &

Tang,2016) in the context of nancial risk. We com-

bine these perspectives by analyzing the reach of

CSI coverage– which inuences the general atten-

tion to CSI in a rm’s stakeholder network–in con-

junction with the severity of CSI coverage–which

inuences individual stakeholders’ likelihood to

sanction.

Literature Review

There is a longstanding debate about rms’ respon-

sibilities towards society (Bowen, 1953; A. Carroll,

1979), focusing in particular on the relationship

between CSR and corporate nancial performance.

Research on this theme attempts to establish how

social norms, markets, and institutions work indi-

vidually or together in a complex process such that

responsible rm behavior converges with protable

rm behavior. Many arguments for a positive

relationship between CSR and nancial perfor-

mance are rooted in stakeholder theory (Freeman,

1984). The core argument is that stakeholders are

central to a rm’s functioning and value creation

(Donaldson & Preston, 1995; Jones, 1995) and

that CSR positively affects stakeholder relations.

Some recent studies (Eccles, Ioannou, & Serafeim,

2014; Flammer, 2015), as well as meta-analyses

(Orlitzky, Schmidt, & Rynes, 2003), indicate that

there is a positive relationship between CSR and

corporate nancial performance, but the evidence

is not unequivocal (Barnett & Solomon, 2012;

Brammer & Millington, 2008).

An important turn in the debate about the eco-

nomic value of CSR was marked by a shift towards

Copyright © 2017 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 2266–2284 (2017)

DOI: 10.1002/smj