Abnormal CSR and Financial Performance

Abstract

This study develops a corporate social responsibility (CSR) measure for abnormal CSR. Based on a microeconomic framework, we argue and show that firm-level variables determine a firm-specific, normal (expected) level of CSR performance, where the marginal costs of CSR equal its marginal benefits. Any deviation from these equilibrium points is a proxy for abnormal CSR, which is negatively related to a firm’s short-term financial performance (i.e., profitability). Hereby, larger values result in proportionally larger decreases in financial performance (inverted U-shape). We conduct our empirical analyses using cross-sectional CSR performance data for U.S. listed companies from 1991 to 2013. Further analyses reveal that this negative effect of abnormal CSR exists for both positive and negative abnormal CSR. Our results hold for alternative measures of firm and CSR performance, an instrumental variable regression, and propensity score matching. Our model could serve as a first indicator for abnormal CSR for investors and other stakeholders.