The Economics and Politics of Corporate Social Performance

The Economics and Politics of Corporate Social Performance

By
David P. Baron, Agus Harjoto, Jo Hoje
Business and Politics. August
2011, Vol. 13, Issue 2, Pages 1-48

Firms operate in a capital market, a product market, and a market for social pressure directed at them by social activists, NGOs, and governments. An equilibrium in these three markets yields a three-equation structural model that relates corporate financial performance (CFP), corporate social performance (CSP), and social pressure. This paper estimates the simultaneous equation model for a panel of over 1,600 firms and finds that CFP is uncorrelated with CSP and negatively correlated with social pressure. CSP is decreasing in CFP and increasing in social pressure. Social pressure is increasing in CSP and decreasing in CFP, which is consistent with social pressure being directed to soft targets. Disaggregating the panel indicates that CFP is positively correlated with CSP for firms in consumer markets and negatively correlated for industrial markets. For consumer markets, CSP is increasing in CFP, which is consistent with a perquisites hypothesis that managers spend on CSR when they can afford it. For industrial markets CSP is decreasing in CFP, which is consistent with a moral management hypothesis. For both consumer and industrial markets, CSP is responsive to social pressure.