Theory testing - Does CSR Reduce Firm Risk? Evidence from Controversial Industry Sectors

Theory Testing Post

Does CSR Reduce Firm Risk? Evidence from Controversial Industry Sectors

The purpose of this article is to test if a relationship exists between corporate social responsibility (CSR) investment and overall risk reduction for controversial industry sectors such as tobacco, gambling and alcohol.  If a relationship can be established, firms in these industry segments can determine whether to develop strategic approaches to CSR management.  The article proposed two hypotheses:

1. “Under the risk-reduction hypothesis, we predict a negative association between CSR engagement of controversial industry firms and firm risk” and

2.  “Under the window-dressing hypothesis, we predict a positive (or at best insignificant) association between CSR engagement of controversial industry firms and firm risk.”

The research conducted for this article included data from 513 firms engaged in businesses seen as controversial, including alcohol, tobacco, gambling, oil, cement and biotech.  Risk reduction in these firms was then compared to over 18000 firm-years of similar data for non-controversial firms.  The research supported hypothesis number one as opposed to number two.  Controversial industries proved to decrease overall risk by engaging in CSR strategies.

This research is broadly based and relevant for strategic managers involved in controversial industries.  Developing a strategic investment approach in CSR is essential for lowering risk in these firms.  Further, the results of this testing showed a stronger negative correlation between hypothesis number 1 and controversial industry firms than those in non-controversial industries.  This is a valid point for consideration by executives in those non-controversial industries to consider with respect to the level of strategic CSR investment strategies compared to long-term risk reduction.