Limits to Nonmarket Insurance: A Textual Analysis of the Impact of CSR on Media Sentiment

Abstract

Prior research examining the impact of corporate social responsibility (CSR) on stakeholders has largely focused on studying the insurance like effect of CSR outlays and the resulting effect on stock returns, thereby emphasizing the implications for shareholders. Our study examines the following research question: “Do secondary stakeholders perceive the nonmarket insurance effect potentially arising out of a company’s CSR activities in the face of integrity-based negative events?” We use the notion of nonmarket insurance (Arnott & Stiglitz, 1991) to hypothesize a negative relationship between the net-negative sentiment score and investments in CSR. In addition, we predict inverse relationships between the sentiment score and several firm characteristics. Our study focuses on the effects of two of the largest scams in India, the 2G Scam and the Coal Scam, on 13 publicly listed companies (six in the case of one scam and seven in the case of the other). We use text analysis to compute a sentiment score from ...