Why do Firms Do Good? Evidence from Managerial Efficiency

Abstract

Are firms doing good? And, if so, why do they engage in social responsibility? To find out, we model corporate social responsibility (CSR) as a choice of the firm to self-restrain from the full exploitation of a production set that contains negative externalities. Compared to such an unconstrained set, some firms choose to behave 'responsible'. Therefore, they may deviate systematically from optimal costs and profits and produce inefficiently. We test this theory using stochastic frontier analysis to estimate firm-specific 'inefficiency', which is conditioned on CSR. CSR determines systematic deviations from optimal cost and profit functions of the firm rather than profitability or cost itself. This way of modeling allows us to identify why firms conduct CSR: altruism, strategic reasons, or 'greenwashing'. Using CSR data from Kidder, Lydenberg and Domini for 1991-2004, we establish that various constituting elements of CSR have a significant impact on profit and cost efficiency. Therefore, CSR can not be regarded as greenwashing. Instead, we provide evidence that supports the idea that strategic reasons is the predominant motive of CSR.

Keywords: social responsibility, costs, profits, efficiency, stochastic frontier

JEL Classification: D21, D24, D61, L25, M14