Political connection and CSR: Evidence from Korea

Abstract

AbstractScholars have been raising voices for corporate leadership in politics, namely the political corporate social responsibility (CSR). While many anecdotes of democratic deficits to corporations support the claim, it is still dubious whether corporations can be trusted with such a role. If the motivation for CSR is for further value creation as the resource based‐view suggests, they may thrive in their political role by creating shared value for both private and public sectors. However, if their motivation is mere societal acceptance as the institutional theory suggests, they will fail to serve both public and private; firms will fulfill self‐interest at the cost of society at best. One way to investigate this is to examine the interaction between political connection and CSR and thereby reveal the motivation for CSR. While both concepts have been extensively studied separately, their interaction has been sparsely explored with inconclusive mixed results. Thus, this paper clarifies the effect of political connection on CSR. To this end, this paper exploits the 2008 presidential election in South Korea as an exogenous shock to the channels for political connection. This paper captures the difference‐in‐difference estimate of the effect of political connection on CSR with instrumental variables to alleviate endogeneity problems and two‐way fixed effects to handle firm heterogeneity. As a result, this paper demonstrates a negative causal effect of political connection on CSR, a decline by 4.9% on average, which resolves the conflict in the literature. In addition, the negative effect supports institutional theory over the resource based‐view as the motivation for CSR and raises a cautious voice for political CSR.