Trust: Boundary Conditions for CSR on Firm Performance in Emerging Economies

Abstract

Does doing good improves firm performance in emerging economies that are characterized by institutional voids? In any social structure, trust is the core mechanism that facilitates cooperation and coordination between two parties and facilitates the transition from informal institutions to formal institutions in emerging economies. Social trust shapes expectations on the outcome of interactions within the community and business transactions. High trust in government lubricates the effectiveness of changes in law and regulations, whereas low trust impedes government reforms. Low trust in government reduces the likelihood of stakeholders’ dependence on the government to meet their demands. Using panel data from 1,315 firms from the period 2007 to 2018, this paper found that under the condition of low government trust and social trust, the positive signaling effect of CSR is strengthened, and improves firm performance. While trust does not directly affect firm performance, it moderates the stakeholders’ reception of firms’ signals sent via CSR.