Seeking Legitimacy Through CSR: Evidence from Controversial Industries
56 Pages Posted: 8 Apr 2015
Date Written: April 8, 2015
Controversial industry sectors, such as alcohol, gambling, tobacco, and firearms, have suffered organizational legitimacy problems for a long period of time around the world. This paper examines whether corporate social responsibility (CSR) activities reduce the level of risk for firms in controversial industry sectors in an attempt to seek organizational legitimacy. We argue that managers in controversial industries are motivated to actively engage in risk management to combat negative publicity and gain organizational legitimacy. Using data covering 32 countries, this study finds that both the systematic and total risk for firms in controversial industry sectors are generally higher than those for firms in conventional industry sectors due to their harmful image. We then show that controversial industry firms’ engagement in CSR initiatives and policies has a substantial risk-decreasing effect, and that might increase the probability of obtaining and maintaining the social license to operate. The documented effect of CSR on firm risk, however, is more pronounced for firms in Europe and North America than in the Asia-Pacific region, suggesting differential CSR-risk association in different region. These results are significant and robust even after potential endogeneity problems are mitigated. We interpret that our results are supportive of the “harmful image”, “social license to operate” and “differential recognition” explanations.
Keywords: Corporate social responsibility; Sinful industry; Controversial industry; Risk management; Social license to operate
Suggested Citation: Suggested Citation