We examine whether and how foreign environmental standards influence global sourcing decisions. Taking a question-driven approach, we find a negative association between the stringency of a country's environmental standards and its share in US imports for 82 manufacturing industries across 77 countries between 2006 and 2016. This pollution haven effect holds not only for sourcing from owned foreign operations (offshore integration), but also for sourcing from unrelated third parties abroad (offshore out-sourcing), and is stronger in industries with high toxic emissions and low technological intensity. These results are robust across alternative measures of environmental stringency and to using the Kyoto Agreement as an instrumental variable. These findings shed new light on how firms use global sourcing, and especially offshore outsourcing, to arbitrage across institutional environments.
Several studies suggest that political ties help firms survive or perform but do not examine the boundary conditions concerning which types of firms and which type of ties help firms. We draw from resource dependence and resource-based theories to argue that political ties can improve both firm survival (labeled “buffering”) and performance (labeled “enabling”), with weaker firms gaining more from buffering and stronger firms gaining more from enabling. We further examine the relative impact of local and central ties. We test our hypotheses on the television manufacturing industry in China between 1993 and 2003. Results demonstrate the buffering roles of political ties, and under narrower conditions, their enabling roles. Local ties account for these outcomes, while central ties do not provide buffering or enabling benefits.
Most managers and the business press regard “value creation” as the increase in shareholder wealth represented by a rise in corporate profit or stock price. A broader conception of value creation goes beyond shareholders to include the value that is distributed to additional stakeholders of the firm, including employees, suppliers, and customers. We develop a mathematical framework that allows this broader notion of value creation and distribution to be assessed and quantified in many cases. We illustrate the framework using historical data on Southwest Airlines and American Airlines over 3 decades.
This study examines whether product market competition affects corporate social responsibility (CSR). To obtain exogenous variation in product market competition, I exploit a quasi-natural experiment provided by large import tariff reductions that occurred between 1992 and 2005 in the U.S. manufacturing sector. Using a difference-in-differences methodology, I find that domestic companies respond to tariff reductions by increasing their engagement in CSR. This finding supports the view of “CSR as a competitive strategy” that allows companies to differentiate themselves from their foreign rivals. Overall, my results highlight that trade liberalization is an important factor that shapes CSR practices.
We argue that mines located near environmentally sensitive water sources are subject to nonmarket risks arising from the potential collective actions of local stakeholders and their allies. Stakeholder mobilization can impose material costs on a mine in the form of delays, regulatory hurdles, and closure. We find that stock markets recognize these nonmarket risks and apply a discount on announcements by mining companies whose mines are located near environmentally sensitive water sources, particularly rivers. However, we also find that investor reaction is stronger in countries with strong institutions that support collective action. Thus, nonmarket risk management is important even in countries that are typically characterized by low political and institutional risks. We discuss the degree to which these results can be generalized beyond mining.
We ask whether, along with ethical issues, bribing affects the behavior and performance of firms in A frica and L atin A merica. Our statistical analysis shows that bribe payments do not reduce the short‐term performance of firms, but frustrate investments in fixed assets, which is the foundation of firms' long‐term growth. It is like seeking a job via nepotism or education. Nepotism makes it likely to find a job in the short term. However, the solid skills generated by education raise the odds of finding better jobs in the future. We rule out some common explanations for the trade‐off between bribing and investment (e.g., bribes drain resources to invest or that less efficient firms bribe and do not invest). Our analysis suggests that firms with short‐term orientations are more likely to bribe and firms with long‐term orientation are more likely to invest .
This paper shows that corporate short-termism is hampering business success. We show clear, causal evidence that imposing long-term incentives on executives—in the form of long-term executive compensation—improves business performance. Long-term executive compensation includes restricted stocks, restricted stock options, and long-term incentive plans. Firms that adopted shareholder resolutions on long-term compensation experienced a significant increase in their stock price. This stock price increase foreshadowed an increase in operating profits that materialized after two years. We unpack the reasons for these improvements in performance, and find that firms that adopted these shareholder resolutions made more investments in R&D and stakeholder engagement, especially pertaining to employees and the natural environment.
Some argue that since shareholders are the only stakeholder who have a claim on a firm's profits, managers should focus only on maximizing shareholder wealth. Not only will this satisfy shareholders, it will also satisfy a firm's other stakeholders, since—in principle—these other stakeholders get paid before shareholders. This article shows that this logic is deeply flawed. In particular, it shows that if the only stakeholder who has a claim on a firm's economic profits is shareholders, then—in most competitive settings—a firm will not be able to attract the kinds of resources it needs to generate these profits. To attract the kinds of resources that can generate profits, managers must recognize that stakeholders, besides shareholders, have claims on the profits that their resources help generate. This, in turn, suggests that managers seeking to generate economic profits must adopt a stakeholder perspective in how they manage their firm. This article explores the managerial implications of this conclusion.
Companies often accumulate intangible assets by taking internally and externally oriented CSR actions. Contrary to popular beliefs, the data show that they undertake more internal than external ones: firms do more and communicate less. How does a potential gap (i.e., a misalignment) between internal and external CSR actions affect a firm's market value? We find that although together (the sum of) internal and external actions are positively associated with market value, a wider gap has negative implications. In other words, firms do not realize the full benefits of their internal actions when such actions are not externally communicated to key stakeholders, and to the investment community in particular. This negative association with market value is particularly salient in CSR ‐intensive and the natural resources and extractives industries .
Corporate social responsibility has many purported benefits, one of which is that it can insure against the adverse stock price effects of negative events. But do managers purposefully use CSR in this way and do such investments provide intended insurance‐like benefits? By taking advantage of a natural experiment where a randomly selected set of pilot firms were exposed to elevated short‐sale risk unleashed by the SEC regulation, we find evidence that they do. Once the SEC initiated the regulatory change, firms that faced greater risk increased CSR more than firms that did not. In addition, increased CSR lowered short interests in pilot firms' stocks and this reduction is attributable to the insurance‐like effect of CSR rather than simply prevention of adverse events.
Firms create value not only for shareholders, but also for other stakeholders, including employees, customers and suppliers. This article applies a method to quantify the “new” economic value created by a firm over an interval of time; the method also reveals the distribution of that value among the stakeholders. The proposed method gives managers some means to assess changes in the economic value created and distributed. We find that the creation and distribution of value has varied greatly among major U.S. airlines and global automakers in recent decades. Moreover, returns to shareholders typically accounted for only a small proportion of firms' total value creation and often had little relation to broader changes in the magnitude and distribution of value .
The debate about how investors perceive corporate social responsibility (CSR) predates Milton Friedman's famous statement that the only social responsibility of business is to increase profits. Although extensive research has studied whether sustainability contributes to financial performance, we have yet to understand whether investors believe it pays off. This financial event study of reactions to the addition, continuation, and deletion from DJSI World, the first global sustainability index, shows that investors care little about DJSI announcements. Nonetheless, there is some evidence that global assessments of sustainability are converging and that investors may increasingly be valuing continuation on the DJSI, suggesting that firms may gain at least limited benefits from reliable sustainability activities.
This article examines the effect of negative news on financial risk. It shows that negative media articles regarding environmental, social, and governance (ESG ) issues increase a firm's credit risk. It also provides a detailed analysis of the impact of an article's reach and severity, i.e., how many readers are exposed to the article and how harshly it criticizes the firm. The results allow to quantitatively assess the risk that emanates from negative ESG news. For executives, three strategies are derived for limiting a firm's exposure to this risk: balancing corporate social responsibility programs with operational safety programs, reporting suboptimal environmental and social performance transparently and proactively, and avoiding acquisition targets and markets with a legacy of negative news .
Many markets have several voluntary certification programs that sellers can use to signal product or organizational quality. Although many scholars emphasize the potential for competition between labels, we argue that there can be positive spillovers in adoption of “competing” certification schemes and propose a framework for understanding how those spillovers arise through three channels: suppliers, adopters, and audience. Managers of nascent certification programs can use this framework as a roadmap for attracting various stakeholder groups. We use our framework to analyze the diffusion of Chinese green-building labels and find evidence of large positive spillovers through the supplier and audience channels. These results suggest that the risks of tipping toward a single standard may be small in practice.
Entrepreneurs entering new markets must consider how their products or services create value for customers. What customers value, however, is often shaped by competition between different stakeholders who seek to define problems and appropriate solutions. We argue and find that competing stakeholders influence what becomes valued in the market and shape the technologies and products developed by entrepreneurs. From the perspective of those promoting new markets, market growth requires a balancing act between maintaining control over market definitions and attracting new customers. In growing a new market, entrepreneurs and market pioneers may unintentionally attract other stakeholders who seek to alter or redefine market meanings, which can drive demand away from initial producers, foster the development and adoption of unforeseen technologies, and facilitate market entry of diverse organizations.
The purpose of this study was to examine how different types of activist groups behave differently when targeting firms for social change. We find that traditional activist groups rely on boycotts and protests, whereas religious groups and activist investors rely more on lawsuits and proxy votes. Additionally, we find that protests and boycotts are associated with greater media attention, whereas lawsuits and proxy votes are associated with investor perceptions of risk .
With firms across many industries facing escalating costs associated with social conflict, new tools are emerging to help firms mitigate these risks by seeking the support of the local communities in which they operate. Community benefits agreements (CBA s) are contracts in which a community provides consent for a new investment in return for tangible benefits, such as local hiring and revenue sharing. We argue that although CBA s are costly for the firm, they are particularly valuable when communities can cause costly disruptions and delays for a firm. Our study of investor reactions to the announcement of 148 CBA s signed between mining companies and local indigenous communities in Canada shows that investors value more CBA s signed with communities with strong property rights and histories of protest .
Firms are increasingly tackling social issues across the world. Nonprofit organizations (NPOs) are often identified as natural channels for facilitating such engagement, but we have no systematic evidence to confirm this. We tackle this question by outlining the conditions under which allocating company aid for disaster relief and recovery through NPOs results in greater donations than when the firms disburse its aid directly to victims. We analyze all major natural disasters that affected the world between 2003 and 2015 and observe that firms would have donated more through an NPO (directly) in countries with low (high) institutional development where they lacked (had) local operations. Yet, firms frequently chose the channel that yielded lower donations.