Irresponsible Corporate Water Actions – Cognitive Judgments and Reactions by Shareholders

Abstract

Extant literature suggests that cognitive judgements associated with corporate social irresponsibility (CSiR) are distinct and need to be analyzed separately from corporate social responsibility (CSR). This paper specifically focuses on analyzing impact of corporate irresponsibility, within the scope of water actions. We investigate how shareholders evaluate and react to irresponsible corporate water actions by developing a conceptual model. Our model identifies that stakeholder orientation of current irresponsible action, and also of prior CSR and CSiR performance by firms, affect market reactions. Shareholders interpret irresponsible actions towards secondary stakeholders to carry less effects for firms and remain indifferent to such actions, but react negatively when primary and legal stakeholders are affected. We propose that prior primary CSR/CSiR performance mainly drives positive/negative capability reputation, and prior secondary CSR/CSiR performance mainly drives positive/negative character reputation. We further theorize that positive character reputation of secondary CSR performance stimulates insurance-like benefit against earnings loss following an irresponsible event. On the other hand, capability reputation of primary CSR/CSiR performance stimulates greater effects of expectancy violation/conformity. We conduct an event study on negative water news featuring S&P 500 firms during the years 2005 to 2017, to provide some empirical evidence in support of our conceptual model.