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STUDY: Companies Offset Corporate Malfeasance With Good Deeds

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SCIENCE-ISH!
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Don't be evil -- but if you are, make sure you do a little charity work to compensate.

In a new working paper from the National Bureau of Economic Research, authors Matthew Kotchen of Yale and Jon Junbien Moon of Korea University take a look at the motivations behind why certain companies do the things they do, providing "an empirical investigation of the hypothesis that companies engage in corporate social responsibility (CSR) in order to offset corporate social irresponsibility (CSI)."

"We find general support for the causal relationship: when companies do more 'harm,' they also do more 'good,'" write Kotchen and Moon, who analyzed a 15-year dataset covering roughly 3,000 publicly-traded companies.

Their investigation bears out a number of interesting results, all centered around one common theme:

GENERALLY, "GOOD" COMPANIES ARE JUST YANKING YOUR CHAIN

Kotchen and Moon: There is much empirical support for the notion that companies are penalized if they are perceived to conduct business in ways that conflict with social values. This is particularly true when inconsistencies arise between the pursuit of corporate profits and social goals -- such as environmental protection, public health, and human rights, among others. In cases where the inconsistencies are large and there is sufficient public awareness, it is advantageous for companies to anticipate the social pressure and to take a proactive stance toward lessoning the potential for conflict. Actions of this type are considered CSR, and they often comprise an important part of corporate strategy.

SELFLESS, GENEROUS, AND KIND -- BUT ONLY WHEN SOMEONE'S WATCHING

Kotchen and Moon: We find general support for the hypothesis that more CSI results in more CSR... The result holds regardless of whether we identify the relationship off of variation within companies or between companies. We also find heterogeneity among industries, where the effect of CSI on CSR appears to be stronger in industries for which CSI tends to be the subject of greater public scrutiny, with examples being chemical and pharmaceutical companies and the automobile industry.

PR IS EVERYTHING...AND EVERYTHING IS PR

Kotchen and Moon: Finally, we investigate the degree of substitutability between different categories of CSR and CSI. While CSI in the specific area of corporate governance does not affect CSR in the same category, it does stimulate CSR in most other categories. This result suggests that when companies are perceived as having poor corporate governance from a CSI perspective, they seek to compensate in other areas of social performance. In contrast, we find a strong relationship between CSI and CSR within the specific areas of community relations, environment, and human rights, perhaps because these dimensions of corporate social impacts -- good and bad -- are among the most salient to the public.

The ultimate conclusion?

"When CSI concerns arise about corporate governance, companies seemingly choose to offset with CSR in other dimensions, rather than reform governance itself."
POSITION:  No positions in stocks mentioned.

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