Washing Away Sins

Washing Away Your Sins?
Corporate Social Responsibility, Corporate Social

Irresponsibility, and Firm Performance
Author(s): Charles Kang, Frank Germann and Rajdeep Grewal
Source: Journal of Marketing, Vol. 80, No. 2 (March 2016), pp. 59-79
Published by: Sage Publications, Inc. on behalf of American Marketing Association
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Charles Kang, Frank Germann, & Rajdeep Grewal
Washing Away Your Sins? Corporate

Social Responsibility, Corporate
Social Irresponsibility, and
Firm Performance
The authors address the questions of whether and how corporate social responsibility (CSR) relates to firm
performance and, in so doing, identify four mechanisms pertaining to this relationship: (1 ) slack resources lead to
CSR (i.e., slack resources mechanism) (2) CSR improves performance (i.e., good management mechanism), (3)
CSR makes amends for past corporate social irresponsibility (CSI) (i.e., penance mechanism), and (4) CSR
insures against subsequent CSI (i.e., insurance mechanism). Using an integrative approach, the authors
incorporate the four mechanisms in their empirical model specification. Specifically, to model the interplay
among CSR, CSI, and firm performance and to test the four mechanisms simultaneously, they propose a
structural panel vector autoregression specification. In support of the good management mechanism, results from
an unbalanced panel data set of more than 4,500 firms and up to 19 years suggest that firms that engage in CSR
are likely to benefit financially from their CSR investments. Moreover, the authors do not find support for the slack
resources or the insurance mechanism. In contrast, and in support of the penance mechanism, often firms' CSR
seems to trail their CSI. However, the results also suggest that the penance mechanism is ineffective in offsetting
negative performance effects due to CSI.
Keywords : corporate social irresponsibility, corporate social responsibility, firm performance, mechanisms, structural
panel vector autoregressive model
Online Supplement http://dx.d0i.0rg/l 0. 1 509/jm. 1 5.0324
Salomon 2012; Bhattacharya and Sen 2004; Jayachandran,

Kalaignanam, and Eilert 2013; Margolis, Elfenbein, and
Corporate
Corporate tions is isrequired that social
required by law tions
advance that advance
by responsibility
(e.g., McWilliams law and (e.g., goodsocial
social Siegel McWilliamsgood beyond
(CSR) beyond - company andthat
that Siegelwhich
which ac- Walsh 2007). However, the debate on how doing good and
2001) - continues to draw interest from practitioners and doing well converge has yet to be resolved (e.g., Chin,
academics alike. Ipsos (2013) reports that 77% of consumers Hambrick, and Treviño 2013; Groening, Swaminathan, and
believe that companies should be doing more to contribute to Mittal 2015; Hull and Rothenberg 2008; Mackey, Mackey,
society, and a study conducted by Reputation Intelligence and Barney 2007). Specifically, our examination of the extant
(2013) indicates that 73% of consumers across the 15 largest CSR literature reveals the following four mechanisms that
markets in the world will recommend companies that deliver have been proposed - independently1 - regarding the rela-
on CSR. Against this backdrop, most of the extant academic tionship between CSR and (positive) firm performance:
CSR-related research has scrutinized the conception that
companies "do well by doing good" (e.g., Barnett and 1 . Slack resources mechanism: Companies engage in CSR
because they are doing well financially and have slack
resources (e.g., McGuire, Sundgren, and Schneeweis 1988;
Charles Kang is Visiting Assistant Professor, A.B. Freeman School Orlitzky, Schmidt, and Rynes 2003).
of Business, Tulane University (e-mail: ckang2@tulane.edu). Frank 2. Good management mechanism: CSR is part of good man-
Germann is Assistant Professor of Marketing, Mendoza College of agement and thus improves financial performance (e.g.,
Business, University of Notre Dame (e-mail: fgermann@nd.edu). Hillman and Keim 2001; Hull and Rothenberg 2008).
Rajdeep Grewal is the Townsend Family Distinguished Professor,
Kenan-Flagler Business School, University of North Carolina (e-mail:
grewalr@unc.edu). The authors thank Timothy Gilbride, Patrick Murphy,
Arvind Rangaswamy, Hari Sridhar, and William Wilkie for their helpful 1 We are not aware of a study that has either identified or examined
comments on an earlier version of this research. In addition, they gratefully these four mechanisms simultaneously, as we do here. We note,
acknowledge the constructive guidance of the JM review team. Dominique however, that some studies have examined the slack resources and
Hanssens served as area editor for this article. good management mechanisms simultaneously (e.g., Scholtens
2008).
© 2016, American Marketing Association Journal of Marketing

ISSN: 0022-2429 (print) Vol. 80 (March 2016), 59-79
1547-7185 (electronic) 59 DOI: 10.1 509/jm. 15.0324
3. Penance mechanism: Companies engage in CSR as a form of about correlation and little about causation, these correlative
penance to offset past corporate social irresponsibility (CSI)2 studies are informative .... From the perspective of cor-
(e.g., Heal 2005; Kotchen and Moon 2012). porate managers and policy analysts, however, the dis-
4. Insurance mechanism: CSR builds a reservoir of goodwill to tinction is critical." In this study, we follow an integrative
attenuate negative reactions if and when things go wrong; in
approach and examine all four mechanisms simultaneously.
other words, CSR provides an insurance mechanism against
CSI (e.g., Rammer 2013; Godfrey, Merrill, and Hansen We also use what we deem appropriate econometric tech-
2009). niques to move closer to causality.3 Specifically, recog-
nizing that we have annual data on more than 4,500 firms
The good management, penance, and insurance mecha-
across 19 years (i.e., large cross section and small time
nisms, explicitly or implicitly, postulate positive effects of
series), that there is a need to model the interplay among
CSR on firm performance, whereas the slack resources
CSR, CSI, and firm value simultaneously and there might
mechanism suggests a positive effect of firm performance on
be contemporaneous effects among the three variables, we
CSR. Thus, while not mutually exclusive, good management
propose and estimate a structural panel vector autoregressive
and slack resources mechanisms propose reverse causal (SPVAR) model.
paths. Likewise, while again not mutually exclusive, penance
Our results show support for good management and
and insurance mechanisms also propose reverse causal
penance mechanisms but none for slack resources and
paths. Specifically, the penance mechanism suggests that
insurance mechanisms. That is, our empirical findings
firms engage in CSR in time t to offset CSI that occurred
suggest that firms benefit financially from CSR because it
in time t- x, x > 1, whereas the insurance mechanism
leads to positive financial performance. Moreover, we
proposes that firms engage in CSR in time t - x, x > 1, to
find that CSR frequently trails CSI temporally - that is,
insure against CSI in time t.
that firms seem to use CSR strategically to offset past
The key purpose of our study is to investigate these four
CSI. Yet our results also suggest that the penance
mechanisms simultaneously and identify which of them is/
mechanism is not effective at compensating for negative
are operative. Thus, we further the debate on how doing good effects of CSI.
and doing well converge. Moreover, while addressing this
We proceed as follows: We first elaborate on the four
question, we also shed light on the at least equally important
mechanisms proposed in the literature. Next, we develop our
question of whether doing good and doing well converge. We
empirical model specification that allows us to examine the
find that the answer to the latter question appears to be yes;
dynamic interplay among CSR, CSI, and firm performance.
thus, the answer to the former question has substantial academic
Subsequently, we present our data and empirical results. We
and managerial significance.
conclude with a discussion of the implications, as well as
Of note is that the CSR literature provides empirical limitations, of our research.
support for each of the four mechanisms; however, as
indicated previously, a limitation of the literature is that it has
not yet studied the four mechanisms simultaneously. Indeed, Background
the studies only examine one or at most two of the mecha- Extant CSR literature suggests four mechanisms of how CSR
nisms (i.e., slack resources and good management) at a time. and firm performance relate to each other. As shown in
Such an approach might be problematic because important Figure 1, the first two mechanisms (i.e., slack resources and
relationships that the unmodeled mechanisms suggest could good management mechanism) involve the direct link between a
result in either a partial picture of the phenomenon or, worse firm's CSR and its financial performance, whereas the last
yet, false statistical findings (i.e., omitted variable bias). The
two mechanisms (i.e., penance and insurance mechanism)
current study shows, for example, that CSR and CSI are examine the link between CSR and CSI. The performance
significantly correlated. Thus, by modeling only CSR and implications of CSR are implicit in the latter two mecha-
firm performance potentially important effects resulting from nisms, as CSR is expected to mitigate the adverse influence
CSI cannot be teased out. In addition, most studies employ of CSI incidents. In the following, we describe the four
simplistic and correlational, rather than causal, econometric mechanisms as well as the relationship among the four
models. Highlighting the issues regarding these models,
Margolis, Elfenbein, and Walsh (2007, p. 27) urge that 3As we mention subsequently, we take several concrete steps to
"causal mechanisms need to be ... tested." Similarly, King move closer to causality, recognizing that we are relying on real-
and Lenox (2001, p. 107) suggest that if "one cares merely world data and that experimental data cannot be used to study such
complex organizational phenomena. In light of the time series data
that we employ (e.g., Demiralp and Hoover 2003), we take the
2We define CSI as firm-induced incidents that appear to hurt the following steps: We ensure that our data are stationary; we
social good - that is, the antithesis of CSR. BP' s Deepwater Horizon simultaneously model CSR, CSI, and firm performance to ensure
oil spill in 2010 is an example of a CSI incident. However, we there is no omitted simultaneity; and, in line with the literature, we
recognize that firm efforts drive both CSR initiatives (which can be include contextually grounded contemporaneous effects (which lead
viewed as direct efforts) and CSI incidents; thus, Appendix A to the structural VAR specification) to mitigate deleterious effects
presents a theoretical model that links CSR and CSI efforts to our from temporal aggregation. Furthermore, recognizing the panel
measures of CSR initiatives and CSI incidents. Because our data are nature of our data, we include firm- and time-specific fixed effects
annual, consistent with our measure of CSR that counts the number and adapt the Blundell and Bond (1998) estimator that uses lagged
of CSR initiatives, our measure of CSI counts the number of CSIvalues and change in lagged values for endogenous variables as
incidents. instruments to identify the causal effects.
60 1 Journal of Marketing, March 2016
FIGURE 1
The Four Mechanisms
Time (t) Time (t)

Financial Performance CSR CSI CSR
l J l J
ï ï
Mechanism 1 Mechanism 3
Slack Resources: Penance:
Financial performance in (t - x, x > 1 ) CSI in (t - x, x > 1 )
causes CSR in t causes CSR in t
Time m (t) Time (t)

CSR Financial Performance CSR CSI
'
Mechanism 2 Mechanism 4
Good Management: Insurance:
CSR in (t- x, x £ 1) CSI in t
causes financial performance in t causes CSR in (t - x, x > 1 )
mechanisms in more detail. Table 1 shows examples

In addition, ofmost cited scholarly article in
arguably the
support of the slack resources mechanism is McGuire,
empirical studies on the four mechanisms.
Sundgren, and Schneeweis (1988), which shows that a
Slack Resources Mechanism firm's prior performance is more closely related to its
CSR than subsequent performance. Others, such as
A plethora of studies have examined the direct link between a
Preston and O'Bannon (1997), conclude that the rela-
firm's CSR and its financial performance (for a survey see,
tionship between CSR and financial performance is
e.g., Margolis, Elfenbein, and Walsh 2007). Some of these
bidirectional, while Scholtens (2008) reports that only a
studies posit that firms engage in CSR because they are doing
few studies have used CSR as the dependent variable and
well financially, generally referred to as the slack resources
financial performance as the independent variable. Thus,
mechanism. Supporters of this link argue that good financial
empirical substantiation of the slack resources mecha-
performance provides firms with slack resources, which in
nism is relatively sparse.
turn provide the opportunity to invest in CSR-related activities
such as community relations (e.g., Orlitzky, Schmidt, and
Good Management Mechanism
Rynes 2003; Waddock and Graves 1997). In addition, pro-
ponents of the slack resources mechanism tend toMost viewofCSRthe extant empirical CSR-related research has
activities as voluntary, meaning that managers have a high the conception that companies do well by doing
scrutinized
good (e.g.,
flexibility to initiate or cease them. Accordingly, they argueBarnett and Salomon 2012; Bhattacharya and Sen
that a firm's decision to invest in CSR activities largely
2004; Jayachandran, Kalaignanam, and Eilert 2013; Luo and
Bhattacharya 2006; Margolis, Elfenbein, and Walsh 2007;
depends on the availability of excess cash (Chin, Hambrick,
and Treviño 2013; McGuire, Sundgren, and Schneeweis
McWilliams, Siegel, and Wright 2006). Of these studies,
1988). Similarly, advocates of the slack resources mechanism roughly 50% find a positive relationship between CSR and
also tend to believe that CSR-related activities are not critical financial performance, 25% find no relationship, 20% find
to the success of the firm; that is, they fall under the category mixed results, and 5% find a negative relationship (Margolis
of discretionary spending and are thus especially sensitive to and Walsh 2001; Scholtens 2008).
the existence of slack resources (e.g., McGuire, Sundgren, Proponents of the doing well by doing good viewpoint
and Schneeweis 1988). argue that the cost of CSR is lower than the benefits that
Supporters of the slack resources mechanism have used accrue from it (e.g., Hull and Rothenberg 2008) and that it is
various examples to support their mechanism. For example, simply a part of good management to engage in CSR. They
Waddock and Graves (1997) report that IBM had significant suggest, for example, that superior CSR can attract and
philanthropic programs during good economic times but retain quality employees (e.g., Greening and Turban 2000);
canceled many of those programs when the going got tougher. enhance employees' morale, productivity, and satisfaction
Moreover, Chin, Hambrick, and Treviño (2013) report that (e.g., Waddock and Graves 1997); reduce costs by increasing
conservative CEOs pursue CSR only as performance allows. operational efficiencies (e.g., Hart and Ahuja 1996); increase
Corporate Social Responsibility and Firm Performance 1 61
TABLE 1
Examples of Empirical Studies on the Four Mechanisms
Other
Representative Mechanisms Empirical Key Insights Pertaining to
Mechanism Papers Examined Approach Empirical Basis the Four Mechanisms
Slack McGuire, Good Ordinary Data on 131 publically A firm's prior performance is
resources Sundgren, and management least traded firms' CSR more closely related to CSR
Schneeweis squares covered in the Fortune than is subsequent firm
(1988) (OLS) survey of corporate performance.
reputations between
1983 and 1985; firm
performance from 1977
and 1984
Chin, Hambrick, Good Generalized Data on up to 249 Conservative chief executive

and Treviño management estimating publically traded firms' officers (CEOs) pursue CSR
(2013) equation CSR initiatives between initiatives only as performance
2005 and 2009. Authors allows, whereas liberal CEOs
use KLD data to capture emphasize CSR even when
the firms' CSR. recent firm performance is low.
Good Luo and Slack Structural Data on 1 13 publically CSR is a driver of customer
management Bhattacharya resources equation traded firms for the satisfaction, which in turn
(2006) modeling 2001-2004 periods; drives firm performance.
firms are covered in the Notably, CSR reduces
ACSI and Fortune's customer satisfaction and
America's Most Admired hence performance among
Corporations survey firms with low innovativeness
capability
Jayachandran, Hierarchical Data on 518 publically Product social performance
Kalaignanam, linear traded firms (3,701 firm- (PSP) has a positive impact on
and Eilert (2013) modeling years). Authors use KLD financial performance. In
data to capture the firms' addition, PSP weakness
CSR. harms firm performance more
than PSP strength helps firm
performance.
Penance Kotchen and Insurance Pooled Performance and CSR Firms engage in CSR in order
Moon (2012) OLS, data on all firms listed in to offset past CSI.
between- the KLD database
effects and (-3,000) from 1991 to
fixed-effects 2005.
models
Muller and Event study Data on 354 publically Firms' reputation for CSI was
Kräussl (201 1) and OLS traded firms. Authors associated with the greatest
use KLD data to capture likelihood of making a
the firms' CSI. subsequent charitable
donation in response to
Hurricane Katrina.
Insurance Godfrey, Merrill, Event study Data on 178 negative Prior CSR provides insurance-
and Hansen and OLS events caused by like benefits to the firms that
(2009) publically traded firms caused negative events.
between 1 993 and 2003.
Author uses KLD data to
capture firms' CSR.
Flammer (201 3) Event study Data on 1 56 ecologically Negative stock-market
and OLS harmful events caused reactions to ecologically
by publically traded firms harmful announcements are
between 1 980 and 2009. smaller for firms with higher
Author uses KLD data to levels of environmental CSR.
capture firms' CSR.
customer satisfaction (e.g., Luo and Bhattacharya 2006);resulting

and positive stakeholder perceptions of the firm (e.g.,
Hull and Rothenberg 2008). Accordingly, scholars who
help the firm market its products (e.g., Fombrun 1996).
support
Advocates of this link have proposed that CSR can become a the positive effect of CSR on financial performance
source of competitive advantage due to, for example, have
the argued that CSR improves stakeholder relationships,
which leads to positive firm performance (e.g., Hillman and proponents of the insurance mechanism posit that CSR
Keim 2001 )A should not be used to atone for past CSI but rather as
insurance against future CSI. Thus, compared with the
Penance Mechanism penance mechanism, where CSI in time t-x, x>l,
Historically, most research has examined the slack causes CSR in time t, proponents of the insurance mech-
resources
anism
and/or good management mechanisms to address how CSR propose that potential CSI in time t should cause CSR
in time t-x, x > 1 . The insurance mechanism is con-
and firm performance relate to each other; more recently,
however, scholars are beginning to explore other ceptually
mech- grounded in the literature that suggests that a
anisms. Building on Heal (2005), who proposes that firm'sCSR
good reputation can serve as an intangible asset in
times of crises and attenuate negative stakeholder responses
is a program of actions for firms to reduce externalized
to bad news
costs, Kotchen and Moon (2012) argue that firms engage in (e.g., Jones, Jones, and Little 2000; Godfrey,
Merrill,
CSR as a form of penance to offset their past CSI. Spe-and Hansen 2009; Schnietz and Epstein 2005); in
other words,
cifically, Kotchen and Moon (2012) argue that CSR is a CSR presumably helps build a reservoir of
goodwill among the firm's stakeholders that endows the
type of Coasian solution that allows firms to efficiently
firmhas
reduce externalized costs (i.e., costs that the firm with idiosyncrasy credits that act as safeguards (i.e., as
caused through CSI but that it does not pay back in insurance
full). In against CSI).
essence, CSR allows the firm to make amends for the Klein and Dawar (2004) provide empirical support for
unpaid bill. the notion that CSR acts as an insurance mechanism against
For example, in the case of an oil spill, the company that CSI. Specifically, they demonstrate that CSR attenuates
caused the spill usually only pays a fraction of the long-term negative consumer responses in the case of a product harm
costs that accrue from the spill, largely because it is crisis. In addition, Flammer (2013) finds that the negative
impossible to estimate the precise long-term costs and stock market reaction to ecologically harmful events is
damage caused. Similarly, when firms treat their workers smaller for companies with higher levels of environmental
poorly, it is difficult to gauge the negative ripple effect of CSR. Furthermore, Minor (2011) and Minor and Morgan
this poor treatment on the individual workers, their families, (201 1) propose that the primary role of CSR is to increase a
and the communities in which they live. Yet (primarily firm's value by insuring the firm against potential losses
nonacademic) empirical evidence shows that firms are caused by future CSI. The performance implications of this
penalized if they are perceived as not holding up their end of mechanism are thus again implicit: although the returns to
the bargain and conducting their business in ways that CSR during "normal times" might be insignificant, the
conflict with social norms and values. For example, fol- financial benefits of CSR during adverse events could be
substantial.
lowing the Deepwater Horizon oil spill in 2010, U.S. public
opinion polls were extremely critical of BP' s initial response
to the spill, and sales at BP gas stations declined by as much Relationship Among the Four Mechanisms
as 40%. Thus, Kotchen and Moon (2012) argue that firms Although the four mechanisms described previously suggest
have an incentive to engage in CSR because it acts as a different causal paths, it is important to note that they are not
penance mechanism that allows the firm to compensate for necessarily mutually exclusive. For example, while the good
externalized costs stemming from past CSI. The perfor- management and slack resources mechanisms propose
mance implications of this approach are implicit. reverse causal paths (i.e., CSR -► financial performance vs.
financial performance CSR), it is possible that both
Insurance Mechanism
mechanisms are active in a firm. Indeed, while a firm might
Similar to the penance mechanism, advocates of thebelieve
insur- that it will benefit financially from engaging in CSR,
ance mechanism argue that it is imperative to consider
the CSR
firm might be more inclined to do so if it is already doing
and CSI as separate constructs. Moreover, proponents of
well financially. Likewise, although the penance and insur-
the insurance mechanism also view CSR as a strategicance mechanisms also propose reverse causal paths, they are
mechanism that can protect against (future) CSI (e.g.,
again not necessarily mutually exclusive, and firms might
Flammer 2013; Godfrey, Merrill, and Hansen 2009; Minor
engage in both. Moreover, firms could potentially invest in
and Morgan 2011). The two mechanisms differ in CSRthat
to build goodwill (i.e., invoke insurance) during times
when they have financial slack. Thus, the insurance and
4As indicated previously, a small fraction (approximatelypenance
5%) of mechanisms are also not mutually exclusive. In
the studies that have examined the CSR-financial performance link
general, interdependencies might exist among all four
reason that CSR results in negative financial performance (e.g.,
mechanisms; therefore, it becomes important to study them
Margolis and Walsh 2001; Scholtens 2008). Advocates of this
simultaneously.
negative effect usually argue that CSR unnecessarily raises a firm's
costs (e.g., Aupperle, Carroll, and Hatfield 1985; McWilliams and
Siegel 1997) and that it draws resources away from the coreSummary
areas of and Initial Evidence
business (e.g., Jensen 2002), which ultimately results in subpar
Although our literature review suggests four mechanisms
performance. We note that such an effect would suggest a fifth
mechanism: the bad management mechanism. Little evidence exists the relationship between CSR and firm performance,
regarding
in the literature for this effect, so we do not include it here,researchers
though have made no attempt to simultaneously study
our empirical analysis does test it. these mechanisms (nor to summarize these mechanisms as
we do here). The majority of the literature focuses on one FIGURE 2
mechanism at a time (typically on the direct influence of Pairwise Correlations
CSR on firm performance outcomes) and thus only paints
a partial picture of CSR' s influence. Furthermore, the A: Pairwise Correlation Between CSR and
dichotomization of CSR into CSR and CSI is a recent
phenomenon (e.g., Groening, Swaminathan, and Mittal 2015;
Jayachandran, Kalaignanam, and Eilert 2013; Kotchen■151and
Moon 201 2).5 Finally, as King and Lenox (2001) observe, the
methods used in the extant CSR literature are either too
.10- nn
simplistic, perhaps because they focus on only one mecha-c s /
nism, or simply inappropriate (also see Margolis, Elfenbein, N / ^ N/ '
« ^ x / 7 ' / '
and Walsh 2007; Scholtens 2008). I « .05- ^ v ' ' V / '
To further corroborate the misgiving that can stem from o ü 'r V v V V'
V
correlational analysis focusing on only one relationship at a o y
time, we resort to model-free analysis of our data. As we 00
1992 1994 1996 1998 2000 2002

elaborate subsequently, we have firm-level annual data for
up to 19 years (i.e., an unbalanced panel) from multiple
-.05 -
sources on number of CSR initiatives, CSI incidents, firm Year
performance (Tobin' s q), and other variables. In Figure 2,

Panel A, we show the pairwise correlation between a firm's
lagged CSR (i.e., t - 1) and its current financial per-
formance (i.e., t) as well as the pairwise correlation
between a firm's CSR (i.e., t) and its lagged financial
B: Pairwise Correlation Between CSR and CSI
performance (i.e., t - 1).
Note that the correlation between lagged CSR and
financial performance (solid line) is positive from 1992 to■5 1
2002 and close to zero from 2003 to 2009. Thus, one might
conclude that firms benefit financially from CSR (i.e., that the
data provide support for the good management mechanism) o J
given the positive correlation between the two constructs

ro ^ / J
o y
until 2002. However, the dotted line in Figure 2, Panel A, to- X O S'
reveals that the correlation between lagged financial
performance (i.e., t - 1) and CSR (i.e., t) looks quite similar.
Indeed, financial performance in t - 1 is positively corre-
lated with CSR from 1992 to 2005. Therefore, on the basis .0 -H
1992 1994 1996 1998 2000 2002 2004 2006 2008

of these data, one might conclude that companies engage in
CSR because they are doing well financially (i.e., support Year
for the slack resources mechanism).
Similarly, in Figure 2, Panel B, we present the correlation
between CSR and CSI. The solid line shows the pairwise
correlation between a firm's lagged CSR (i.e., t - 1) and its
CSI (i.e., t). The correlation increases from .03 in 1993 to .43
Notes: The correlations shown
in 2003 and remains at approximately .40 until 2009. Fur- data set of more than 4,500 firms. We also examined the
thermore, the dotted line in Figure 2, Panel B, shows the correlations considering only firms for which we have full data
pairwise correlation between CSR (i.e., t) and lagged CSI across the 19 years (i.e., balanced panel; n = 190), and the
results are similar. The CSR and CSI scores are from the KLD
(i.e., t - 1) and identifies a similar pattern. Thus, paradoxi-
Social Ratings Database.
cally, these patterns suggest that firms increasingly tend to do
both "good" and "bad," and therefore, it seems sensible
to examine which comes first - CSI or CSR? We note that
correlation between CSI and CSR also emphasizes the
the correlational analysis again does not shed much lightimportance of including CSI as an additional variable in the
on whether CSR antecedes CSI or vice versa. The high CSR-firm performance framework. Indeed, it is possible that
the close-to-zero correlation between CSR and firm perform-
ance starting in approximately 2003 (as discussed previously
5Several studies have subtracted a firm's CSI scores from the
and shown in Figure 2, Panel A) can be explained by the high
firm's CSR scores to arrive at the firm's (net) CSR score (e.g., Hull
correlation between CSR and CSI starting around that same
and Rothenberg 2008; McWilliams and Siegel 2000; Servaes and
time; in other words, the prevalence of CSI cancels out the
Tamayo 2013; Waddock and Graves 1997). However, such an
approach assumes that CSR and CSI are equivalent and, forotherwise positive performance effects of CSR. We next
example, that a good deed fully "writes off' a bad deed, which is develop an empirical model specification that allows us to test
likely not the case. for the existence of the four mechanisms simultaneously.
64 / Journal of Marketing, March 2016
Model CSIit
(1) Ax CSRit
Motivation
Tobin' s q¡t
Our data are similar to extant CSR literature (e.g., Margolis, P Xu Xn À,j3 CSIi(t_p)
Elfenbein, and Walsh 2007), in that we have annual infor-
mation on CSR initiatives and CSI incidents. We believe that = ^21 ^22 ^23 CSRj(t_p)
these initiatives and incidents are linked together by the basic P='|Xi Xpn J&j LTobin's Oi(.-P).
economic concept of firm efforts - in which efforts are Öcon.CSlXit + Tiesu + TcSlD
reflected in initiatives and determine the incidents. Thus, it is + öCOn, CSrXu + TļcSR.i + TcSrD
important to provide microeconomic foundations for the
öcon,Tobin'sqXit + ^Tobin'sq.i I~Tobin'sq
relationship between CSR and firm performance, because
9CSI it
such a foundation helps develop "a better understanding of
economic activities and outcomes," (Kreps 1990, p. 7), in + ^CSRit
which activities relate to CSR and CSI and outcomes to firm _^PTobin'sqit _
performance. We thus develop a model based on economic

p Aqj X'2 À,J3 CSIi(t_p)
theory (an exercise similar in spirit to Hanssens and Ouyang
2001) that (1) builds on theory of the firm primitives = J, À,2i X 22 ^23 CSRi(t-p)
(i.e., profits, sales, and costs) to view the firm as maximizing p=l [x.3, xp32 xpi}' LTobin's q.(.-p).
net present profit and (2) uses optimal control theory to model + OconXjt + H¡ + ID + <pit,
the costs associated with CSR. In the economic theory model,
where
we recognize that CSR and CSI influence sales and costs; as a
result, the optimal solution involves a complex interplay '1 0 O'
among CSR, CSI, and firm performance. The economic A = - a2i 1 0 ;
theory model also suggests that our empirical model speci- - a3i - a32 1 _
fication should capture the simultaneous interplay among
i = 1, 2, ...,N is the firm index; t e{To,Ti,
CSR, CSI, and firm performance. For exposition purposes,
period index; CSI, CSR, and Tobin's q ar
we provide details on the economic theory model in
variables in the system; yit = [CSIit, CSRit
Appendix A.
the 3 X 3 matrix that indicates the conte
tionships among the endogenous variables,
Model Development
and (X32 represent the contemporaneous eff
As mentioned previously, we have annual panel data on firms the contemporaneous effect of CSI on T
in which we observe firm performance (Tobin' s q) and the contemporaneous effect of CSR on Tobin's
firms' levels of CSR and CSI. Recognizing that we have
panel data on a large number of firms as well as a system of ~ip >p
1 1 12 *13
equations, and that we seek to model dynamics, we employ a ^21 ^22 ^23
panel vector autoregression (PVAR) specification (e.g., _^31 ^32 ^33.
Holtz-Eakin, Newey, and Rosen 1988, Love and Zicchino
2006). Furthermore, because we have annual-level data, it is the coefficient matrices of the lags of the endogenous
seems reasonable to assume contemporaneous effects among variables where X£3, X^2, and XPl2 (p=l,...,P) are
some of the focal variables (i.e., CSR, CSI, and firm per- associated with the four mechanisms (slack resources, good
formance). Therefore, we employ a SPVAR specification in management, penance, and insurance mechanism, respec-
which a vector of endogenous variables is linearly repre- tively); P = the number of lags; Xlt = the (K x 1 ) vector of the
sented by its current and lagged effects (e.g., Cooley and control variables for firm i at time t (i.e., ROA, log(employee),
Dwyer 1998, Enders 2004). In particular, we specify the financial leverage, advertising-to-sales, and R&D-to-
relationship among CSR, CSI, and firm performance using a sales), where K is the number of control variables;
system of three equations. The first equation assesses the ©con = [©con, CSI» 6con,CSR» öCOn,Tobin'sq] > where 0conv <U*e the
effect of prior CSR, prior CSI, and prior firm performance on (1 x K) vector of coefficients of the control variables for
current CSI. The second equation assesses the effect of prior each equation; H¡ = [ticsii, r|CSRi, %obin sqii]' where r| ¡
CSR, prior and current CSI, and prior firm performance on is the unobserved firm-specific fixed effect for firm i;
current CSR. Finally, the third equation assesses the effect of D = [di99i, ...,d2009]' is the (T x 1) vector of year
prior and current CSR, prior and current CSI, and prior firm dummies where dt = 1 if year = t, dt = 0 otherwise;
performance on current firm performance. We note that we r= [Iesi, Icsr, rTobinsq]' where r. is the (1 xT) vector of
control for several other variables (e.g., ROA, firm size) that coefficients of the year-fixed effect; T = the number of time
may also have an impact on the three focal variables. In periods; and <pit = [<pCSIit, (pCSRit, <probin.s qit]' = the error term
summary, the three equations form a system of equations that for the system of equations. In addition, the composite error
allows us to understand the dynamic interplay among CSR, term coit = [o>csnt, cocsru, cabin's qit] is expressed as the usual
CSI, and firm performance, and we estimate the following fixed effect decomposition, where Cûjt = H¡ + cplt. Further-
SPVAR model: more, we assume that (pit is independently and identically
distributed across i and t with the assumption that in CSR immediately after CSI occurred because, in their
E(<Pitly¡(t- 1) opinion, stakeholders would want to see the company "make
E(<Pit<Pit'|yi(t-i)>---.yi(t-p)) things right again." Moreover, in support of our argument that
firm performance does not have a contemporaneous effect on
fc.foM.j otherwise •«"«
10, otherwise J = »), for0stSsST- CSR, 80% of the respondents reported that, unless CSI
occurred, they change their CSR strategy annually or even
where E<p is a positive definite matrix.6
less frequently and that short-term firm performance does not
Contemporaneous Effects affect their firm's CSR.
In summary, we let the matrix A be a lower triangle
Compared with the reduced-form PVAR specification, our
matrix because we believe there are no contemporaneous
SPVAR model is multiplied by the matrix A to account for
effects on CSI from CSR and firm performance and on CSR
potential contemporaneous effects. We use theoretical
from firm performance. Thus, we use this recursive causal
elaboration, as Iyengar, Van den Bulte, and Lee (2015)
ordering to identify the structural parameters in the matrix A
suggest, to identify the contemporaneous relationship among
(for details regarding our estimation procedure, see the Web
firm performance, CSR, and CSI. In particular, we assume
Appendix).
that CSI has a contemporaneous effect on CSR (i.e., (X21 * 0)
because at least some firms should engage in CSR activities
shortly after CSI occurred to attenuate negative consumer
responses (e.g., following its toy recall in late 2007, Mattel Data and Method
started testing every production batch of toys for containing
potentially dangerous levels of chemicals and toxins).
KLD Social Ratings Database
However, we do not see any reasons why CSI incidents
We obtained corporate social performance data from the
should occur immediately after the firm engaged in CSR.
Kinder, Lydenberg, and Domini (KLD) Social Ratings
Moreover, firms often do not time and/or have control over
Database. This database has been widely used in the aca-
when CSI occurs. Oil spills, for example, almost always
demic literature (e.g., Hull and Rothenberg 2008; Kotchen
happen by accident, and the likelihood of them occurring
before or after CSR would thus be the same. and Moon 2012); it provides annual data on firms' strengths
and concerns in seven social issue areas: community, cor-
Furthermore, we also assume that CSI has a con-
porate governance, diversity, employee relations, environ-
temporaneous effect on firm performance (i.e., (X31 * 0).
ment, human rights, and product quality and safety. For
Indeed, firms' stock prices often decrease after a significant
example, the community area consists of eight strength
CSI incident occurs (e.g., BP' s stock price decreased after
indicators (e.g., charitable giving, support for housing,
the oil spill in 2010; also see Flammer 2013). Yet although
support for education) and six concern indicators (e.g.,
firm performance might have a longer-term effect on CSI
investment controversies, negative economic impact). The
(i.e., when firm performance continues to decline, firms might
KLD data begins in 1991, and we used the complete KLD
eventually take shortcuts, which could increase the likelihood
data set up until 2009. We note that KLD substantially
of CSI occurring in the future), short-term firm performance
changed its inventory of strength and concern indicators in
should not have a contemporaneous effect on CSI. Finally,
2010, making comparability to prior years very tenuous (e.g.,
we assume that CSR has a contemporaneous effect on firm
Chin, Hambrick, and Treviño 2013). Thus, all firms for which
performance (i.e., «32 * 0), but not vice versa. As Chollet
KLD provides data for the time period 1 99 1-2009 constituted
and Cellier' s (2011) event study demonstrates, CSR
our initial sample. In Table 2 we list all strength and concern
announcements can influence short-term firm performance.
indicators across the seven issue areas. Overall, the database
However, our discussions with numerous senior executives
covers approximately 80 indicators.
suggest that firms evaluate and plan their CSR activities and
Consistent with Kotchen and Moon (2012), we consider
goals annually (or even less frequently). Therefore, it is
all strength indicators as CSR and all concern indicators as
highly unlikely that they would change their CSR strategy on
CSI of the firm. The KLD database provides a yearly binary
the basis of short-term firm performance. Moreover, as
summary of a firm's strengths (i.e., CSR) and concerns
mentioned previously, we employ Tobin' s q to capture firm
(i.e., CSI) for each indicator belonging to the seven social
performance in this study; considering that Tobin's q is a
issue areas. For example, if a firm has consistently given more
market-based performance measure, it should capture any
than 1.5% of trailing three-year net earnings before taxes to
changes in CSR or CSI contemporaneously.
charity, the "charitable giving" CSR indicator for the firm and
We conducted a survey among 25 U.S.-based senior
executives to validate our identification restrictions. The year is coded as 1 , otherwise 0. To determine each firm' s CSR
and CSI in a given year, we followed Kotchen and Moon's
survey results provided strong support for our assumptions.
(2012) approach and totaled the firm's scores of all strength
For example, most executives confirmed the contempora-
and concern items in and across all seven issue areas. Thus,
neous effect from CSI to CSR, noting that they would engage
for each year, we calculated two scores for each firm: one
representing the firm's overall CSR and the other one its
6This assumption ensures that the equation-by-equation estimator
(e.g., Arellano and Bond 1991; Blundell and Bond 1998) isoverall CSI. We note that this procedure places equal weight
asymptotically equivalent to the corresponding system-of-equationson each item. Next, we created the standardized overall CSR
estimator of PVAR models (Cao and Sun 201 1). and CSI scores for each firm and year:
TABLE 2
Strength and Concern Items of the KLD Social Ratings Database
Qualitative Issue Area Type Categories # of Categories
Community Strengths Charitable Giving, Innovative Giving 8

Non-U.S. Charitable Giving
Support for Housing
Support for Education (added 1994)
Indigenous Peoples Relations (added 2000,
moved 2002)
Volunteer Programs (added 2005)
Other Strength
Concerns Investment Controversies 5
Negative Economic Impact
Indigenous Peoples Relations (200
Tax Disputes (added 2005)
Other Concern
Corporate governance Strengths Limited Compensation 5

Ownership Strength
Transparency Strength (added 2005)
Political Accountability Strength (added 2005)
Other Strength
Concerns High Compensation 6
Ownership Concern
Accounting Concern (added 2005)
Transparency Concern (added 2005)
Political Accountability Concern (add
Other Concern
Diversity Strengths CEO 8

Promotion
Board of Directors
Work/Life Benefits
Women & Minority Contracting
Employment of the Disabled
Gay & Lesbian Policies
Other Strength
Concerns Controversies 3
Non-Representation
Other Concern
Employee relations Strengths Union Relations 7

No-Layoff Policy (ended 1 994)
Cash Profit Sharing
Employee Involvement
Retirement Benefits Strength
Health and Safety Strength/Other Streng
Concerns Union Relations 5
Health and Safety Concern
Workforce Reductions
Retirement Benefits Concern (added 1992)
Other Concern
Environment Strengths Beneficial Products and Services 8

Pollution Prevention
Recycling
Clean Energy
Communications (added 1996, moved 2005)
Property, Plant, and Equipment (ended 1995)
Management Systems
Other Strength
Concerns Hazardous Waste 7
Regulatory Problems
Ozone Depleting Chemicals
Substantial Emissions
Agricultural Chemicals
Climate Change (added 1999)
Other Concern
TABLE 2
Continued
Qualitative Issue Area Type Categories # of Categories
Human rights Strengths Positive Record in South Africa (1994-1995) 4

Indigenous Peoples Relations Strength
(added 2002)
Labor Rights Strength (added 2002)
Other Strength
Concerns South Africa (ended 1994) 7
Northern Ireland (ended 1994)
Burma Concern (added 1995)
Mexico (1995-2002)
Labor Rights Concern (added 1 998)
Indigenous Peoples Relations Concern
(added 2000)
Other Concern
Product Strengths Quality 4

R&D/Innovation
Benefits to Economically Disadvantaged
Other Strength
Concerns Product Safety 4
Marketing/Contracting Concern
Antitrust
Other Concern
over time. For example, Cox, Brammer, and Millington

desumi (O)"" -CSR(I)'t-CSR(I)t (2004) argue that improved corporate social performance
desumi (O)"" s.d. (CSR(I)t),
should lead to significant financial gains only in the long run.
where Z(CSR(I))it is the standardized CSR(I) score for firm i Therefore, compared with accounting-based financial per-
and year t, CSR(I)it is the original CSR(I) score for firm i and formance measures such as return on assets (ROA) or return
year t, CSR(I)t is the average CSR(I) score in year t, and on equity (ROE), which only capture short-term perfor-
s.d. (CSR(I)t) is the standard deviation of CSR(I) score in mance, Tobin 's q is a more appropriate financial performance
year t. measure to understand the benefits as well as potential costs
Following recent CSR and CSI research (e.g., Kotchen of a firm's social performance (see Germann, Ebbes, and
and Moon 2012), we standardized the scores for two reasons: Grewal 2015). We calculated Tobin' s q using Chung and
First, some of the CSR and CSI items were added and/or Pruitt's (1994) proposed method.
removed over the years. Thus, the total number of CSR and
CSI items varies over time (as mentioned previously, we Control Variables
include time fixed effects in our model specification, which
It is important to account for firm-, industry-, and economy-
also control for this change in items). For example, the
specific variables, because the market valuation of a firm
support for education (CSR) item, which is one of the
(Tobin's q) can depend on these factors (e.g., Lee and Grewal
strengths in the community area, has existed only since 1994.
2004). To account for firm-specific variables, we include
Second, the number of firms included in the KLD database
financial leverage, ROA, and firm size as control variables.
also varies over time. For example, the KLD database includes
Financial leverage should be negatively related with Tobin's
approximately 650 firms from 1991 to 2000, approximately
q; ROA, which reflects current period profitability, should be
1,100 firms from 2001 and 2002, and approximately 3,100
positively related with Tobin's q; and firm size should be
firms from 2003 onward. Therefore, we used standardized
negatively related with Tobin's q (Jayachandran, Kalaignanam,
CSR and CSI scores in our analysis to minimize the effect of
and Eilert 2013). Moreover, we also include R&D intensity
different samples sizes.
(i.e., the ratio of R&D to sales) as a control variable because
extant research has shown that product innovations pos-
Financial Variables
itively influence Tobin's q (e.g., Sorescu and Spanjol 2008)
as well as a firm's CSR strategy (Luo and Bhattacharya
We obtained financial performance data as well as control
2009).
variables for as many of our initial sample firms and years as We also control for advertising intensity (i.e., the
possible using Compustat, our second data source. We
ratio of advertising to sales) because advertising intensity is
selected Tobin' s q as our firm performance measure known
becauseto, on the one hand, positively affect sales and brand
equity and thus Tobin's q (e.g., Sethuraman, Tellis, and
it is market based and reflects the investors' long-term
Briesch
expectation of the firm's future earnings (Miller 2004). In 201 1; Sorescu and Spanjol 2008; Sridhar, Narayanan,
and Srinivasan 2014) and, on the other hand, affect the firm's
contrast to short-term marketing efforts, such as promotions,
CSR strategy (Luo and Bhattacharya 2009). Finally, as
the financial benefits of CSR activities might only manifest
TABLE 3
Descriptive Statistics
Variables CSI CSR Tobin's q Log(emp) FinLev ROA AdtoSales RDtoSales
CSI 1.0000
CSR .3643 1.0000
Tobin's q -.0869 .0059 1.0000
Log(number of employees) [Log(emp)] .4074 .3817 -.1323 1.0000
Financial leverage (FinLev) .0778 -.0474 -.0996 .0543 1 .0000
ROA .0270 .0697 .0621 .2039 -.1008 1.0000
Advertising-to-sales ratio (%) (AdtoSales) -.0189 .0440 .1047 .0080 -.0139 -.0385 1.0000
R&D-to-sales ratio (%) (RDtoSales) -.0222 -.0213 .0747 -.0857 -.0012 -.1645 .0037 1.0000
M 1.7938 1.4851 1.6209 1.2247 .1926 .0196 .0120 .3469
SD 1.9112 2.0549 1.4342 1.9240 .2050 .1731 .0441 6.3368
Notes: The means, standard deviations, and pairwise correlati

used standardized CSR and CSI scores in our empirical an
mentioned previously, we derived include the firmgeneralized

and time ort
f
effects in our model specification
panel generalized to tease methodout indu of
idiosyncrasies (including variance-covariance
those matrix of the reduced-form
that might residual influe
(Lu).7 Furthermore,
Tobin's q calculations) with firm fixed we used Monte Carlo simulation
effects and to boo
and bust periods with timeobtain upper
fixed and lower 95% confidence bands (see Doan
effects.
Our final sample, which 1992).
is an unbalanced panel with ti
gaps, consists of approximately 4,500 firms, 24,500
points, and data from 1991 to 2009 after removing se
outliers whose Tobin's q is greater than 15. In addition,
Results
We traded
sample firms are publically present the results
firms in the following
from order:
a (1) unit root
wide ran
industries. We present thetests, (2) SPVAR estimates, and
descriptive (3) IRF results. Next,
statistics in Tablwe
present a post hoc analysis.
Data Analysis
Approach
Stationarity
We performed our analysis and Unit Root First,
as follows: Tests we tested
stationarity and unit roots. Second,
As we show in Tablewe
4, the estimated the
null hypothesis of unit rootdyn
is
panel generalized method
rejectedof moments
for all model
three variables of interest. using
Furthermore,
Blundell and Bond estimator. Third,
ADF test statistics we applied
of the first-differenced these
CSI, CSR, and
mators to each equation in the
Tobin's reduced-form
q variables PVAR
are -74.937, -97.229, and -50.413, sys
and recovered the contemporaneous effects
respectively (p < .05); thus, based
our focal variables on t
are first-
identification restrictions.difference
Finally, we
stationary. estimated the dyna
of the carryover effects (over time) using generalized imp
response functions. Model Estimation and Optimal Lags Selection
Stationarity in time series.
In the firstTo ensure
step of thatprocedure
our two-step estimation our (see analy
the
does not produce spuriousWeb results, we used
Appendix), we estimated the
a reduced-form VARaugmen
model
Dickey-Fuller test (ADF; Dickey and
using the Blundell Fuller
and Bond estimator.1979) to exam
We first determined
stationarity and unit root
the for each
optimal number time
of lags series
p, where, to
consistent with deter
research
whether the underlying data panel
on dynamic generation process
data models (e.g., Huang, Hwang, andof
variable is evolving over time or
Yang 2008), we use is stationary
the mj (Granger
statistic (where j signifies the order
Newbold 1974). Because our panel suggested
of autocorrelation) data by are unbalanced
Arellano and Bond (1991). a
have time gaps, the Im-Pesaran-Shin (2003) unit root
The idea behind the mj statistic is that the residual from the t
which has been widely dynamic
usedpanel
todata
test individual
model should be free of serial unit
auto-
processes, cannot be used.correlation.
In addition, we
Doornik, Arellano, tested
and Bond station
(2006) propose that
after first-differencing because our
if the error term D¡t ismodel estimation
not serially correlated, is b
significant and
on the first difference. negative first order serial correlationjvill occur in the dif-
ferenced residuals (i.e., vļ - î(t- 1)) and no significant
Impulse response functions. To examine the dynam
second order serial correlation will be evident. Thus, we
effect of one endogenous variable
on another, we used im
response functions (IRFs). Generalized IRFs (Dekimpe a
7We derived the impulse response functions using the variance-
Hanssens 1999; Pesaran and Shin 1998) trace the effect
covariance matrix of thejeduced-form residual (L^) rather than the
one-unit (e.g., one standard deviation) shock to one variabl
structural-form residual (I<p) because this approach allows us to relax
the system on another variable
the need to imposeover
a recursivesubsequent
ordering (Dekimpe and Hanssens time pe
1999).
while holding all other variables' shocks equal to zero.
TABLE 4 In the second step, we estimated the contemporaneous
effects
Summary of Unit Root And Stationarity Tests of The from the variance-covariance matrix of residuals from
Variables the reduced-form PVAR model. The results in Table 6
suggest that as the level of CSI increases, the level of
Variable Statistics p-Value Conclusion
CSR increases (a2i = 1.522 , p < .05); thus, it seems that
ACSI -74.937 .000 Stationary firms increase the level of CSR engagement reactively to cope
ACSR -97.229 .000 Stationary with their current CSI practices. This result suggests that the
ATobin's q -50.413 .000 Stationary penance mechanism holds contemporaneously. Furthermore,
the level of CSR has a positive impact on firm performance
Notes: We use lags of one in the ADF regression. The reported statistic
(0C32
is the inverse normal Z statistic. Choi's (2001 ) simulation = .395, p < .05), which suggests doing good leads to
results
doing well
suggest that this statistic offers the best trade-off between size immediately, in support of the good management
and power. mechanism. The contemporaneous effect of CSI on firm
performance is negative, which suggests the current level of
CSI practices decreases firm performance ((X3 1 = - .962,
p < .05).
examined the mi and ni2 statistics and obtained the optimal
We present the estimation results from the reduced-form
number of lags when the mi statistic is negative and stati-
PVAR model with a two-lags specification in Table 5. We
stically significant and when the m2 statistic is not statistically
test the validity of the instruments using the Hansen (1982)
significant. Table 5 ("AB test" rows) illustrates the first- and
test of overidentifying restrictions. The null hypothesis that
second-order serial autocorrelation results. In the equation in
instruments are overidentified is not rejected for all three
which CSI is the dependent variable, the mi statistic is estimations. Yet it is difficult to understand the effect of one
negative and statistically significant (mi = -3.21) while the
endogenous variable on another variable by examining the
m2 statistic is not significant at the .05 level (m2 = -1.72)
estimates in Table 5. Instead, to understand the dynamic
when the number of lags specified is 2. Similarly, in the
effect of the independent variables on the dependent variable,
equation in which CSR is the dependent variable, a two-lags
we must investigate IRFs that take into account the dynamic
specification satisfies the criterion suggested by Arellano and
interplay among the variables.
Bond (1991) (mi = -2.35 and m2 = -.94) at the .05 sig-
nificance level. The two-lags specification in the equation in
IRFs
which Tobin' s q is the dependent variable is also sufficient to
remove the serial autocorrelation in the residual (mi = -4.80 Because we are interested in testing the four mechanisms
and m2 = .29). Thus, the optimal lag length for our dynamic (i.e., whether and how doing good and doing well converge),
panel data model is two. we focus on the relationship between CSR and CSI and the
TABLE 5
Estimation Results From The Reduced-Form PVAR Model
Dependent
Independent CSI(t) CSR(t) Tobin's q(t)
CSI(t-1) .1620** -.2256 -.1718**

CSI(t - 2) .1250* -.1825** .0723
CSR(t - 1 ) -.0231 .4530*** .0154
CSR(t - 2) .0251 .0332 -.0593
Tobin's q(t - 1 ) -.0421 -.2986* .3935***
Tobin's q(t - 2) -.0003 -.1440 .0028
ROA -.0430 .0975 -.1103
Log(emp) -.0195 -.1489 -.2583***
Financial leverage .0841 .1074 .0409
Ad-to-sales 2.9651 23.1109 2.0771
R&D-to-sales -.0009*** .0009 -.0015
Year fixed effect9 Included Included Included
AB test (m-i) -3.21*** -2.35** -4.80***
AB test (m2)b -1.72* -.94 .29
Hansen test of overidentification restrictions^ x2 = 123.36 X2 = 12.56 %2 = 163.59
p-value: .095* p-value: .961 p-value: .084*
*10% significance level.

**5% significance level.
***1% significance level.
aWe use first-differencing in all three models to control for firm- and industry-specific fixed effects.
*>The AB test (m2) is a test for autocorrelation of the residuals for the first-differenced model. In a valid mo
AR(2) behavior.
cThe Hansen test of overidentification restrictions examines whether the instruments are valid.
TABLE 6 of firm performanc
Estimation Results of Contemporaneous
good management me
Effects influences firm perfo
(.75% increase) and tha
Dependent
approximately one yea
Independent CSI CSR Tobin's q in Figure 3, Panel A, i
not have a positive im
CSI 1 1.5216 (.0351) -.9618 (.0230)
mechanism is not supp
CSR 0 1 .3954 (.0100)
Tobin's q 0 0 1 In Panel B of Figure 3
CSR and CSI. As the l
Notes: Standard errors havearea reported in paren
positive effect
culated based on 1 ,000 bootstrap samples.
which suggests that
supported. This result i
effort does not
relationship between CSRlead to an increase
and in the levelfirm
of future CSI. perf
erating IRFs. In Figure 3,
Moreover, in support we
of the present
penance mechanism, the right-hand the
for these two relationships
graph in Figure 3, Panel B, showsalong a positive impact ofwith
CSI on t
bands generated by the
CSR that Monte
lasts for approximately one year. Carlo simu
hand graph in Figure In summary,3, Panel
our results provide empiricalA, supportwefor the sho
good management
between CSR and firm and penance mechanisms and do not (th
performance
FIGURE 3
Impulse Response Functions
A: Impulse Response Functions for the Dynamic Relationship Between CSR and Financial Performance (Tobin's
Response of Tobin's q to CSR Shock Response of CSR to Tobin's q Shock
7I
' A 05 ' -''
»
A * Q ' _ '
s
5
+;
o»
o 33'''''A' 'I X.
tí
-1-2
C O
AI tí
-V
* -.15.
'/ ' A -V * '/ /
+; £Z i ' n C -2 i *
£Z S 1 i » ' ' V n ^ 8 ~25 9^
Sm
2 »
-
» V ^ ^
û. 0 1' 2 3 4 5 6 _ _ 7- - -8
"1 '
-.4 J
-3J Year Year
B: Impulse Response F
Response of CSI to CSR Shock Response of CSR to CSI Shock
"3l ' ' 15 ' 1 i' ì

2 13 V
© 1 / x X o
1.1''
''
pCC 1/
CO
' /C
X ?9
C 9IA '' *'
/ "
o (SV 1/2 . yr 3 4 5 6 7 8 " _ja.--40 , O 7 ' '' ł

JO 0
4- ' V/ ^
a>c _
4- _
■1 1
1 ' v
1^ '- ^ ' 0) » '
o »' . »
i. X
Î-
O
° Q
* I '' - -
0)
Û. - ¿
- Q
¿ . ' '
Q X
' Q)
Û. °I I ' ' - ~
* / I ' ^
~-3 ' y -.10 1 v'2 3 4__5

*
"4 Year "3 Year
Notes: The graphs show the 2.5% and

obtained from 1 ,000 Monte Carlo s
Corporate Social
support the slack resources and insurance mechanisms. We FIGURE 4
elaborate on these findings in the discussion section. Unrestricted Versus Restricted Impulse Response
Functions for the Dynamic Relationship Between
Post Hoc Analysis: Is CSR a Potent Penance CSI and Financial Performance (Tobin's q)
Mechanism?
Given that our empirical results suggest that firms tend to

engage in the penance mechanism, we next sought to
investigate whether the penance mechanism actually makes
amends for firms' past CSI. To that end, we first investigated
the performance implications of CSI using IRFs. The black
line in Figure 4 shows the response of firm performance to a
CSI shock. As might be expected, CSI has a negative
influence on firm performance.
To examine the effectiveness of the penance mechanism,
we next estimated a restricted (as opposed to an unrestricted)
IRF; that is, we estimated the effect of CSI on firm per-
formance without allowing CSR to have an impact on either
CSI or performance. Whereas (unrestricted) IRFs examine
the effect of one variable on the full dynamic system,
Notes: The graph shows the results from the restricted (gray solid line)
and unrestricted (black solid line) IRF, as well as the 2.5% and
restricted impulse response functions examine a subset of the
97.5% confidence bands of the response functions (dashed
endogenous variables and thus allow researchers to inves- line for the restricted impulse response; dotted line for the
tigate the effect of one variable on the partial dynamic system
unrestricted impulse response).
(for technical details, see Pauwels 2004).8
The gray line in Figure 4 illustrates the effect of CSI on firm
into four mechanisms, and we test and model these four
performance under the dynamic system without CSR. Of note
mechanisms
is that the largest negative effect of CSI on firm performance is simultaneously. Existing literature (e.g., Kotchen
the same in the restricted as well as the unrestricted estimation and Moon 2012; Luo and Bhattacharya 2006; Margolis,
(i.e., -.338 at year 0). In addition, the negative effect of CSI on Elfenbein, and Walsh 2007) has studied and modeled only
firm performance fades away between years 1 and 2, regardless one or at best two mechanisms simultaneously; such an
of whether the firms' CSR is considered in the dynamic system. approach, however, is limited because it does not permit
These findings suggest that CSR does not shield a firm from or addressing concomitant effects among the four mechanisms,
attenuate the negative performance implications of CSI. Thus, resulting in either a partial picture or even false statistical
while the data indicate that firms strategically use CSR to com-
findings. As our model-free evidence shows, CSR and CSI
pensate for past CSI (i.e., engage in the penance mechanism), are (paradoxically) fairly highly correlated (r ~ .4) starting in
the effort seems fruitless from a firm performance perspective.
approximately 2003, indicating that omitting CSI from the
CSR-firm performance link might yield misleading findings.
Thus, we separate CSI from CSR, and, more importantly,
Discussion integrate the CSI construct into the CSR-financial per-
formance
To address the questions of whether and how CSR relates toframework. As should be evident, separating CSI
from the CSR construct is meaningful because failure to do so
firm performance, we seek to simultaneously model four
can effectively cancel out important granularities in the data.
mechanisms that have been proposed in the literature: slack
We note that many prior studies have simply averaged a
resources, good management, penance, and insurance. Given
firm's CSR and CSI scores into one overall CSR score (e.g.,
the identified mechanisms and the KLD and performance data
Hull andto
available, we propose a SPVAR empirical specification Rothenberg 2008; McWilliams and Siegel 2000;
Waddock
empirically model the interplay among CSR, CSI, and firm
and Graves 1997). However, such an approach
assumes that one bad deed (i.e., CSI) effectively cancels out
performance and to simultaneously test for the four mecha-
nisms. We now discuss the theoretical and managerialgood
one deed (i.e., CSR), and vice versa, which is highly
con-
questionable.
tributions and implications of our research.
Our modeling approach, new to the CSR literature, offers
Theoretical Contributions several advantages. Simultaneously modeling the four
mechanisms allowed us to explore each of the mechanisms
The literature on why firms engage in CSR is quite scattered.
and correct for any statistical simultaneity bias. Moreover,
We summarize the varying propositions and integrate we them
use the SPVAR model for a large number of firms
(approximately 4,500) for a period of up to 19 years. Thus,
8The use of restricted IRFs might be subject to Lucas's (1976)
the SPVAR specification enables us to benefit from the time
critique (e.g., Franses 2005; Van Heerde, Dekimpe, and Putsis
series and panel nature of our data and get as close to causality
2005), because the restriction changes the underlying data gen-
eration process by putting an (arbitrary) assumption on the data as possible with nonexperimental data. With stationary, time-
generation process. Cognizant of this critique, we emphasize that we series data we can account for simultaneity, one source of
use restricted IRFs in addition to generalized IRFs. identification issue, by simultaneously modeling CSR, CSI,
72 / Journal of Marketing, March 2016
and firm performance. Because these data are annual, it also resulting positive performance effects of CSR were roughly
mitigates deleterious effects from temporal aggregation four times larger when not considering CSI in the system (we
by including contemporaneous effects (which lead to the present the results in Figure WA1 in the Web Appendix).
structural VAR specification; e.g., Demiralp and Hoover This finding illustrates that not including all three variables in
2003). The panel nature of our data enables us to include firm- the system results in significantly biased estimates, in support
specific fixed effects to account for unobserved hetero- of our integrated approach. In addition, this result also
geneity, and an adapted version of Blundell and Bond's suggests that firms without CSI incidents might experience a
(1998) estimator uses lagged values and change in lagged significantly greater performance boost from their CSR
values for endogenous variables as instruments to identify investments than what the (average) positive effect of our
the causal effects. Thus, we establish near causality for the three-variable SPVAR indicates.
influence of CSR (and CSI) on firm performance. In the Increasingly, however, firms engage in both CSR and
process, we provide insights for Margolis, Elfenbein, and CSI. Indeed, Figure 2, Panel B, shows that the correlation
Walsh's (2007, p. 4) assertion that "if only doing 'good' between firms' CSR and CSI has increased significantly since
could be connected to doing 'well,' then companies might be 2000. So the question becomes: How do CSR and CSI
persuaded to act more conscientiously." Specifically, we converge? Our integrated analysis of the four mechanisms
provide empirical evidence that CSR investments have a allows us to shed light on that question. Specifically, our
positive impact on firm performance. We consider this model results indicate that many firms ramp up their CSR
finding highly noteworthy given, on the one hand, the rig- shortly after a CSI incident occurred. Although we can only
orous methods we use and, on the other hand, the ongoing, speculate, we conjecture that recent consumer trends - in
complex debate about whether doing good implies doing particular, consumers wanting firms to be better corporate
well. citizens (e.g., Ipsos 2013) - have significantly contributed to
the increased correlation between CSR and CSI. This con-
Managerial Implications sumer trend is further revealed in the media attention CSR has
We summarize the managerial implications of our research in

received over the years. We searched Factiva's 1979-2014
records and counted the number of newspaper articles that
Table 7. Foremost, our finding that doing good leads to doing
well should be of particular relevance to managers. We referenced the term "CSR" in each year. As depicted in
hope it will encourage managers and their respective firms Figure WA2 in the Web Appendix, the results revealed a
significant increase in the number of articles on CSR over the
to act more conscientiously. Moreover, our study also
shows that CSI has a significant negative effect on firm years. Moreover, the number of CSR-related articles has
performance. Although not necessarily surprising, aside increased exponentially since 2000, when the correlation
from event studies (e.g., Chen, Ganesan, and Liu 2009; between CSR and CSI began increasing as well. Thus, firms
Flammer 2013), little empirical evidence demonstrates the might engage in CSR following CSI in an effort to make
negative performance effects of CSI using a large-scale amends for their past missteps, thereby appeasing their
data set, as we do here. stakeholders. However, the results from our restricted IRF
To further assess the negative impact of CSI on firm indicate that using CSR for penance reasons does not pay off
financially.
performance, we estimated a two-variable SPVAR model
A few potential explanations for the ineffectiveness of the
including only CSR and Tobin's q and excluding CSI. The
penance mechanism come to mind. Perhaps stakeholders
interpret firms' CSR efforts following CSI as unauthentic
TABLE 7 or even as deceitful, seeking to "greenwash" their past
mistakes. Furthermore, when firms engage in CSR to
make amends for past CSI, perhaps stakeholders view
1 . Firms can expect negative financial
those efforts as a sign performan
that the CSI is more severe than they
from their CSI.
had initially thought. Such an interpretation would be
2. Increasingly, many firms engage in both CS
consistent with Chen, Ganesan, and Liu (2009), who show
3. Firms that engage in both CSR and CSI tend
CSR after CSI occurred. that when product recalls occur, proactive recall strategies
4. Many firms appear to engage in CSR after CSI occurred to result in more severe negative stock market responses than
offset their past CSI. reactive ones. Further research should investigate these
5. Using CSR to offset past CSI does not attenuate the conjectures.
negative performance implication of CSI. Rather than following CSI with CSR, firms might be
6. Few firms invest in CSR just because they are doing well
better advised to use CSR to build a reservoir of goodwill to
financially.
7. There appear to be two types of firms: insure against potential future CSI. Indeed, Flammer (2013)
• Some firms engage in CSR to offset their past CSI. shows that the negative stock-market reactions to ecologi-
• Other firms engage in CSR because (we speculate) it iscally harmful events are smaller for companies with higher
simply part of what they do. levels of previous environmental CSR. Similarly, Godfrey,
The latter firms can expect to see significant financial Merrill, and Hansen's (2009) research suggests that CSR
returns from their CSR investments. However, the former
leads to positive attributions from stakeholders who then
firms likely see little if any positive financial returns from their
CSR investments. temper their negative judgments and sanctions toward firms
when CSI occurs because of the accrued goodwill (also see
Minor and Morgan 201 1). Yet our results indicate that most do not reference the large normative literature on corporate
firms do not employ CSR in this manner. That is, we do not ethics and social responsibility. Furthermore, we treat all CSR
find empirical support for the insurance mechanism. Instead, and CSI as equally good and bad. However, treating, for
firms that engage in both CSR and CSI tend to invest in CSR example, a substantially underfunded defined pension plan the
after CSI has occurred. Our findings pertaining to the in- same way as a deep water oil spill is likely a stretch. Researchers
effectiveness of the penance mechanisms coupled with those in the future should develop a way to classify the various CSI
of Flammer (2013) and Godfrey, Merrill, and Hansen (2009) events captured in the KLD data in terms of their severity.
and others should encourage firms to consider CSR as a form
of insurance in the future. A word of caution, however, seems Conclusion
warranted: Although CSR might insure a firm against rela-
Scholars have scrutinized the concept that companies do well
tively harmless (future) CSI, it might act as a liability if severe
CSI occurs. Indeed, Germann et al. (2014) find that high by doing good for decades (e.g., McWilliams, Siegal, and
levels of brand commitment attenuate negative consumer Wright 2006). However, debates on whether and how doing
good and doing well converge continue to rage (e.g., Mackey,
responses in low-severity product recalls but augment them
in high-severity product recalls. Correspondingly, while a Mackey, and Barney 2007). While our study might not re-
reputation for CSR might provide a reservoir of goodwill solve these ongoing, complex debates, we believe that our
selection of the four mechanisms and the three-way fit among
against nonsevere CSI, it might increase scrutiny, akin to a
contrast effect, if severe CSI occurs. Further research could those mechanisms, the KLD data, and our chosen methods
and analyses shed new light on an old problem. We hope that
examine this proposition.
our research helps firms make better CSR decisions and that
Finally, we show that the slack resources mechanism is
not active. Indeed, our results indicate that slack resources it also encourages academics to further explore the perfor-
might actually lead to a decrease in CSR, although not mance implications of CSR.
until a few years later. Post hoc interviews with 1 1 exec-
utives shed at least some light on this somewhat puzzling
finding: In a nutshell, all executives acknowledged that Appendix A: Economic Theory Model
when their firms' performance increases suddenly, they will
Overview
generally not increase their non-business-related invest-
ments (e.g., CSR) in an effort to avoid jeopardizing the We suggest that firms seek to maximize the present value of
pending lucrative annual compensation (e.g., high bonuses their future profits where these profits depend on sales and
due to the strong performance). Researchers should further costs. We also suggest that efforts related to CSR and CSI
investigate this potential explanation. avoidance9 influence sales and that there are costs associated
In summary, our model results indicate that there are two with these efforts. Costs associated with CSR are the direct
types of firms that pursue CSR: those that do so not because costs the firm expends on CSR efforts such as donating to a
they are doing well financially but (we speculate) because charitable cause (e.g., Coca Cola donating bottled water during
they believe that it is the right thing to do and those that do so hurricane Katrina). It is important to note that although CSR
to make amends for their past CSI. Although the former firms costs are private information for the firm and the outcomes are
might engage in CSR for seemingly altruistic reasons, they publically observed, the efforts should drive observed out-
can expect to see significant financial returns from their CSR comes. Thus, even though our economic theory model focuses
investments. In contrast, the latter firms will likely see few if on CSR efforts and our empirical model focuses on observed
any positive effects from their CSR investments. CSR, the link between the two should be apparent.
Similarly, costs associated with CSI avoidance efforts are
Limitations also direct costs (e.g., Exxon Mobil reinforcing the hulls of its
crude oil transportation ships to reduce the probability of oil
Although we believe our research has broken some new
leaks when accidents occur). Here again, CSI avoidance
ground, we acknowledge some limitations that might provideefforts are private information for the firm, while level of CSI
worthwhile avenues for further research. For example, ais publically observed. Nonetheless, CSI avoidance efforts
potential limitation that we must acknowledge is our CSR and
should relate directly (and negatively) to CSI incidents, and
CSI data. Although the KLD data have been used extensivelythus, the link between the economic theory model that
in existing research, the CSR and CSI measures are based on
focuses on CSI avoidance efforts and the empirical model that
somewhat subjective rather than objective evaluations.
focuses on CSI incidents is similar to that for CSR. The
Future research should replicate our findings using different
distinction between CSR efforts and CSI avoidance efforts is
CSR and CSI data. Unfortunately, to date, we are not aware in the outcomes; whereas CSR efforts are aimed to do good,
of a source other than KLD that could provide such data.CSI avoidance efforts are aimed to avoid a bad outcome. For
Furthermore, although we believe that the identification
our CSR-CSI context, we model the costs associated through
restrictions we imposed to estimate the SPVAR model are the expected loss and buffering effects of CSR efforts and CSI
sensible, we must acknowledge that our results are sensitive
avoidance efforts.
to them (e.g., Uhlig 2005). Moreover, we ignore normative
issues, such as the question of whether ethical behavior has 9In our economic theory model, "CSI avoidance efforts" refer to
value regardless of the financial payoff. Correspondingly, the
we costs associated with avoiding CSI.
We conclude that the solution to the economic theory In the parlance of optimal control theory (e.g., Kamien
model should be structured such that optimal CSR efforts and Schwartz 1991), S represents the state variable and r and i
are a function of CSI avoidance efforts and sales and, in turn, are the control variables (i.e., variables that firms make
optimal CSI avoidance efforts depend on CSR efforts and decisions on). To maximize the system in Equation A3, we
sales. Recognizing that firm values depend on these two define the Hamiltonian 7Y(r, i, |Li) as follows:
efforts, we note that an empirical model to study CSR, CSI,
(A4) H( r, i, Ji) = (m x S - C(r, i)) + 'i x (gs(S, r, i)),
and firm value should incorporate the dynamic interplay
among CSR, CSI, and firm value. where 'i is the costate variable.
At optimality, the necessary conditions, which are suf-
Economic Model ficient when H is concave in r and i, are as follows (e.g.,
Kamien and Schwartz 1991):
We rely on the basic economic notion that firms seek to
maximize utilities and profits to develop a theoreticaldTC dTï du dTï
(A5)
model for the effect of CSR and CSI; specifically, we use ar=0;ir=0;and¥=p^-āš=a
primitives from theory of the firm (e.g., Becker 2007,
With this dynamic CSR decision problem in place, we now
Chapter 5). Within the theory of the firm framework, profit
seek to develop the specification for cost C(r, i) and evolution
maximizing can be subsumed within utility maximization,
of sales as specified in dS/dt = gs(S,r, i).
such that a "firm may act as if it maximized a utility function
that depends not only on its profits, but also on color, sex,
and family background of employees" (Becker 2007,
Cost Function Specification
p. 70) - that is, CSR and CSI; thus, we focus on long-term
Three components of CSR relevant costs are important. First
profit maximization. In this framework, we define profits
we consider the direct costs associated with CSR efforts
(tc) at a given time t as follows:
r. Firms exert such efforts to promote social causes; for
(Al) nt = Rt- Ct, example, for every pair of shoes that TOMS sells, the firm
donates one to a child in need (known as the "one for one"
where R and C represent revenues and costs, respectively.
model). Thus, we use the function gR(r) to represent these
With the profit function described in Equation Al, we
costs, where gR(. ) is a typical continuous twice differ-
seek to develop a dynamic optimization problem for a firm in
entiable indirect cost function that satisfies properties of cost
which the firm chooses an optimal level of efforts for CSR
functions (e.g., Kreps 1990, p. 251-253). As costs typically
and efforts to avoid CSI. To lay out this specification, we
increase with efforts and are convex, a popular form for
represent revenues as Rt = m x St (e.g., Naik and Raman
costs is quadratic (e.g., Naik and Raman 2003), such that
2003), where x is the product operator, m represents the margins
one could specify gR(r) = (l/2)r2.
that account for all expenses other than those associated with
Second, similar to CSR efforts r, we consider costs
CSR and CSI, and St is the sales at time t; thus, Ct can be viewed
associated with direct CSI avoidance efforts i. Firms exert
as the costs associated with CSR and CSI. If p represents the
these CSI avoidance efforts to reduce the probability of CSI
discount rate and rt and it CSR efforts and efforts to avoid CSI,
incidents. For example, accidents during the transportation of
respectively, V t G [0, °°) , the firms' net present value of its current
crude oil are imminent; thus, oil firms such as Exxon Mobil
and future profits Q¥) can be given as follows:
»00 «00
reinforce the hulls of their transportation ships to reduce the
probability of oil leaks when such accidents occur. Thus,
(A2) ¥(r,i)= e~pt x nt dt= e"pt x (Rt - Q) dt
Jo Jo CSR efforts represent doing social good, while CSI avoid-
ance efforts serve to reduce harm from CSI incidents.
= [ e~pt x (m x St-Ct) dt
Jo Similar to CSR efforts, we use the function g¡(i) to rep-
resent costs associated with CSI avoidance efforts. Again,
Equation A2 represents continuous time infinite horizon
a quadratic functional form can be used for such costs
profit flows, and as is common in this literature (e.g., Rao
(i.e., g,(i) = (l/2)i2).
1986), we will not index variables by t to facilitate reading.
Third, we consider the costs that firms can expect to incur
As is typical in dynamic optimization (e.g., Kamien and
when unforeseen CSI incidents occur (oil spills, product harm
Schwartz 1991; Sethi and Thompson 2006), we seek to crises). Because CSI is associated with incidents, we model
maximize Equation A2 subject to constraints due to the
the costs associated through expected loss I and the buffering
dynamic response function of sales S; that is,
effects of CSR and CSI avoidance efforts. Expected loss I can
be seen as a firm-specific typical or average loss associated
(A3a) max Í e"pt x (m x S - C(r, i)) dt with a CSI incident; for example, for a firm in a particular
r > 0, i > 0 J0
business, I could represent the average over the previous ten
subject to years. To specify these buffering effects, we recognize that
the buffering effects should increase as efforts increase and
there should be some difference in the buffering between
(A3b) ļ£ = gs(S,r,i), CSR efforts and CSI avoidance efforts. Thus, we specify
where gs(. ) is an appropriate dynamic response function for
the costs due to such incidents as gj(r, i) = I x e-0 x 0* + * x 0,
sales. where 0,A,e[O,o°). Because efforts r and i are positive and
0 and X are positive, the expression 0 x (r + X x i) is positive; (A8) 7ť(r, i, |i) = (m x S - C(r, i))+îx (gs(S, r, i))
thus as efforts increase, e~(r + x,xl)->0; thus efforts reduce = m x S - (gR(r) + gi(i) + gi(r, i))
the costs associated with CSI incidents. Furthermore, 0
+ 'ix (gs(S,r,i))
instruments the nature of the buffering effect of efforts;
0 = 1 implies that the level of CSR efforts proportionally
reduce expected loss; 0 < 1 implies that the translation of
= m x S - Qr2 +ķ2 + Ixe"ex(rUxi)j
efforts for expected loss is lower than when 0 = 1; 0 > 1 + |i x (ßr x r + ßj x i + ßs x S
implies an amplification of efforts such that the translation + ßrS x r x S + ßiS x i x S).
of efforts is higher than 0 = 1. X ensures that the effects of
CSR efforts r are different from those of CSI avoidance With the Hamiltonian in Equation A8, the first order
conditions would be
efforts i. If X is less than 1 , CSR efforts buffer more than CSI
avoidance efforts; if X is equal to 1, both efforts buffer
equally; and if X is greater than 1, CSI avoidance efforts (A9a) ?=-rłIx0xe-9x',Uxi'
dr
buffer more than CSR efforts.
+ |XX(ßr + ßrsXS)=0,
In line with the preceding discussion, we can write the
costs as follows:
(A9b) -^r= -i +Ol IxGx A.X e"e*(r + Xxi)
(A6) C(r, i) = gR(r) + gi(i) + gi(r, i) + n x (ßi + ßis x S) = 0,
_ _ļ_r2 Ii2 + j x e" 0 x (r + x x f) . and

2 2
du dn
(A9C) ¥ = pX^āš
Sales Function Specification = - m - n x (p + ßs + ßrt x r + ßis x i).
As is typical in optimal control In theory, one could solve

applications in Equations
marketing, A9a and A9b for
efforts
we need to specify the evolution of r and i sales
the as functions of other parameters
function S (e.g., including
the costate variable
Naik and Raman 2003), which serves 'i. However, due to in
as a constraint the presence
the of the
exponent (withA3b).
Hamiltonian specification (Equation both r andThus,
i in the exponent),
now these weequations
elaborate on the functional are referred to
form ofas transcendental
gs(S,r,i). equations
We that require the use
rec-
ognize that change in sales (dS/dt) of the Lambert W function
should be and a
thus numerical methodsof
function to
CSR efforts and CSI avoidance efforts and the level ofsolve them (e.g., Hayes 2005). Solving for ļi requires using
transversality conditions obtained from steady-state con-
sales (i.e., consistent with extant research, we do expect
persistence in sales; e.g., Sridhar et al. 2011). Fur- ditions on state and costate variables (i.e., dS/dt = 0 and
thermore, it is reasonable to expect that the efficacy of dn/dt = 0, respectively.10
CSR efforts and CSI avoidance efforts depends on the Although we cannot derive the analytic solution from
level of sales. For example, larger firms (i.e., firms that Equations A9a-c, in line with optimal control theory
have higher sales) tend to be better known, and the media
tend to scrutinize better-known firms more often than
10We consider two alternate specifications for costs associated
smaller firms (e.g., Brooks et al. 2003); thus, it seems
with CSI incidents (gn(. )). For both these specifications, we do not
reasonable to assume that larger firms' CSR efforts make
and changes to expected loss I but argue that the buffering effect
depends only on CSR efforts r. Because expected losses I can be
CSI avoidance efforts also receive greater scrutiny. Thus,
viewed as a typical or average firm-specific loss associated with a
in our specification for dS/dt, we include the interaction
between CSR efforts and sales and CSI avoidance efforts CSI incident, CSI avoidance efforts should reduce the probability of
CSI incidents, and as a result, the benefits of CSI avoidance efforts i
and sales; that is,
are built into L Thus, buffering effects only depend on CSR efforts r.
We recognize that the buffering effects should increase as efforts
increase and thus have two options to specify these efforts: (1)
(A7) ^ = gs(S,r,i) Similar to our previous specification, we use the exponential
= ßr x r + ßi x i + ßs x S + ßrS x r x S + ßiS x i x S. function to specify g¡(r) = Ixe"^xr' or (2) we can use a much
simpler inverse function, such that gj (r) = 0r x I/r, where 0r G [0, o°) .
In this second specification, because efforts r are positive, the
expected loss I is positive, 0r is positive, and the expression 0r x I/r
Profit Maximization is positive and decreases as effort r increases; thus, CSR efforts
reduce the costs associated with CSI incidents. If 0r is less than 1 , the
Optimal efforts for CSR and CSI avoidance (i.e., r andbuffering
i, effect of CSR efforts is amplified; if 0r equals 1, the CSR
efforts proportionally reduce expected loss; and if 0r is greater than
respectively) can be obtained by maximizing infinite horizon
1, CSR efforts do not have much of a buffering effect. The solution
profits - that is, the firm value given in Equation A2. To
to the first specification, where gj(r) = I x e"^xr' would still
maximize this value, the cost function and evolution of involve the Lambert W function and the use of numerical methods.
sales function in Equations A6 and A7 are substituted into
The solution to the second specification, where g¡(r) = 0 x I/r,
the Hamiltonian in Equation A4, which produces the
would lead to a cubic functional form for r and a linear functional
following: form for i; thus, there would be three solutions for r and one for i.
literature (e.g., Naik, Raman, and Winer 2005), we can conclusion can be reached for optimal CSI avoidance efforts
speculate on the structure of the possible solution. For i*. Furthermore, recognizing that firm values depend on these
example, the solution for optimal CSR efforts r* from two efforts, we can conclude that the empirical model to study
Equation A9a would suggest these optimal efforts are a CSR, CSI, and firm value should incorporate the dynamic
function of CSI avoidance efforts i and sales S. A similar interplay among the three variables.
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Corporate Social Responsibility, Corporate Social

Washing Away Your Sins? Corporate

Online Supplement http://dx.d0i.0rg/l 0. 1 509/jm. 1 5.0324

Salomon 2012; Bhattacharya and Sen 2004; Jayachandran,

© 2016, American Marketing Association Journal of Marketing

60 1 Journal of Marketing, March 2016

Time (t) Time (t)

Time m (t) Time (t)

mechanisms in more detail. Table 1 shows examples

Corporate Social Responsibility and Firm Performance 1 61

Chin, Hambrick, Good Generalized Data on up to 249 Conservative chief executive

customer satisfaction (e.g., Luo and Bhattacharya 2006);resulting

62 1 Journal of Marketing, March 2016

Corporate Social Responsibility and Firm Performance 1 63

1992 1994 1996 1998 2000 2002

performance (Tobin' s q), and other variables. In Figure 2,

given the positive correlation between the two constructs

1992 1994 1996 1998 2000 2002 2004 2006 2008

64 / Journal of Marketing, March 2016

performance. We thus develop a model based on economic

Corporate Social Responsibility and Firm Performance 1 65

66 1 Journal of Marketing, March 2016

Community Strengths Charitable Giving, Innovative Giving 8

Corporate governance Strengths Limited Compensation 5

Diversity Strengths CEO 8

Employee relations Strengths Union Relations 7

Environment Strengths Beneficial Products and Services 8

Corporate Social Responsibility and Firm Performance 1 67

Qualitative Issue Area Type Categories # of Categories

Human rights Strengths Positive Record in South Africa (1994-1995) 4

Product Strengths Quality 4

over time. For example, Cox, Brammer, and Millington

68 1 Journal of Marketing, March 2016

Notes: The means, standard deviations, and pairwise correlati

mentioned previously, we derived include the firmgeneralized

Corporate Social Responsibility and Firm Performance 1 69

CSI(t-1) .1620** -.2256 -.1718**

*10% significance level.

70 1 Journal of Marketing, March 2016

Response of Tobin's q to CSR Shock Response of CSR to Tobin's q Shock

Response of CSI to CSR Shock Response of CSR to CSI Shock

"3l ' ' 15 ' 1 i' ì

o (SV 1/2 . yr 3 4 5 6 7 8 " _ja.--40 , O 7 ' '' ł

~-3 ' y -.10 1 v'2 3 4__5

"4 Year "3 Year

Notes: The graphs show the 2.5% and

Given that our empirical results suggest that firms tend to

72 / Journal of Marketing, March 2016

We summarize the managerial implications of our research in

Corporate Social Responsibility and Firm Performance 1 73

74 1 Journal of Marketing, March 2016

Corporate Social Responsibility and Firm Performance 1 75

_ _ļ_r2 Ii2 + j x e" 0 x (r + x x f) . and

As is typical in optimal control In theory, one could solve

76 1 Journal of Marketing, March 2016

Corporate Social Responsibility and Firm Performance 1 77

78 1 Journal of Marketing, March 2016

Corporate Social Responsibility and F

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CSI(t-1) .1620 -.2256 -.1718