Firm Litigation Risk and the Insurance Value of Corporate Social Performance

By Ping-Sheng Koh, Cuili Qian, Heli Wang. 2013

414 citations recorded by the source corpus.

This paper advances the risk management perspective that superior social performance enhances firm value by serving as an ex ante valuable insurance mechanism. We posit that good social performance is more valuable as an insurance mechanism for firms with higher litigation risks. Moreover, value generation of corporate social performance (CSP) depends on whether a firm has gained pragmatic legitimacy (i.e., a firm's financial health) and moral legitimacy (i.e., whether or not a firm operates in a socially contested industry) among its stakeholders. We find that the value of CSP as insurance against litigation risk is practically significant, adding 2 to 4 percent to firm value. But CSP is less likely to create value if the firm is in financial distress or is operating in socially contested industries.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/4354d839b7e1ac48761e22150bbb5f0061645f24

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Citations in the corpus

Revisiting the corporate social performance‐financial performance link: A replication of waddock and graves (2016, methodology): “…and used KLD ratings to measure CSP. Recent studies continue to use KLD ratings to measure CSP (e.g., Jayachandran, Kalaignanam, and Eilert, 2013; Koh et al., 2014; Luo et al., 2015; Ramchander, Schwebach, and Staking, 2012), despite the ongoing debate on whether KLD ratings are good measures…”
Effects of Corporate Social Responsibility on Corporate Financial Performance: A Competitive-Action Perspective (2018, background): “Second, firms taking high-level risks may benefit from CSR because firm reputation, a valuable resource gained from CSR, can mitigate the potential damage from risks (Koh et al., 2014; Williams & Barrett, 2000).”
Corporate Environmental Responsibility and the Cost of Capital: International Evidence (2016, background): “Koh et al. (2014) find that the insurance effect of CSR is more valuable for firms with higher litigation risks.”