The Impact of External Business Environment on Corporate Social Responsibility: Theoretical Implications and Empirical Evidence

Abstract

The literature evidently demonstrates the CEO-centric effect upon firms’ Corporate Social Responsibility (CSR) engagements. Given the CEO’s strong discretionary power over CSR decisions and self-serving motive divergent from shareholder value maximization, it would be interesting to investigate the strategic decisions made by the CEO on CSR policy facing varied dimensions of market conditions. From an agency theory perspective, the paper develops a theoretical framework to model and clarify the relationships between firm’s CSR provisions and the three dimensions of external market conditions: market complexity, munificence, and dynamism. Furthermore, I empirically measure the market dimensions and test the propositions implied by the theoretical work. Consistent with the model implications, I found CEOs tend to invest more in CSR in a competitive market, less in CSR when the market is munificent and more in CSR when the market is dynamic and unpredictable. The results are consistent with the extant literature and shed light on the value relevancy of CSR activities.