Signaling legitimacy across institutional contexts—The intermediary role of corporate social responsibility rating agencies

Abstract

Research Summary Good corporate social responsibility (CSR) ratings can increase a firm's legitimacy and reduce its default risk. Yet, the interpretation of CSR varies between different countries. We investigate whether CSR ratings have a risk‐mitigating effect across different institutional contexts. We find that good CSR ratings have a general risk‐mitigating effect. Yet, we also find that the effect decreases when the rating agency is embedded in the institutional context of its home country and the rated firm operates in a country with a different culture or regulatory system. This suggests that a rating agency's country of origin and its embeddedness in that country's context play an important role in the relationship between CSR ratings and default risk. Managerial Summary In this article, we investigate to what extent CSR rating agencies signal organizational legitimacy across institutional contexts. Specifically, we evaluate how institutional distance between the rating agency and the rated firm moderates the negative effect of the CSR rating on the firm's default risk. We compare two CSR rating agencies, OEKOM, which is strongly embedded in its institutional context, and ASSET4, which operates across diverse institutional contexts. Based on a panel of 604 firms in 13 countries from 2011 to 2016, we show that CSR ratings from both rating agencies have a risk‐mitigating main effect. Yet, only in the case of OEKOM is the effect negatively moderated by regulatory and cultural distance. Thus, the legitimating effect of institutionally embedded CSR rating agencies decreases with institutional distance.

What Prompts Small and Medium Enterprises to Implement CSR? A Qualitative Insight from an Emerging Economy

“…Davies and Crane [24] defined ethical, legal, and economic factors as the main priorities of any CSR activity. Dahlsrud [25] identified that there are five key dimensions of CSR, including environmental, social, economic, stakeholder, and voluntary action dimensions. The five-factor CSR model presented by Dahlsrud [25] corresponds to the standard CSR model of Carroll [2], in which economic, legal, and ethical domains are the same as those identified by Dahlsrud [25], and environment may fall under legal if it is obligatory by state laws or voluntary if state laws do not restrict it.…”

The pressure behind corporate social performance: Ownership and institutional configurations

“…Other stakeholders may also exert substantial pressure toward CSP. Debtholders may be instrumentally attracted by the risk reducing capacity of CSP (Kölbel & Busch, 2019; Shiu & Yang, 2017), but may oppose initiatives that redistribute firm value. Employees and customers may demand CSP based mostly on relational and moral motives (Aguilera et al, 2007), while strategic partners, such as suppliers, are more concerned with firm survival (instrumental) and relational stakeholder management.…”

Does global integration stimulate corporate citizenship? The effect of international trade agreements and regulatory quality on state and private firm adoption of CSR standards

“…First, we add to the global strategy and CSR literatures by identifying and modeling how international trade and investment agreements, through policy transferal, encourage the adoption and upward harmonization of CSR standards by firms. Scholars have suggested that CSR is a “cross-sectional” phenomenon that requires concurrent examination of why firms engage in CSR and why countries and global stakeholders promote it (Bitektine, 2011 ; Kölbel & Busch, 2019 ; Sahlin-Andersson, 2006 ). This literature focuses on the importance of global civil society and private regulatory frameworks such as those established by the United Nations and other intergovernmental organizations (Sahlin-Andersson, 2006 ).…”

“…For example, if a state joins an agreement that contains specific labor standards, those standards are typically then reflected in domestic law or regulation, and therefore firms within that state will have to adhere to these now harmonized standards. These enforcement mechanisms are coercive in the sense that they are reflected in laws and rules established by member states, but also support the development of a shared understanding about what is acceptable or legitimate both between and within states (Bitektine, 2011 ; Kölbel & Busch, 2019 ).…”