Trends and Issues in Strategic Management

Corporate Social Performance and Economic Cycles

Jeffrey S. Harrison1 • Shawn L. Berman2

Received: 23 January 2013 / Accepted: 27 March 2015 / Published online: 4 April 2015

� Springer Science+Business Media Dordrecht 2015

Abstract Do firms respond to changes in economic

growth by altering their corporate social responsibility

programs? If they do respond, are their responses simply

neglect of areas associated with corporate social perfor-

mance (CSP) or do they also cut back on positive programs

such as profit sharing, public/private housing programs, or

charitable contributions? In this paper, we argue that be-

cause CSP-related actions and programs tend to be dis-

cretionary, they are likely to receive less attention during

tough economic times, a result of cost-cutting efforts.

However, the various CSP performance areas vary in terms

of their resource requirements and their influence on fi-

nancial performance (short- and long-term), which sug-

gests that firms may respond differently depending on area.

Consequently, in addition to examining CSP concerns

separately from positive actions and programs (CSP

strengths), we also examine the influence of economic

growth across the five areas of diversity, employee rela-

tions, the environment, product quality/safety, and the

community. Based on data from 837 firms over 15 years,

our results suggest that firms neglect some areas associated

with CSP during economic downturns, resulting in in-

creased concerns about community and employee relations,

product safety/quality, and the environment. However, this

relationship does not apply to positive actions and

programs. Instead, firms tend to increase their positive CSP

programs in areas such as diversity, employee relations,

and the environment during periods of slow economic

growth and reduce them when the economy picks up. We

offer potential explanations for our findings and discuss

their importance to research on CSP.

Keywords Corporate social responsibility � Corporate social performance � Measurement of social performance � Economic cycles � Recession

Introduction

Corporate social responsibility has become a part of the

fabric of Western society (Bondy et al. 2012). Society

expects organizations to perform responsibly in the social,

environmental, and economic arenas (Elkington 1997;

Garriga and Melé 2004; Norman and MacDonald 2004),

and organizations have responded through a variety of

plans, programs, communications, and other activities with

the intended purpose of either purposefully aligning the

interests of society with the interests of the firm, or at least

providing this impression (Du and Vieira 2012; Hsu 2012;

McShane and Cunningham 2012; Uecker-Mercado and

Walker 2012). In some of the most controversial industry

sectors, this may involve simply minimizing harm (Lin-

dorff et al. 2012).

Although there is disagreement regarding the precise

definition of what constitutes corporate social responsi-

bility, its normative foundation is strong, based on moral

concepts such as responsibility, harm, intention, and con-

sequences (Eabrasu 2012). It is possible to argue that there

is a contradiction between the pursuit of social goals and

the pursuit of profit. Sabadoz (2011) refers to this logical

& Jeffrey S. Harrison [email protected]

Shawn L. Berman

[email protected]

1 Robins School of Business, University of Richmond,

Richmond, VA 23173, USA

2 Anderson School of Management, University of New

Mexico, MSC 05-3090, Albuquerque, NM 87131, USA

123

J Bus Ethics (2016) 138:279–294

DOI 10.1007/s10551-015-2646-9

conflict as a ‘‘necessary contradiction’’. However, many

scholars have argued that there is no contradiction, and that

both objectives may be simultaneously pursued, because of

the economically advantageous benefits that socially re-

sponsible firms enjoy (i.e., Barringer and Harrison 2000;

Du et al. 2011; Russo and Fouts, 1997; Porter and Kramer

2011; Shane and Spicer 1983).

Because resources expended in socially responsible

ways potentially have less direct or less obvious financial

benefits (e.g., spending on ‘‘social causes’’), the relation-

ship between social responsibility and profits has attracted

significant research attention (i.e., Barnett and Salomon

2006; Berman et al. 1999; Choi and Wang 2009; Hillman

and Keim 2001; Margolis and Walsh 2003; Orlitzky et al.

2003; Surroca et al. 2010). Some studies have supported a

positive relationship between corporate social performance

(CSP) and firm performance, while others have not; how-

ever, a meta-analysis documented a small positive rela-

tionship overall (Orlitzky et al. 2003). The converse

question, that profitability may lead to improved social

performance, has also been studied and confirmed (e,g.,

Surroca et al. 2010; Waddock and Graves 1997).

While many researchers have studied the relationship

between CSP and firm profitability, none, to our knowl-

edge, has studied the link between economic growth and

CSP. Based on a review of the corporate social responsi-

bility literature, Campbell (2007, p. 952) proposes: ‘‘Cor-

porations will be less likely to act in socially responsible

ways when they are experiencing relatively weak financial

performance and when they are operating in a relatively

unhealthy economic environment where the possibility for

near-term profitability is limited’’. As noted, the first part of

this proposition has been confirmed in the empirical re-

search literature. The second part, dealing with relative

economic conditions, has not.

In this study, we provide evidence regarding the influ-

ence of economic growth on CSP. In addition to measuring

CSP as an aggregate of all of the various components of

corporate social responsibility, we also examine each

component separately based on the assumption that eco-

nomic growth may have a different effect on, for example,

environmental performance as compared to employee

performance. We also examine a firm’s CSP strengths and

weaknesses independently because strengths are more

closely associated with positive actions that may be re-

source intensive (i.e., charitable contributions, employee

benefits), whereas concerns are more likely to be associated

with neglect of particular areas (i.e., environmental in-

fractions, tax violations) or cutting back on expenditures

(i.e., layoffs). Consequently, economic growth could in-

fluence these two aspects of CSP differently.

Our findings offer strong evidence that economic con-

ditions influence CSP and, as expected, they influence

some areas of CSP differently than other areas. The dif-

ferences are important to the literature because they help us

understand how firms and their managers value various

factors associated with CSP. In supplemental analyses, we

also find that positive CSP actions and programs (strengths)

influence firm profitability differently than neglect of par-

ticular areas associated with CSP (concerns). Our evidence

provides a strong argument that economic growth should

be measured and included in future studies of CSP.

The rest of the paper is organized as follows: First, we ex-

amine firm motivations for pursuing socially responsible be-

havior, as well as countervailing influences. We then discuss

how changes in economic growth might be expected to influ-

ence CSP, as a whole and by type of CSP. Following a de-

scription of our methods and presentation of results, we discuss

the implications of our findings for research and practice.

The Stability of Investments in Social Responsibility

Although we did not find extant studies related directly to

the relationship between economic growth and CSP, evi-

dence from existing research suggests such a relationship.

Some of this evidence regards the conjecture that higher

slack resources (i.e., more liquidity), which are often as-

sociated with profitability, allow for higher levels of ac-

tivities associated with social responsibility. This idea is

supported by Harrison and Coombs (2012) in the context of

community investments and is also broadly supported in

the Orlitzky et al. (2003) meta-analysis of the relationship

between corporate financial performance and corporate

social responsibility. To complete the picture, there is

evidence that slack is related to economic cycles (Sadowski

2011). So economic health influences slack, and slack in-

fluences CSP. Note also that this logic suggests that it will

be important to control for slack in any test of the rela-

tionship between economic growth and CSP.

Corporations reacted to economic uncertainty caused by

the most recent recession by reducing investments in many

areas. As of September 2010, total liquid assets rose as a

share of total corporate assets by approximately 2 % since

the start of the recession (Sadowski 2011). This ratio in-

creased to as high as 7.4 % at times, which was the highest

relative cash percentage for U.S. corporations since the

middle of the 1950s (Sadowski 2011). Anecdotal evidence

suggested reductions in investments in everything from

information technology to research and development as the

economy weakened (Virki 2010). Does a slowdown in

these types of investments also extend to social and envi-

ronmental activities? In the language of Harwood et al.

(2011), how ‘‘resilient’’ is investment in corporate social

responsibility?

280 J. S. Harrison, S. L. Berman

123

Corporate Social Responsibility as a Crucial

Investment Area Resistant to Changes in Economic

Growth

There are reasons to believe that CSP may not decline

significantly during an economic downturn. As mentioned

previously, past empirical findings suggest a small positive

relationship between CSP and financial performance,

which is supported by a rather large conceptual literature.

In this section, we will focus on some of the core ideas in

this literature to demonstrate that firms may be reluctant to

reduce investments in CSP-related areas even during eco-

nomic downturns.

Many of the early arguments supporting responsible

corporate behavior were based on avoidance of negative

responses due to a lack of responsibility. For example,

Spicer (1978) suggested that socially responsible compa-

nies are less likely to be subject to expenses related to

adverse legislation, regulatory penalties, or consumer re-

taliation. Consequently, the stocks of socially responsible

companies are less risky and therefore more attractive to

investors (Cornell and Shapiro 1987; Shane and Spicer

1983). This reasoning also supports a direct effect between

social responsibility and profitability because socially re-

sponsible firms, on average, should spend less on the ex-

penses associated with bad citizenship. Investment funds

may provide another benefit specifically related to demand

for particular shares of stock, which can influence their

prices and thus shareholder wealth (Waddock and Graves

1997). Many billions of dollars have been channeled into

funds that invest solely in companies that satisfy particular

criteria of social responsiveness (Pava and Krausz 1996).

In addition, firms that are considered to be good citizens

should be more attractive as business partners or associates,

thus leading to competitive advantage. For example, cus-

tomers may be more likely to shop at a store that is known as

a ‘‘good corporate citizen’’ (Brown and Dacin 1997; Sen and

Bhattachara 2001). Or highly skilled workers may be at-

tracted to firms that rank high on a list of the best employers

(Moskowitz 1972; Turban and Greening 1996). Similarly,

responsible corporate behavior can facilitate the formation of

long-term contracts, alliances and joint ventures (Barringer

and Harrison 2000; Harrison and St. John 1996). In addition,

stakeholders are more likely to trust a socially responsible

firm compared to firms that exhibit irresponsible behavior,

and trust can lead to a reduction in transactions costs (Wil-

liamson 1975) by reducing the amount of resources needed

for creation and enforcement of contracts containing elaborate

safeguards and contingencies.

Some of the more recent arguments in favor of corporate

social responsibility are based on the notion of reciprocity,

which motivates a firm’s stakeholders to respond favorably

to virtuous firm behavior in economically meaningful ways

(Becker 1986; Bosse et al. 2009; Fassin 2012; Simon

1966). For example, stakeholders may be motivated to

exhibit a high level of performance when engaging with a

firm that has exhibited fairness and integrity in its dealings.

They should also be more likely to share value-creating

information with such a firm (Harrison et al. 2010). A re-

cent study provides some evidence for this position. It

demonstrates that employee productivity is related not only

to the integrity a firm manifests in its treatment of em-

ployees, but also its customers (Cording et al. 2014).

Society scrutinizes businesses based on widely held

beliefs about what comprises socially responsible behavior

(Brummer 1991). Consequently, tough economic times

may represent the ideal time to make targeted investments

that help a firm differentiate itself from competitors,

especially for firms that have targeted CSP as a central part

of their strategies. Discriminating consumers reward firms

that support causes in which these consumers believe

(Vogel 2006), which may allow firms to retain, or grow,

market share in periods of recession. Executives may also

recognize that CSP considerations are vital to the future of

the business and should be cut with great caution. Indeed,

contrary to the argument they lay out above, Ellis and

Bastin (2011, p. 303) find that ‘‘the way the media has [sic]

reported on CSR [corporate social responsibility] has

changed during the life cycle of the recession; moving

away from the death of CSR to CSR being a mechanism by

which companies can survive and come out ‘the other

side’’’. Moreover, they speculate ‘‘the recession has, across

the board, had little real impact on CSR activities.’’

Corporate Social Responsibility as a Discretionary

Expense Highly Subject to Changes in Economic

Growth

As the economy slows, business investment weakens

(Forrester 1976). Investments in CSP may be no different

in this regard, where such activities may be seen as a

discretionary expense that is only reasonable during pros-

perous times. At the core of the argument against invest-

ments in CSP is the idea that attempts to be a good

corporate citizen are more costly than the benefits derived

from such actions (Aupperle et al. 1985). Adding to this

perception is the fact that benefits are often difficult to

measure directly. Magnifying this position is the strong

tradition, correct or incorrect, that the primary responsi-

bility of managers is to produce high financial returns, and

therefore investments that are less certain to provide such

returns should be avoided (Friedman 1970; Rappaport

1986; Wallace 2003). Based on this logic, investments that

are not measurably related to a firm’s financial perfor-

mance should be avoided and should certainly be reduced

or eliminated during tough times.

Corporate Social Performance and Economic Cycles 281

123

Related to these arguments, timing may actually be the

critical deterrent to investments in corporate social re-

sponsibility. Most often these sorts of investments are

discretionary and may take a long time to produce tangible

returns. For example, investments focused on the com-

munity, product safety, or employee relations may result in

benefits over the longer term based on the reciprocal forces

discussed in the previous section. However, the expenses

are incurred immediately, thus reinforcing the short-term

perspective often associated with shareholder wealth

maximization (Stout 2012).

The idea that corporate social responsibility is an expen-

sive indulgence is amply evidenced in the popular press. For

example, Caulkin (2009, p. 1) writes, ‘‘Non-government or-

ganisations and a number of other CSR observers see signs of

companies reverting to the default position that, in today’s

conditions, anything other than business as business is a

luxury that they can’t afford (emphasis added)’’. Doane

(2005, p. 25) also suggests that investments in corporate so-

cial responsibility might not ‘‘pay off in the 2- to 4-year time

horizon that public companies…often seem to require’’. Echoing Caulkin, Doane asserts that ‘‘investments in things

like the environment or social causes become a luxury and are

often placed on the sacrificial chopping block when the going

gets rough’’. Finally, Ellis and Bastin (2011, p. 295) sum-

marize this view: ‘‘In times of recession or economic down-

turn, it is necessary to question whether CSR is seen by

business as a desirable optional extra, which can be culled in

favor of profit maximization’’. In acknowledging that this

view exists among some managers, Freeman (1984, p. 40)

writes ‘‘that the phrase often heard from executives is ‘cor-

porate social responsibility is fine, if you can afford it’’’.

Similarly, Halal (1987, p. 124) suggests ‘‘…business people, under the pressure of adapting to a challenging new

environment in a time of economic crisis, came to view

social responsibility as a luxury that was to be afforded

after they had earned sufficient profits to indulge in this

type of philanthropy’’. Halal describes the ‘‘pressure of

adapting to a challenging new environment’’ as being the

root cause of viewing social responsibility as a luxury. In

this description, it is not necessarily an actual firm-level

profit decline that results in a new attitude about invest-

ments in social responsibility. Rather, it is economic

uncertainty that causes the attitude (and presumably be-

havior that is consistent with this attitude). The same forces

that have resulted in firms building up their liquid assets

during the present downturn (Sadowski 2011), rather than

investing them, are likely also to lead to a situation in

which firms are unlikely to make new investments in non-

core areas that may not be closely linked to short-run

profits.

To summarize, during recessions firms may be more

likely to focus on ‘‘quick fixes’’ that can lead to short-term

positive financial outcomes rather than on corporate social

responsibility activities. One possible finding from our

study, then, is that when the economy weakens, CSP de-

clines, or at least no longer grows (Juscius 2010).

Differential Influences of Economic Cycles on CSP Factors

During an economic recession, CSP may decline either

(1) because of the elimination of positive programs or

activities in which firms previously engaged or (2) be-

cause of concerns resulting from efforts to cut back in

areas that are socially sensitive, leading to negative

stakeholder reactions such as lawsuits, regulatory actions,

or contract controversies. These two different types of

responses require separate treatment (Mattingly and Ber-

man 2006). The health of the economy, up or down, is

likely to have a different impact on positive programs

than it does on behavior that leads to social concerns.

Consistent with a stakeholder perspective that firms are

accountable to multiple constituencies (Freeman 1984),

we will examine these phenomena across multiple areas,

including the community, the environment, products/ser-

vices, employees, and diversity. We will discuss CSP

strengths and concerns in terms of their resource re-

quirements and their potential influence on financial per-

formance in the short term. We are choosing to discuss

short-term financial implications because, consistent with

the theory presented in the last section, we believe that

economic downturns are likely to put pressure on man-

agers to focus more on the short term.

Influences of the Economy on CSP Strengths

CSP strengths come from positive corporate programs or

activities associated with corporate social responsibility.

For example, in the community area, strengths are associ-

ated with activities such as generous corporate giving

programs (domestic and international) and support for

community housing and educational programs. Invest-

ments in the community can require a lot of resources

(although they may be relatively easy to reduce if neces-

sary), and they tend to have an immediate negative impact

on the financial condition of the firm. That is, philanthropy

directly reduces the amount of financial resources available

for the shareholders and other stakeholders, and for other

types of investments directly related to firm operations.

Any potential financial payoff is uncertain, and is likely to

be realized over a period of years rather than immediately.

This is the type of investment we expect to see reduced

during economic downturns and increased in periods of

economic prosperity.

282 J. S. Harrison, S. L. Berman

123

Corporations can also increase their CSP through

strengths in other areas. In the human resources area, CSP

strengths include factors such as employee profit sharing

programs and strong retirement benefits. For product

quality and safety, CSP strengths include the development

of a noteworthy quality or R&D program, as well as pro-

duction of new products that benefit the economically

disadvantaged. New programs to develop these sorts of

product and employee strengths seem fairly resource in-

tensive both financially and in human terms, and would

tend to have a noticeable impact on a firm’s bottom line,

although it is possible that the payoffs could begin to ac-

crue to the firm a little more quickly than in areas such as

corporate philanthropy that are less closely related to the

value-creating core of the business.

Environmental strengths are also highly relevant to this

discussion and often included in studies of corporate social

responsibility (i.e., Berman et al. 1999; Choi and Wang

2009; Hillman and Keim 2001; Kang 2013; Waddock and

Graves 1997). Environmental strengths are associated with

programs such as pollution prevention, recycling, and use

of alternative fuels. These sorts of programs tend to use a

lot of financial, human and even capital resources; how-

ever, some of the expenses can be recouped through cost

savings (Russo and Fouts 1997). Still, even in the best-case

scenario that the benefit to cost ratio is positive, it will

likely take a while to be realized. Consequently, a period of

economic recession may be an unlikely time to begin an

activity in this area.

Finally, diversity strengths are another factor often in-

cluded in studies of corporate responsibility. Support of

strong family benefit programs such as daycare can be very

resource intensive; however, most of the other factors

would seem to have a more moderate impact on the bottom

line of the firm. For example, most of the diversity

strengths focus on firm treatment of protected groups or

females, such as their participation in leadership as CEO or

on the board of directors, use of female- or minority-owned

contractors, employment of the disabled, or progressive

gay/lesbian policies. Because the bulk of the diversity

strengths are not as resource intensive as some of the other

strengths, they may not have as much of a negative im-

mediate influence on financial performance, and may

therefore respond differently to economic cycles than the

other strengths.

Overall, because of the amount of resources required to

start new programs in the CSP strength areas, and the

immediate effect of these resource allocations on financial

performance, we expect that firms are unlikely to engage in

actions to build these strengths during economic down-

turns, and are more likely to build programs in these areas

in economic good times. Having said this, we acknowledge

that highly visible positive programs may be hard to

eliminate without serious consequences, especially with a

vigilant press. In fact, the counter argument is that firms

might actually be interested in engaging in positive pro-

grams for the reason of attempting to counteract the in-

fluences of a recession. Regardless, there is variance across

both the resources needed and the theorized time lags be-

tween resource allocations and potential financial payoffs,

as well as the uncertainty of those payoffs. Consequently,

we need to test both the cumulative CSP strengths and the

individual strength areas to gain a complete picture.

Influences of the Economy on CSP Weaknesses

During a recession, CSP could also decline through ne-

glect of areas associated with corporate social responsi-

bility. We define CSP concerns as problems stemming

from violations of societal expectations associated with

corporate social responsibility. Again, we will examine

each of the CSP concern areas in terms of the resources

involved and the potential for short-term impact on fi-

nancial performance.

Three of the CSP concern areas seem to have a lot in

common in terms of the types of corporate behaviors as-

sociated with them. Community concern areas include

problems such as tax disputes, investment controversies,

and having a negative impact on the community. Product

concerns include marketing or contracting controversies,

product safety problems, and antitrust concerns. Employee

concerns include difficulties with unions, health and safety

concerns, and concerns about pensions or benefits, as well

as workforce reductions. These sorts of problems seem to

share a common objective in that they all seem to be

closely associated with efforts to reduce the resources al-

located to these areas in an effort to cut costs and thus

increase financial performance in the short term. For ex-

ample, tax disputes can occur as a result of trying to avoid

taxes, union difficulties can emerge as companies try to re-

write union contracts during tough times and, of course,

workforce reductions are directly associated with cost-

cutting efforts. Because of their strong link to cost cutting,

we expect that all of them will be more evident during

recessions and less evident when economic times are good.

The cost savings associated with environmental con-

cerns seem to be less direct. For example, in the environ-

mental area, concerns include problems with substantial

omissions or hazardous waste. On the surface, we are un-

sure how increasing omissions or waste would be expected

to significantly reduce resource allocations and thus in-

crease financial performance. Perhaps the most logical

expectation is that firms may simply reduce resources ex-

pended for monitoring and control activities in an effort to

cut costs during recessions, and increase these resources

during economic upturns.

Corporate Social Performance and Economic Cycles 283

123

The influence of the economy on diversity concerns is

also challenging to predict. Diversity concerns focus pri-

marily on employee discrimination in one form or another,

and at various levels of the organization (i.e., rank-and-file,

top management). Discrimination, different from affirma-

tive action, would seem not to have much impact on re-

source allocations, except for the legal costs associated

with defending the firm. In today’s society, a firm that

discriminates is likely to experience negatives such as legal

suits, reduced consumer demand, fewer opportunities for

alliances with other firms, and so forth, which can even-

tually hurt financial performance. However, we do not

believe the economy will have a significant impact on the

level of discrimination in the firm.

Giventhatthreeofthe fiveCSPconcernareasaresoclosely

related to cost cutting, we expect to find increased concerns

during recessions and fewer concerns during economic up-

turns.Asbefore, the varianceinpossiblecostsavingsandtheir

possible influence on short-term financial performance across

the five areas serves as motivation to investigate the rela-

tionships both cumulatively and separately.

Methods

The KLD Measures

To assess our central question of the relationship between

economic growth and CSP, we examine the CSP of some

of the largest best-known companies in the United States

economy. We use the Kinder, Lydenberg, and Domini

(KLD) ratings of firms’ social and environmental perfor-

mance because they are based on investments and other

firm behaviors related to these areas. Also, the KLD

measures currently are the most widely used in empirical

research on CSP (i.e., Choi and Wang 2009; Harrison and

Coombs 2012; Manner 2010). Deckop et al. (2006, p. 334)

recognized KLD as ‘‘the largest multi-dimensional CSP

database available to the public’’. Waddock (2003, p. 369)

refers to the KLD data as ‘‘the de facto [CSP] research

standard’’. Beginning with Graves and Waddock (1994)

and Brown and Perry (1994), researchers have been drawn

to the data because they provide a fairly consistent set of

ratings on non-financial performance. The data’s use is not

restricted to academia, as KLD itself noted that 60 % of the

world’s top institutional financial managers use KLD’s data

and research to evaluate investments (Chatterji et al. 2009).

The fact that KLD data are collected by a third party for a

non-academic purpose is a strength with regard to its use in

academic research, because it eliminates the potential bias

that an academic researcher, because of familiarity with the

topic, might unintentionally code variables in a manner

consistent with expected results.

We acknowledge from the outset that, like all data

sources, the KLD data have weaknesses (Chatterji et al.

2009; Griffin and Mahon 1997; Rowley and Berman 2000).

However, it is not our intention in this paper to add to the

discussion of the strengths and weaknesses of the database

as a proxy for CSP—let alone attempt to resolve these

disputes. We are using the KLD measures because (1) they

are currently the most widely used proxy for studying so-

cial and environmental performance in organizational re-

search, so determining their relationship with economic

growth should be of broad interest in the field; and (2) the

KLD measures are based on real firm behaviors, which

may include positive behaviors associated with

CSP strengths or neglectful behaviors associated with

CSP concerns. After two acquisitions, the KLD data are

now owned by MSCI Inc. and called the ESG (environ-

mental, social and governance) indices, but to avoid con-

fusion we are keeping the traditional name most often

found in the research literature.

The KLD ratings are set up by categories—the natural

environment, the community, products, diversity, and em-

ployee relations—with a score for strengths and concerns

for each area. Examples include participation in programs

that benefit the economically disadvantaged (community

strength), promotion of women and minorities (diversity

strength), violations of health and safety standards (em-

ployee concern), high emissions of toxic chemicals (envi-

ronmental concern), and marketing or contracting

controversies (product concern). If the rating in one of

these areas changes it does so because of an observation by

a KLD researcher for the year in which it changes. Each

strength or concern counts as 1 point for the area (either

positively or negatively). So, in essence, we are asking

whether we are likely to see changes (positive or negative)

based on firm activities during the year in question in

connection to changes in economic growth, which is pre-

cisely the purpose of our study.

Because we are using KLD data, we are not in a position

of having to determine which of the concerns or strengths

is more or less important. Each rating is based on firm

behavior, and managers make the decisions that influence

the observed behavior. These same managers are influ-

enced by reports about the economy. In a downturn, we

might see a firm execute a layoff. This would result in

adding a 1 to the concerns category in the employee area.

In the same year, the company could participate in a new

public/private partnership for the economically disadvan-

taged. This would result in adding a 1 to community

strengths.

KLD researchers use a proprietary research process to

collect the data they use to make their ratings (KLD Re-

search and Analytics 2008). However, we assume that

much of the information they use for their ratings is also

284 J. S. Harrison, S. L. Berman

123

publicly available. To confirm that such is the case, and to

get a better sense for how KLD makes its ratings, we ex-

amined several instances where KLD had changed a rating

for a variable in one of the most commonly used categories

for 2008 and 2009. We did searches using publicly avail-

able information such as press releases, annual reports, the

popular business press, and trade magazines and found

evidence supporting the ratings change made by KLD.

Table 1 illustrates what we found, with examples based on

a concern and strength for each of the five categories of

employee relations, product issues, diversity, community,

and the environment.

Sample

Because we are examining broad trends, we include as

much data as possible while also ensuring comparability

from year to year. KLD reports summary measures of total

strengths and concerns for each of the five areas we in-

clude. However, since KLD began collecting data in 1991

some variables have been added and dropped within their

broad categories, which means that KLD’s summary

measures are not directly comparable from year to year. To

ensure comparability and eliminate the possibility that any

changes we observe are due simply to including or ex-

cluding particular variables, we settled on a group of

variables for each area that was available for each of the

years of our study. From 1995 to 2009, fifty variables were

consistently included for each company for the five areas,

which is an average of 10 ratings per area. In 2010 KLD

made highly significant changes to the database, both

adding and dropping numerous variables. The changes

obviously reflect changes in the demand patterns of their

core business customers (not academic researchers). Un-

fortunately, this means that the 2010 data are not compa-

rable to 2009 or previous data. Our database, then, includes

50 variables in the five groups over the years 1995–2009.

The number of firms included for each year varies, which

means that we have an unbalanced panel design. Our

sample includes 837 firms for most of the tests. We lost a

small number of firms for our moderation tests because

ROA was not available in the subsequent year for some

observations.

Measures

Dependent Variable

Our dependent measures are all based on the KLD ratings.

Based on the corporate social responsibility literature, five

KLD areas are attractive to researchers who examine social

issues. They are community relations, product safety/

quality issues (reflecting customer interests), employee

relations, diversity issues and environmental protection

Table 1 Examples of KLD ratings and corresponding evidence

Company Rating Evidence Information source

Cytokinetics, Inc. Employee concern Reducing workforce by 29 % RTT News (2008)

Amazon.com, Inc. Employee strength Granted large stock awards 10-K (2008)

Sealed Air Corp. Product concern Paid $25 million to victims of a night club

incident in which their foam insulation

caught fire

Providence Journal (2008)

Whole Foods Market, Inc. Product strength Ranked #1 for product quality by peer group Fortune (2008)

UAL Corp. Diversity concern Numerous anti-discrimination legal suits filed Justia-Dockets and Filings (2009)

USG Corp. Diversity strength Benefits that address work–life balance,

including flexible work schedule,

mother’s room, childcare, employee

assistance

Company website (2008)

Pall Corp. Community concern Understated income tax payments and

provision for taxes relating to

intercompany balance

Business Wire (2008)

Tiffany and Co. Community strength Contributed $10 million to

charitable foundation

10-K (2008)

Patriot Coal Corp. Environmental concern Paid $6.5 million civil penalty for

discharge permit violations associated

with the federal Clean Water Act

U.S. Environmental Protection

Agency website (2009)

American

Superconductor Corp.

Environmental strength Direct investment in clean energy market Written testimony for the

Senate Committee on

Environment and Public

Works (2009)

Corporate Social Performance and Economic Cycles 285

123

(Berman et al. 1999; Choi and Wang 2009; Hillman and

Keim 2001; Kang 2013; Waddock and Graves 1997). As

suggested previously, economic cycles may influence CSP

strengths differently from CSP weaknesses. Consequently,

our primary tests include models with two different de-

pendent variables. The first is the sum of CSP strengths

(Total Strengths), and the second is the sum of CSP con-

cerns (Total Concerns). We standardized the totals for the

five areas for increased comparability (i.e., Mattingly and

Berman 2006). For consistency, we used the standardized

scores for each KLD area throughout our analyses, in-

cluding the correlation matrix. We ran models separately

for each of the five CSP areas, consistent with the idea that

firms may respond differently in the various areas. In

supplemental analyses, we also ran models to investigate

whether economic cycles moderate the relationship be-

tween CSP and firm performance. These supplemental tests

and corresponding results are described in the ‘‘Discussion

and Implications’’ section.

Primary Independent Variable

Our primary independent measure is change in gross do-

mestic product (DGDP) Per Capita (Economic Report of the President 2011) over 1 year. GDP is appropriate for our

study because it is an indicator of potential changes in the

demand for the products and services of the firms in our

sample, presumably influencing sales and thus the amount

of resources they have available to them to cover their

obligations, as well as discretionary investments (Narayan

2008). Also, GDP is highly correlated with other measures

of economic health, such as unemployment, and is some-

times referred to as ‘‘the central measure of an economy’’

(Hobijn and Steindel 2009, p. 1). Perhaps most important is

the widespread acceptance of Shiskin’s (1974) suggestion

that two consecutive quarterly declines in GDP are a rule of

thumb for identifying recessions (Gaski 2012). The CSP

variables (and controls) lag the GDP variable by 1 year,

allowing firms to adjust their CSP decision-making on the

basis of what is happening in the economy or, alternatively,

to experience the consequences from neglect of certain

areas associated with CSP.

Control Variables

Our control variables are based on financial data from

Compustat. As explained previously, managers might be

expected to respond to an uncertain economy by conserving

cash instead of spending it on activities associated with the

investment areas we are examining or, indeed, any invest-

ments. For example, economic uncertainty could cause a

firm to hold on to cash rather than investing it in programs for

employees or donating it to community causes. We control

for this influence by determining what portion of total assets

is held as cash (cash/assets). We further recognize that the

economy can influence debt, as firms may find it difficult to

pay their obligations in a poor economy. We control for this

influence by comparing debt to a firm’s total capitalization

(total debt/assets).

In addition, the economy may affect profitability and

profitability may in turn influence how much a firm is

willing to invest in initiatives with indirect financial con-

sequences. In pre-analysis testing, we found that ROA (net

income/assets) varies more closely with the economy

relative to other common profitability measures we could

have included (ROE and ROS). Therefore, we include

ROA to control for firm profitability. Firm size might also

be expected to have an influence on how firms respond to

economic conditions, due to higher social visibility and the

extent to which they have resources to invest in the sorts of

initiatives measured by KLD. Our measure of firm size is

the log of firm sales. We also include research and devel-

opment intensity (R&D/sales) and advertising intensity

(advertising/sales) because these variables have been found

to be important in explaining social performance (Brammer

and Millington 2008; Brammer and Pavelin 2006;

McWilliams and Siegel 2000).

We also created industry control variables. However, we

discovered serious multicollinearity issues between the

industry variables and R&D Intensity that could not be

resolved with variable transformations. This is not sur-

prising because the level of R&D spending is strongly in-

fluenced by a firm’s industry. However, because we are

using a panel design that examines changes in variables

longitudinally, we are not particularly concerned about

dropping a variable (in this case industry) that has no

variation over time within particular firms. After ex-

amination, we discovered that it was uncommon for a firm

in our sample to change its primary industry during the

period of study. On the other hand, R&D has been found to

be a very important and potentially even a confounding

variable when examining CSP (e.g., McWilliams and

Siegel 2000). Also, the observed multicollinearity between

R&D and industry suggests that R&D explains much of the

variance associated with industry, so we are not losing

much explanatory power by dropping industry in favor of

keeping R&D. To be cautious, we also excluded the small

number of firms (39) that changed their primary industries

over the course of our study. Table 2 contains descriptive

statistics for our variables for the 837 companies in our

sample.

Statistical Tests

Because some of our sample companies are not represented

for every year of the study, we have an unbalanced panel

286 J. S. Harrison, S. L. Berman

123

T a b le

2 D e sc ri p ti v e st a ti st ic s a n d P e a rs o n c o rr e la ti o n s

V a ri a b le

M e a n

S D

1 .

2 .

3 .

4 .

5 .

6 .

7 .

8 .

9 .

1 0 .

1 1 .

1 2 .

1 3 .

1 4 .

1 5 .

1 6 .

1 7 .

1 8 .

1 9 .

1 . D G D P P e r

C a p it a

0 .0 1 3

0 .0 0 6

–

2 . T o ta l

S tr e n g th s

- 0 .1 7 8

2 .6 7 4

0 .1 2 7

–

3 . T o ta l

C o n c e rn s

- 0 .3 5 6

2 .0 0 8

- 0 .0 0 1

0 .1 8 7

–

4 . C o m m .

S tr e n g th s

0 .0 8 6

0 .3 4 6

0 .1 4 6

0 .6 8 8

0 .2 1 7

–

5 . D iv e rs it y

S tr e n g th s

0 .6 2 6

0 .9 3 5

0 .1 1 3

0 .7 6 2

0 .1 7 7

0 .5 3 0

–

6 . E m p lo y e e

S tr e n g th s

0 .2 0 1

0 .4 3 3

0 .1 5 9

0 .6 6 9

0 .0 5 6

0 .2 9 6

0 .4 2 0

–

7 . E n v ir o n .

S tr e n g th s

0 .0 7 1

0 .2 7 3

0 .0 6 9

0 .6 5 7

0 .1 9 7

0 .3 9 8

0 .3 6 7

0 .2 9 0

–

8 . P ro d u c t

S tr e n g th s

0 .0 4 9

0 .2 0 2

0 .0 9 9

0 .5 7 5

0 .0 2 7

0 .2 1 2

0 .2 1 2

0 .2 5 7

0 .3 0 3

–

9 . C o m m .

C o n c e rn s

0 .0 3 5

0 .1 6 6

- 0 .0 1 6

0 .1 9 3

0 .5 3 2

0 .1 4 7

0 .1 9 1

0 .1 2 9

0 .2 0 6

0 .0 1 5

–

1 0 . D iv e rs it y

C o n c e rn s

0 .4 0 4

0 .4 4 9

- 0 .2 0 5

- 0 .2 3 3

0 .4 5 7

- 0 .1 1 0

- 0 .2 7 0

- 0 .1 7 3

- 0 .1 2 8

- 0 .1 0 5

0 .0 3 4

–

1 1 . E m p lo y e e

C o n c e rn s

0 .4 9 8

0 .5 7 9

- 0 .0 4 7

0 .0 3 0

0 .5 5 7

0 .0 2 3

0 .0 6 7

- 0 .0 2 8

- 0 .0 0 2

0 .0 0 4

0 .0 5 7

0 .0 7 5

–

1 2 . E n v ir o n .

C o n c e rn s

0 .0 7 1

0 .3 3 4

0 .1 2 0

0 .2 4 7

0 .5 2 7

0 .1 6 8

0 .2 1 4

0 .1 2 9

0 .4 0 7

0 .0 7 8

0 .3 6 5

- 0 .0 3 6

0 .1 1 7

–

1 3 . P ro d u c t

C o n c e rn s

0 .1 7 6

0 .4 7 6

0 .0 7 2

0 .3 6 3

0 .6 3 5

0 .3 9 6

0 .3 7 2

0 .1 5 3

0 .2 3 0

0 .0 8 8

0 .3 1 6

- 0 .0 0 5

0 .1 0 6

0 .3 0 9

–

1 4 . C a sh /

A ss e ts

0 .1 7 0

0 .1 3 6

- 0 .0 7 4

- 0 .0 8 5

- 0 .1 3 7

- 0 .1 1 5

- 0 .0 6 0

- 0 .0 6 8

- 0 .0 8 2

- 0 .0 3 5

- 0 .1 0 0

0 .0 5 1

- 0 .0 7 2

- 0 .1 5 8

- 0 .1 4 2

–

1 5 . D e b t/

A ss e ts

0 .4 5 1

0 .2 8 1

0 .0 4 1

0 .0 8 1

0 .1 5 7

0 .0 9 4

0 .0 9 4

0 .0 2 1

0 .0 8 4

0 .0 2 0

0 .0 9 1

- 0 .0 6 0

0 .1 5 6

0 .1 2 0

0 .1 4 4

- 0 .2 5 9

–

1 6 . C u rr e n t

R a ti o

2 .9 7 3

2 .1 5 0

- 0 .0 3 4

- 0 .1 4 1

- 0 .1 1 5

- 0 .1 4 3

- 0 .1 6 7

- 0 .0 7 6

- 0 .1 0 4

- 0 .0 4 8

- 0 .1 0 6

0 .1 1 8

- 0 .1 0 2

- 0 .1 2 3

- 0 .1 4 6

0 .4 1 3

- .4 8 0

–

1 7 . R O A

0 .0 0 8

0 .1 6 4

0 .0 5 9

0 .0 9 8

0 .0 1 0

0 .1 0 7

0 .0 9 2

0 .0 5 5

0 .0 5 8

0 .0 3 3

0 .0 5 2

- 0 .0 3 6

- 0 .1 0 6

0 .0 6 0

0 .1 1 9

- 0 .1 2 1

- 0 .3 3 9

- 0 .0 1 9

–

1 8 . S iz e

6 .4 0 6

1 .6 8 3

0 .1 7 6

0 .4 5 5

0 .3 4 5

0 .4 0 1

0 .4 4 1

0 .3 1 7

0 .3 0 1

0 .1 7 8

0 .2 8 9

- 0 .1 8 0

0 .1 3 8

0 .3 3 0

0 .4 6 8

- 0 .4 6 2

0 .2 7 9

- 0 .4 6 1

0 .3 4 4

–

1 9 . R & D

In te n si ty

0 .1 3 7

0 .4 7 6

0 .0 5 5

- 0 .0 4 0

- 0 .0 2 6

- 0 .0 3 8

- 0 .0 4 8

- 0 .0 0 9

- 0 .0 4 2

- 0 .0 2 4

- 0 .0 3 6

0 .0 0 2

0 .0 1 7

- 0 .0 4 5

- 0 .0 5 2

0 .2 3 5

0 .0 5 8

0 .2 5 4

- 0 .3 9 5

-0 .3 0 9

–

2 0 . A d v e rt .

In te n si ty

0 .0 3 0

0 .0 7 6

0 .0 6 2

- 0 .0 0 3

- 0 .0 0 7

0 .0 4 1

0 .0 1 4

- 0 .0 2 6

- 0 .0 1 0

- 0 .0 0 6

- 0 .0 0 1

- 0 .0 3 7

0 .0 1 5

- 0 .0 1 3

0 .0 1 6

0 .0 7 8

0 .0 3 4

0 .0 6 5

- 0 .1 8 9

- 0 .1 0 5

0 .3 4 2

T h e se

st a ti st ic s a re

b a se d o n a v e ra g e s fo r 8 3 7 c o m p a n ie s a c ro ss

a ll a v a il a b le

y e a rs . S in c e th is st u d y u se s a n u n b a la n c e d p a n e l d e si g n , th e c o rr e la ti o n c o e ffi c ie n ts a re

fo r d e sc ri p ti v e p u rp o se s

o n ly

a n d d o n o t re p re se n t a v a li d te st o f h y p o th e se s. N o n e th e le ss , fo r in fo rm

a ti o n p u rp o se s, c o rr e la ti o n c o e ffi c ie n ts g re a te r th a n .0 6 8 a re

si g n ifi c a n t a t p \

.0 5 , g re a te r th a n .0 8 7 a re

si g n ifi c a n t a t

p \

.0 1 a n d g re a te r th a n .1 1 3 a re

si g n ifi c a n t a t p \

.0 0 1 .T h e to ta l C S R v a ri a b le s a re

b a se d o n th e su m

o f th e st a n d a rd iz e d K L D

v a ri a b le s a c ro ss

th e fi v e a re a s, w h ic h a c c o u n ts fo r th e ir sm

a ll

n e g a ti v e m e a n a n d re la ti v e ly

la rg e r st a n d a rd

d e v ia ti o n

Corporate Social Performance and Economic Cycles 287

123

design with a company identifier as a stratification variable

and year as a period variable. Our complete model is:

CSP ¼ f DGDP per capita; cash=assets;ð debt=assets; current ratio; ROA; size;

advertising intensity; R&D intensityÞ:

We used a two-way random effects model for our sta-

tistical tests because we are generalizing to a population

not completely represented by our sample. Fixed-effects

models focus on the intra-sample variability and assume

that any other unmeasured variables will not impact the

dependent variable. In contrast, random effects models

assume that there are unknowns that can impact the de-

pendent variable, thus acknowledging that the sample was

taken from a larger population (Field, 2001; Snijders

2005). The appropriateness of an effects model is also

confirmed by very high values for the Lagrange Multiplier

(Green 2007), which are reported in the tables containing

our results. Sometimes the Hausman statistic is also com-

puted for comparison with the Lagrange Multiplier (Judge

et al. 1985) to determine whether a fixed or random effects

model is more appropriate. However, in our case, the

Hausman statistic could not be computed because the dif-

ferences between the covariance matrices for the two tests

were not positive definite (Green 2007). Instead of forcing

the issue by computing a generalized inverse, which results

in an inappropriate test statistic, Green (2007) suggests that

in these cases the difference between the two estimators is

random, which argues in favor of a random effects model.

Results

Table 3 includes the results of our statistical tests for Total

Strengths and Total Concerns. The coefficients are highly

significant for both CSP variables. The large size of the co-

efficients for the GDP variable is a function of small average

values for this variable relative to the control variables.

Consequently, the size of the coefficients for GDP is not

directly comparable to the size of the coefficients for the

control variables, although their signs and significance levels

are meaningful. A negative sign for Total Strengths indicates

that firms are more likely to invest in positive CSP programs

when economic growth is weak and less likely to do so when

the economy is strong. This is a rather surprising finding, and

we will examine it further in the discussion section. A

negative sign for Total Concerns means that in slow growing

economies firms are more likely to neglect areas associated

with CSP, resulting in negative outcomes such as pollution,

tax violations, legal suits, or other controversies. Neglect of

CSP is not particularly surprising when firms are dealing

with an adverse economy.

Table 4 provides meaningful detail regarding which

CSP factors are driving the results found in Table 3. As

expected, firms respond differently to economic growth

across the five CSP areas. The Total Strengths variable is

primarily a function of actions and programs associated

with diversity, the environment, and product safety/quality,

although the latter area is less significant than the other

two. Since the individual CSP variables are standardized

for each area, the size of the individual coefficients com-

pared to the size of the coefficients for other CSP variables

in otherwise similar models have some meaning. Conse-

quently, based on the relatively large size of the coefficient

for diversity, these initiatives appear to be the most influ-

ential factor in the Total Strengths variable. The Total

Concerns variable is largely a function of community and

employee relations, environmental problems, and product

safety/quality issues. Diversity is not significant for CSP

concerns—there is no increase or decrease in diversity

concerns as a function of changes in GDP.

Among the most interesting control variables, Size was

significant in all of the models. As we expected, larger

firms tend to have both more strengths and more concerns,

perhaps a function of the diversity of their operations on

the concerns side and the ability their resources give them

to pursue more positive projects (strengths). There is one

negative coefficient, in the diversity concerns model, which

implies that larger firms have fewer diversity concerns.

When Cash/Total Assets is significant, its sign is positive,

which is consistent with the idea that high cash levels fa-

cilitate CSP. In addition, R&D intensity is also important in

Table 3 Effect of real gross domestic product per capita on CSP

CSP dependent variables

Total Strengths Total Concerns

Independent variable

Change in GDP Per Capita -100.5837*** -29.1496***

Control variables

Cash/Total Assets 1.5177*** 0.1887

Total Debt/Total Assets -0.2740 0.6261***

Current ratio 0.0411 0.0341

Return on assets -0.5404** -0.3661*

Size 1.4619*** 0.5294***

R&D intensity 0.3052*** 0.1712*

Advertising intensity 0.2867 -0.4690

Lagrange Multiplier Test 11755.60*** 8109.93***

R-squared 0.2456 0.1417

N 4463 4463

Companies 837 837

Models are two-way random designs with company identifiers as the

stratification variables and years as the period variables

* p \ .05, ** p \ .01, *** p \ .001

288 J. S. Harrison, S. L. Berman

123

many of the models, and is positive in every case. This is as

expected—as firms increase in CSP they might also be

expected to increase their research budgets.

We ran some supplementary tests to examine both

trends and the influence of economic forces on our control

variables independently of our CSP models. Consistent

with observations about the increase in liquid assets during

the most recent recession, we found a positive and sig-

nificant (p \ .01) relationship between change in GDP and current ratios. However, in spite of the fact that we found

that higher cash balances tend to be related to high CSP, we

also found that cash balances as a percentage of total assets

have actually dropped, a possible indication that invento-

ries make up a significant portion of the liquid assets held

by firms as a function of economic cycles. As we expected,

total debt levels are negatively associated with change in

GDP (p \ .001). We also found a negative relationship for size (p \ .001) and a positive relationship for R&D in- tensity (p \ .01). Advertising intensity was not sig- nificantly related to changes in GDP. While ROA had a

stronger relationship with economic volatility in pre-tests

than other common measures of profitability, it nonetheless

was not significant. This is particularly interesting in that it

provides evidence to support a lot of current anecdotal

evidence that many large firms are doing quite well in

terms of profits during the current recession (obviously

others are not, which accounts for an insignificant finding).

Discussion and Implications

The empirical models offer strong evidence that economic

growth influences CSP. Furthermore, there is significant

evidence that firms respond differently to economic growth

depending on whether CSP involves positive actions and

programs or areas that might be neglected, thus causing

concerns. In addition, we found evidence that economic

growth influences various areas of CSP differently—com-

munity, diversity, employee relations, environmental pro-

tection, or product safety/quality. We will discuss each of

these findings, beginning with CSP concerns.

We observed a significant increase/decrease in CSP-re-

lated concerns when the economy is weak/strong. This is

evidence that firms may neglect some aspects of social

responsibility as a response to tough economic times (Halal

1987) and restore their vigilance in these areas during good

times. In this sense, CSP is responding like other types of

corporate resource allocations, which tend to decline with

recessions (Forrester 1976). It is worth mentioning again

that we do not believe that it is necessarily an actual firm-

level profit decline that results in an attitude and decisions

that result in CSP concerns. Instead, it is uncertainty about

the future that results in a new attitude, and presumably

decision-making that is consistent with this attitude. During

a recession, this new attitude might be called survival mode

(Sadowski 2011; Virki 2010).

Table 4 Effect of real gross domestic product per capita on individual CSP variables

Individual CSP strengths Individual CSP concerns

COM DIV EMP ENV PRO COM DIV EMP ENV PRO

Independent variable

Change in GDP PC 0.91 -18.49*** -3.17 -10.59*** -2.34* -4.27*** 0.34 -11.09*** -3.28** -5.45***

Control variables

Cash/Total Assets 0.06 0.55*** 0.08 0.10* 0.05 0.02 -0.06 -0.02 0.02 0.11

Tot Debt/Total Assets 0.02*** -0.03 -0.05 0.00 -0.03 0.02 0.04 0.22*** 0.01 0.07

Current ratio 0.00 -0.00 0.00 0.00* 0.00 0.00* -0.00 0.00 0.01* 0.00

Return on assets 0.07* -0.20** 0.04 -0.05 -0.02 -0.02 0.05 -0.13* -0.02 -0.04

Size 0.12*** 0.42*** 0.11*** 0.08*** 0.03*** 0.04*** -0.05*** 0.06*** 0.09*** 0.14***

R&D intensity 0.06 0.07* 0.00 0.26* 0.01 0.01 0.01 0.00 0.03** 0.05***

Adv intensity 0.01 0.08 0.10 0.00 0.05 0.01 -0.14 -0.09 -0.01 -0.03

R-squared 0.03 0.25 0.10 0.11 0.04 0.09 0.01 0.04 0.11 0.21

N 4463 4463 4463 4463 4463 4463 4463 4463 4463 4463

Companies 837 837 837 837 837 837 837 837 837 837

Models are two-way random designs with company identifiers as the stratification variables and years as the period variables. Results of

Lagrange Multiplier Tests were omitted so this table could fit on one page, which is helpful for comparative purposes; however, they are all

significant at p \ .001 COM community, DIV diversity, EMP employee, ENV environment, PRO product

* p \ .05, ** p \ .01, *** p \ .001

Corporate Social Performance and Economic Cycles 289

123

To really understand this relationship, it is helpful to

look at some of the individual items that make up the

concerns tracked by KLD. Tax disputes are among the

possible concerns in the community relations area. It is

logical that these types of problems will increase in a slow

economy as firms look for ways to cut their tax burdens.

Violation of health and safety standards, workforce re-

ductions and underfunded pensions are all areas of concern

in the employee relations area. All of these seem to be

logical areas for cutbacks during a recession. In the envi-

ronmental area, concerns include violating environmental

regulations and production of toxins. For product safety/

quality, concerns include product safety infractions and

marketing or contracting controversies. Concerns in both of

these areas can be explained by an attitude of trying to save

money. On the other hand, when times are perceived as

good, firms are more likely to try to fix problems in these

areas.

The negative relationship between changes in GDP and

CSP strengths is fascinating and somewhat unexpected. We

will attempt to provide a plausible explanation here, based

on the existing conceptual literature. The starting point is to

accept that some of the vast literature on the long-term

competitive advantages of corporate social responsibility is

legitimate. In the front end, we mentioned some of these

advantages, which include reduced risk (Cornell and Sha-

piro 1987; Shane and Spicer 1983); attractiveness to in-

vestors (Waddock and Graves 1997); attraction of high

quality employees, customers, and other stakeholders

(Vogel 2006; Turban and Greening 1996; Barringer and

Harrison 2000); trust leading to a reduction in transactions

costs (Williamson 1975); reciprocity by stakeholders

leading to higher levels of value creation (Bosse et al.

2009); and higher quality information (Harrison et al.

2010). In each case, the authors relate these factors to

higher firm performance, which should provide incentives

to corporations to engage in responsible behavior.

The second logical step in our explanation of the in-

fluence of growth in GDP on CSP strengths is to under-

stand that firms and their managers make investment

decisions based on the attractiveness of a particular in-

vestment at a particular time. During a recession invest-

ment opportunities in traditional business areas may have

less appeal than during a boom because of uncertainty. For

example, a recession is a less likely time to expand a

business into new markets or to build a new factory than

during an economic boom. Uncertain future demand during

a recession means that the firm may see a positive invest-

ment in CSP as relatively more attractive than during a

boom because other investment opportunities appear

relatively less attractive. This may be especially true for

firms that have a deliberate social responsibility strategy.

On the other hand, during periods of strong economic

growth, a firm may be more likely to invest resources into

areas associated with expansion, which is the other side of

the relationship.

From a strategic perspective, because society scrutinizes

the social behavior of corporations, positive investments in

activities associated with CSP that enhance a corporate

reputation might be seen as a type of differentiation strat-

egy (i.e., Fombrun 2001; McWilliams and Siegel 2001;

Turban and Greening 1996). If so, then a recession may be

perceived as an ideal time to enhance a firm’s reputation

for social responsibility, especially if managers believe that

other firms are likely to make cuts in these areas. Also, it is

possible that positive CSP actions and programs may help a

firm come out of a recession in a stronger competitive

position (Ellis and Bastin 2011).

With regard to the individual CSP strength areas, the

environment, product safety/quality, and diversity are the

driving forces. Positive environmental protection programs

may include recycling programs, pollution prevention

programs, or clean energy programs. Because of social

sensitivity to environmental protection, these sorts of pro-

grams tend to be broadly reported in annual reports, sus-

tainability reports and the media. This reporting can do a

lot to enhance a firm’s social reputation. Furthermore,

some ‘‘greening’’ projects lead to cost savings that can

cover much or all of the expenses, or even result in savings

overall (Russo and Fouts 1997). Positive product factors

include initiatives such as an exceptional quality assurance

program, leadership in R&D, or providing products or

services to the economically advantaged. Again, these are

things that a firm can tout, and quality programs and R&D

can also have economic payoffs. Not surprisingly, positive

community initiatives, mostly associated with charitable

giving, do not increase during economic downturns.

The influence of economic growth has a powerful effect

on positive diversity programs (strengths), although it does

not influence diversity concerns (which means that con-

cerns in this area are immune to changes in economic

growth). Diversity has received an increasing amount of

attention in society (Kochan et al. 2003), so diversity ini-

tiatives are a good way to signal that a firm is seeking to be

socially responsible. Also, most of the diversity initiatives

tracked by KLD tend to be relatively inexpensive when

compared to positive initiatives in other CSP areas. For

example, although the diversity area includes family ben-

efits, which can involve significant resources, it also in-

cludes progressive gay/lesbian policies, appointing

minority members to the board of directors, employment of

the disabled and contracting with women and minorities,

all of which tend to be relatively inexpensive compared to

the other areas. It is possible that the value-to-cost ratio for

implementing these sorts of policies may be perceived as

highly attractive for firms and their managers providing,

290 J. S. Harrison, S. L. Berman

123

perhaps, at least a partial explanation for why firms are

prone to engage in diversity initiatives when economic

growth is slow.

While not the primary purpose of this study, if economic

growth influences CSP, it might also moderate the rela-

tionship between CSP and firm performance. Of course, we

recognize that we may not even find a significant rela-

tionship between CSP and firm performance, given that this

relationship has only been confirmed in about half of the

empirical work on the topic (Margolis and Walsh 2002). In

addition, we are including a control variable, R&D, found

to have a confounding influence on this relationship in

previous work (McWilliams and Siegel 2000). Neverthe-

less, a test for moderation effects has the potential to help

explain why there is inconsistency in previous findings.

For these tests, the lagged relationships need adjustment.

We are testing whether CSP, change in GDP, and the in-

teraction between the two, influence ROA. The GDP and

control variables should be for the same year as ROA be-

cause we are looking at these variables as concurrent in-

fluences on firm performance. To clarify, a particular

year’s profits should be related to the same year’s eco-

nomic growth, liquidity, size, and so forth. However, these

variables need to lag the CSP variables to provide time for

CSP activities to influence profits. This means that an extra

year of financials is needed for each observation. The extra

year’s financial information was not available for 17

companies, resulting in a sample with 820 companies. The

model results are found in Table 5.

The results are quite interesting, but not particularly

supportive of a strong moderation effect. The CSP variable

is negative and significant for the Total Strengths model,

with or without Change in GDP or the interaction term

(CSP strengths 9 Change in GDP). This is an indication

that positive CSP initiatives (CSP Strengths) started in a

particular year are likely to have a negative effect on

profits in the next year. The logical explanation for this

phenomenon is that they cost money, which reduces profits.

Also, CSP programs may have longer term positive fi-

nancial benefits, but most of them probably do not have

immediate financial returns (Doane 2005).

Looking at the moderation effects, the only significant

interaction effect is in the Total Concerns model. Although

it is disappointing to note that the primary variables (CSP

Total Concerns and Change in GDP) in this model are not

significant, we nonetheless ran two more models to deter-

mine what the significant interaction variable means. The

observations used in the original moderation test for Total

Concerns were split based on the median value for Change

in GDP, thus creating a sample for high changes in GDP

and another sample for low changes in GDP (we also tried

splitting at the mean, but this resulted in a highly uneven

distribution of companies). We then ran two models with

ROA as the dependent variable, Total Concerns as the

primary independent variable, and the same control vari-

ables. The first model was for a high growth economy. In

this model Total Concerns was negative and significant,

which means that in a high growth economy less CSP

Table 5 Test for interaction effects of economic growth on the relationship between CSP and firm performance (ROA)

CSP variable used in model (ROA is dependent variable)

Total Strengths Total Concerns Total Strengths Total Concerns

Control variables

Cash/Total Assets 0.0452* 0.0402* 0.0465* 0.0438*

Total Debt/Total assets -0.2584*** -0.2567*** -0.2582*** -0.2561***

Current ratio 0.0021 0.0021 0.0021 -0.0020

Size 0.0425*** 0.0405*** 0.0430*** 0.0412***

R&D intensity -0.0698*** -0.0707*** -0.0694*** -0.0700***

Advertising intensity -0.2384*** -0.2390*** -0.2387*** -0.2384***

Independent variable

CSP -0.0026*** -0.0019 -0.0021** -0.0006

Change in GDP Per Capita 0.5630 0.8854

CSP 9 Change in GDP Per Capita -0.0420 -0.1146***

Lagrange Multiplier Test 1336.80*** 1303.71*** 851.73*** 828.94***

R-squared 0.2623 0.2626 0.2700 0.2702

N 3597 3597 3597 3597

Companies 820 820 820 820

Models are two-way random designs with company identifiers as the stratification variables and years as the period variables

* p \ .05, ** p \ .01, *** p \ .001

Corporate Social Performance and Economic Cycles 291

123

Concerns are associated with higher profits. This logical

effect might be expected in any economy. However, in the

second model for the low growth economy CSP concerns

was not a significant predictor of ROA.

Overall, this paper identifies some fairly important im-

plications for future research on corporate social respon-

sibility in general and specifically for studies that make use

of the KLD measures. First, the change in GDP variable

was a fairly consistent predictor of both CSP Strengths and

CSP Concerns, and across the five CSP activity areas.

Consequently, one implication is that researchers should

use this easily accessible variable as a control in future

empirical work.

Second, CSP Strengths and CSP Concerns performed in

opposite directions overall, as well as in most of the five CSP

activity areas. Most of the corporate social responsibility

research combines CSP Strengths and CSP Concerns for an

overall measure of CSP. In this sort of measure, we might

expect strengths and concerns to offset each other, making

interpretation of results difficult or even incorrect. Given the

popularity of combined measures in the CSP literature, the

offsetting influences problem could help explain some of the

contradictory findings in previous research.

Third, we found that results also varied depending on

which of the five CSP areas was being modeled. Some were

significant, while others were not. These results demonstrate

that researchers should not combine all types of CSP into a

single measure. Future research questions should be more

precise in terms of defining which area or areas of CSP are

being investigated. In addition, future researchers could

explore other factors that might stimulate positive CSP

programs and initiatives or lead to reductions in CSP con-

cerns. Finally, one of the weaknesses of our study is an in-

consistency in the unit of analysis—macro economic

influences versus firm-level decisions that influence CSP. To

overcome this weakness, future research could examine firm

executive perceptions of economic health as the independent

variable rather than changes in GDP.

From a practical perspective, the evidence found in this

paper is relevant in at least two ways. First, it confirms that

corporations have a tendency to neglect some areas asso-

ciated with CSP negatives during recessions, and it is no-

ticed. That is, KLD researchers observed the concerns as

they collected the data. As we noted in the methods section,

the majority of large institutional financial managers use

KLD’s data, and CSP concerns can influence both firm

reputation and investment decisions (Waddock and Graves

1997). Consequently, this study suggests that corporate

managers should exercise caution and restraint when

making decisions that could negatively influence CSP

during tough economic times. Second, the rather surprising

findings that firms tend to engage in positive CSP-related

actions and programs during periods of slow economic

growth suggests that they may be using these tools strate-

gically in an effort to enhance their reputations to coun-

teract difficult economic conditions. Although this study

utilizes a large sample over several years, this is to our

knowledge the first time such an effect has been

documented in the empirical research literature. Conse-

quently, we make this observation with reservations, sug-

gesting that further research is necessary on this topic

before we can draw this conclusion with confidence.

In conclusion, this study offers evidence that changes in

economic growth have a significant influence on firm CSP.

Furthermore, the nature of the influence depends on the

CSP area under investigation and on whether we are dis-

cussing positive CSP actions and programs or neglect of

particular CSP areas of concern. We also find that positive

CSP initiatives are associated with reduced profits in the

next year regardless of economic conditions, but a reduc-

tion in CSP concerns is positively related to profits only in

high growth economies. We hope these findings stimulate

more precise empirical work and theoretical development

on the topic of corporate social responsibility and inclusion

of changes in economic growth in future empirical models.

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