Does Firm Innovation Affect Corporate Social Responsibility?

Abstract

This study examines the relationship between firm innovation and CSR. Stakeholders’ concern over transaction-specific investments exacerbates when firms engage heavily in innovation activities. To secure stakeholders’ support, firms adopt CSR effectively as an ex ante signal of sustainability and goodwill. As CSR is endogenous to a firm’s innovation activities, we rely on an instrumental variable (IV) approach to test our hypothesis. Using a sample of 3,315 U.S. publicly-listed firms from 2001 through 2011, we find that more innovative firms also engage more in CSR activities. This effect is stronger for firms of higher risk and/or operating in a less munificent environment. Additionally, firms with higher innovation reap greater financial benefits from their CSR activities.

Keywords: corporate social responsibility, firm innovation, transaction-specific investments, firm risk, environmental munificence