Corporate environmental responsibility motivated by loss aversion

Abstract

As societal concerns over environmental protection increase, firms begin to face increasing legal obligations to engage in corporate environmental responsibility (CER). Interestingly, however, some firms go beyond what is legally required and proactively undertake CER practices, leaving scholars to question their motivations. To our best knowledge, the previous literature only offers a dearth of information on the characteristics of proactive CER practices as a risky investment. Thus, in this study, we investigate how organizational risk-taking propensity derived by loss aversion affects corporate motivation to implement proactive CER practices. Using data of firms voluntarily participating in the Green Power Partnership program in the United States, we find that firms performing better than their peers are likely to increase their use of green power. As outperforming firms typically have more to lose than underperforming firms, they become more risk-seeking to avoid future loss of competitive advantage. As a result, they become motivated to more proactively engage in stakeholder management in the form of green energy consumption, even though such proactive CER requires more time and resources. We also find that unrelated and related diversifications have conflicting influences on such a motivation mechanism.