Why do Firms Do Good? Evidence from Managerial Efficiency

33 Pages Posted: 18 Mar 2009

See all articles by Lammertjan Dam

Lammertjan Dam

University of Groningen - Faculty of Economics and Business

Michael Koetter

Halle Institute for Economic Research

Bert Scholtens

University of Groningen - Department of Finance & Accounting

Date Written: March 17, 2009

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

Suggested Citation

Dam, Lammertjan and Koetter, Michael and Scholtens, Bert, Why do Firms Do Good? Evidence from Managerial Efficiency (March 17, 2009). Available at SSRN: https://ssrn.com/abstract=1361937 or http://dx.doi.org/10.2139/ssrn.1361937

Lammertjan Dam

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands
+31-50-3636518 (Phone)

Michael Koetter (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

HOME PAGE: http://www.iwh-halle.de/en/about-the-iwh/people/detail/michael-koetter/

Bert Scholtens

University of Groningen - Department of Finance & Accounting ( email )

P.O. Box 800
9700 AH Groningen
Netherlands

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