Exploring the Financial Value of a Reputation for Corporate Social Responsibility During a Crisis
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Volume 7 Number 4
Exploring the Financial Value of a Reputation for Corporate Social Responsibility During a Crisis Karen E. Schnietz Graziadio School of Business and Management, Pepperdine University, Los Angeles, CA Marc J. Epstein Jones Graduate School of Management, Rice University, Houston, TX
ABSTRACT Is there financial value in a reputation for corporate social responsibility during a crisis? The existing empirical evidence for a corporate social–financial performance link has been mixed, but perhaps this is, in part, due to most studies’ emphasis on a reputation’s impact on positive news. What of the opposite case — whether a reputation for social responsibility acts as a ‘reservoir of goodwill’ during corporate crises? This paper draws on literature from the fields of reputation, strategy, risk and social responsibility to outline the reasons why there might be financial value in a reputation for corporate social responsibility during a crisis and then tests them by examining investor reaction to the 1999 Seattle World Trade Organization (WTO) failure, caused by disagreement among member nations on labor and environmental standards and public protests over the same. Seattle represented apparent heightened demand for corporate social responsibility and an increased risk of stricter, future regulation. It was found that a reputation for social responsibility protected firms from stock declines associated with this crisis, even when controlling for possible trade and industry effects. INTRODUCTION Strategic managers have long accommodated the demands of their firms’ immedi-
ate stakeholders, particularly shareholders. Yet, the pressure exerted on managers by non-investor stakeholders, such as environmentalists and other social activists, has increased significantly. The growing influence of the non-investor stakeholders manifests itself in diverse ways. Some firms, such as Chevron, have adopted differentiation strategies based on being more environmentally responsible than other firms in their industry. The amount of capital in socially responsible investment funds has mushroomed in the past decade. And, in 1990, whereas only seven US firms issued sustainability reports detailing their social (as opposed to financial) performance, by 2004, 745 such reports were released in response to mounting public pressure on corporate managers to do so (Corporate Register.com). Despite such heightened managerial attention to corporate social responsibility, there remains a dearth of persuasive empirical studies finding evidence that firm investments in corporate social responsibility yield quantifiable financial benefits. The authors hope to add to the literature on a corporate social–financial performance link by drawing upon studies on the value of corporate reputation to provide the foundation for an analysis linking a firm’s repu-
Corporate Reputation Review, Vol. 7, No. 4, 2005, pp. 327–345 # Henry Stewart Publications, 1363–3589
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Exploring the Financial Value of Corporate Social Responsibility During a Crisis
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