Firm Litigation Risk and the Insurance Value of Corporate Social Performance

Strategic Management Journal, (DOI: 10.1002/smj2171) Forthcoming

Posted: 31 Oct 2013

See all articles by Ping-Sheng Koh

Ping-Sheng Koh

ESSEC Business School

Cuili Qian

University of Texas at Dallas

Heli C. Wang

Hong Kong University of Science & Technology (HKUST) - Department of Management & Organization

Date Written: October 25, 2013

Abstract

This paper advances the risk management perspective that superior social performance enhances firm value by serving as an ex ante valuable insurance mechanism. We posit that good social performance is more valuable as an insurance mechanism for firms with higher litigation risks. Moreover, value generation of corporate social performance (CSP) depends on whether a firm has gained pragmatic legitimacy (i.e., a firm's financial health) and moral legitimacy (i.e., whether or not a firm operates in a socially contested industry) among its stakeholders. We find that the value of CSP as insurance against litigation risk is practically significant, adding 2 to 4 percent to firm value. But CSP is less likely to create value if the firm is in financial distress or is operating in socially contested industries.

Keywords: CSP; insurance value; risk management; firm valuation models; legitimacy

Suggested Citation

Koh, Ping-Sheng and Qian, Cuili and Wang, Heli, Firm Litigation Risk and the Insurance Value of Corporate Social Performance (October 25, 2013). Strategic Management Journal, (DOI: 10.1002/smj2171) Forthcoming, Available at SSRN: https://ssrn.com/abstract=2345164

Ping-Sheng Koh (Contact Author)

ESSEC Business School ( email )

5 Nepal Park
139408
Singapore
+65 6413 9737 (Phone)

Cuili Qian

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Heli Wang

Hong Kong University of Science & Technology (HKUST) - Department of Management & Organization ( email )

Clear Water Bay, Kowloon
Hong Kong

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