CSR Reputation and Firm Performance: A Dynamic Approach

Abstract

Many countries have regulations that require firms to engage in minimum levels of corporate social (CS) activities in areas such as the environment and social welfare. In this paper, we argue that changes in a firm’s compliance with CS regulations are reflected in its reputation for corporate social responsibility (CSR), which affects the firm’s performance. The performance impacts depend on whether the firm’s CSR reputation in the current and prior periods is positive (i.e., the firm exceeds CS regulations), neutral (the firm meets CS regulations), or negative (the firm fails to comply with CS regulations). Our theoretical framework draws on the reputation literature and on the concepts of recency bias, which weights the present more heavily than the past, and negativity bias, which weights negative assessments more heavily than neutral or positive assessments. We test our hypotheses on a sample of 7317 banks over 1992–2007 where we compare a bank’s return on assets (ROA) with its current and prior compliance ratings under the U.S. Community Reinvestment Act. We find that changes in CSR reputation have predictable, asymmetric, and sizeable impacts on firm performance. For example, for an average bank with $1 billion in assets, gaining a positive CSR reputation translates into a rise in profits of 4.04%; gaining a negative CSR reputation results in a drop in profits of − 7.8%.