Corporate Social Responsibility and Inventory Policy

Abstract

In this article, we study the impact of implementing corporate social responsible (CSR) practices on firms’ inventory policy. We propose that there is an inverted U-shaped relationship between firms’ CSR and their inventory levels. Two elements explain such a proposal. First, stakeholders have different interests regarding the outcome of the inventory system. Specifically, we hypothesize that customers put pressure on firms to increase inventories; employees have conflicting views regarding inventories, and for this reason they do not put pressure on firms in a particular direction; and environmental activists force firms to reduce inventories. The second element to explain the previous relationship is that there is a different level of stakeholder proactiveness contingent on the intensity in the implementation of social responsible policies. While employee demands are a priority for every firm, we posit that there is variation in the relative importance attached to customers and the natural environment: for low levels of CSR, customers are more relevant; and for higher levels of CSR, the natural environment gains importance. We test this theoretical prediction using a database that contains financial information from COMPUSTAT and CSR data from the KLD database. Our final sample includes 1881 US companies (9269 observations) for the period 1996-2006. Results provide support to our theoretical contentions. Our findings will be helpful to strategic and tactical decision-making processes on inventory management and will allow researchers to offer concrete advice on the likely outcomes of various stakeholder relationship practices in order to improve the effectiveness of inventory systems.

Keywords: CSR, Inventory Policy

JEL Classification: E22, M14