(Bu Eva) S-Fernandez-Kranz, Santalo - Effect, Product Market Competition, CSR, Strategy

When Necessity Becomes a Virtue:
The Effect of Product Market Competition

on Corporate Social Responsibility
DANIEL FERN
ANDEZ-KRANZ
Department of Economics
IE Business School
Mara de Molina 11
Madrid 28006, Spain
daniel.fernandez@ie.edu
JUAN SANTAL
O
Department of Strategy
IE Business School
Mara de Molina 11
Madrid 28006, Spain
juan.santalo@ie.edu
We test whether Corporate Social Responsibility (CSR) is driven by strategic
considerations by empirically studying the link between competition and
rms social performance. We nd that rms in more competitive industries
have better social ratings. In particular, we show that (i) different market
concentration proxies are negatively related to widely used CSR measures;
(ii) that an increase in competition due to higher import penetration leads to
superior CSR performance; (iii) that rms in more competitive environments
have a superior environmental performance, measured by rm pollution levels;
and (iv) that more product competition is associated to a larger within-industry
CSR variance. We interpret these results as evidence that CSR is strategically
chosen.
1. Introduction
Corporate Social Responsibility (CSR) has been advocated as a key
component of the social contract between business and society, but the
purpose of this contract is still the subject of much debate between
two opposing views: the altruistic view and the strategic view of CSR.
This research project has been partially funded by Madrid Regional Governments
research Grant #S2007/HUM-0413 and the Spanish Ministry of Educations research
Grants #SEJ2007-67582-C02-01 and #ECO2009-07237. The authors thank Luis Diestre for
his priceless help with the data collection process.
C
2010, The Author(s)
Journal Compilation C
2010 Wiley Periodicals, Inc.
Journal of Economics & Management Strategy, Volume 19, Number 2, Summer 2010, 453487
454 Journal of Economics & Management Strategy
According to an altruistic approach to CSR, rms are willing to sacrice
prots for the social interest (Elahuge, 2005). Instead, the strategic
view asserts that rms engage in prot maximizing CSR (Baron, 2001;
McWilliams and Siegel, 2001) and that companies do well by doing
good. Both views coexist without a clear consensus as to whether rms
perform responsibly because they can afford it or because corporate
virtue is protable.
There is a vast empirical literature devoted to the issue of
discerning whether CSR is indeed associated with superior nancial
performance but with inconclusive results. Margolis and Walsh (2003)
in their survey of this literature come across 109 empirical studies and
report that almost half of them, 54, provide evidence of a positive
association between CSR and nancial performance, whereas only
seven studies nd a negative relationship. Among the other, 28 studies
report nonsignicant relationships whereas 20 display a mixed set
of ndings. Yet, even if the sheer force of numbers indicate that the
(almost) absolute majority of studies nd a positive relationship, this
cannot be considered evidence in favor of the strategic view of CSR. A
positive correlation between CSR and prots could indeed be driven
by CSR providing companies with some sort of strategic advantage
that reects on the rms bottom line. But it is also consistent with
CSR being propelled by the existence of economic rents that managers
choose to divert to social initiatives rather than returning them to rm
owners either with or without their approval. Overall, the literature has
been quite ineffective in establishing causality in the observed linkage
between CSR and nancial performance (see also Grifn and Mahoney,
1997, as well as Margolis and Walsh, 2003, for a complete literature
review).
In this paper, we propose a different approach to the testing of
causalityinthe CSR-nancial performance debate. Rather thanstudying
the CSR-prots linkage, we investigate the effect of product market
competitiononCSRlevels andvariance. If altruismeither of managers
or rmownersis the drivingforce that pushes forwardCSRinitiatives,
thentougher competitionshouldreduce the rents available for diversion
to CSRandtherefore it shouldleadto a nonincreasing rmsocial perfor-
mance. Onthe contrary, if CSRstrategies are mainlyundertakenbecause
their usefulness for companies insearchof competitive advantages, then
a more competitive environment could lead to an enhanced use of CSR
as a way to either better differentiate, gain access to new markets, or
achieve a better t betweenthe rms products or services andconsumer
preferences in some unique market niches.
In this paper, we provide strong evidence that rms operating
in more competitive industries are more socially responsible, a result
we view as consistent with the strategic theories of CSR. We do not
Corporate Social Responsibility 455
claim that CSR is never altruistically motivated. In fact, CSR could
be altruistically motivated and at the same time strategically chosen
to serve the interests of the rm. We view our results as indicative
of the importance of the strategic motives for CSR. More precisely,
our results suggest that strategic CSR models have a better t with
the observed competitionCSR linkage than altruism-based theoretical
models.
We perform three distinct empirical tests to support this claim.
First, we show how increases in market concentration measures are
negatively associated with the CSR ratings devised by an independent
investment company. This result holds true when controlling for a vari-
ety of observed and unobserved rm characteristics and it holds when
we consider bothrmsocial strengths andrmsocial concerns indepen-
dently. Second, we provide evidence that an increase in competition due
to higher import penetration leads to superior CSR performance. Third,
we nd that rms in more competitive environments have a superior
environmental performance, measured by rm pollution levels. All
these results are not only statistically signicant, but they also reveal
effects of economic signicance. In particular, our estimates suggest
thatif all else is constantdoubling competition in the marketplace
would increase the CSR ratings of an average company by between
184% and 800%.
Furthermore, we also investigate the linkage between the intensity
of market competition and the variance of CSR ratings across rms. In-
tuitively, if CSR is undertaken by companies as a differentiation device,
then as competition intensies we should see that some companies
choose to improve their social performance whereas other companies
in the same sector will keep it constant or even diminish it, because the
effectiveness of CSR as a differentiation device depends on the relative
social performance vis-` a-vis competitors (Baron, 2006). Consistent with
this argument, we report evidence that shows a positive association
of within-industry CSR variation and the intensity of product market
competition.
The rest of the paper is structured as follows: Section 2 reviews the
literature on altruistic andstrategic CSR, Section 3 provides a theoretical
framework for the competitionCSRlinkage. Section 4 characterizes the
data and the variables used in our empirical analysis. We describe the
empirical strategy in Section 5, whereas in Sections 6 and 7 we showthe
empirical evidence of a positive relationship between competition and
CSR with different proxies of both constructs. Section 8 looks at several
robustness tests, Section 9 investigates the linkage between market
competition and within-industry CSR variance, whereas Section 10
concludes.
2. Literature Review: The Altruistic
and Strategic Motives for CSR
One stream of literature asserts that rms engage in prot maxi-
mizing CSR (Baron, 2001; McWilliams and Siegel, 2001; for a review
see McWilliams et al., 2006) and therefore companies do well by
doing good. From the consumer side, CSR practices may increase
prots because they directly increase consumer willingness to pay
for the rm product (Waddock and Graves, 1997; Reinhardt, 1998;
McWilliams and Siegel, 2001; Bagnoli and Watts, 2003; Baron, 2006,
2008); prevent consumer boycotts (Micheletti, 2003); or they credi-
bly signal to the consumer the unobserved high quality of the rm
products (Feddersen and Gilligan, 2001; McWilliams and Siegel, 2001;
Fisman et al., 2006; Siegel and Vitaliano, 2007). Good CSR stan-
dards can help to attract more or cheaper sources of capital from
altruistic investors or investors that consider that socially responsi-
ble actions signal the high quality of the management team (Graff
Zivin and Small, 2005; Vogel, 2005, chapter 3; Mackey et al., 2007).
Responsible rms may also benet from improved employee morale
and retention (Vogel, 2005, chapter 3; Turban and Greening, 1997).
Finally, businesses could use CSR as a means to preempt more costly
regulatory actions (Segerson and Miceli, 1999; Maxwell et al., 2000),
to avoid taxes (Hansen, 1999; Schmelzer, 1999) and even to inuence
regulations in such a way that their competitors face higher costs than
the rms practicing CSR (McWilliams et al., 2002).
On the contrary, the altruistic theories of CSR (e.g., Aupperle
et al., 1985; Baron, 2006) consider that CSR policies involve necessarily
sacricing rm prots for the social interest (Elahuge, 2005). Firms that
perform responsibly incur a competitive disadvantage because they
experience costs that should be avoided or that should be borne by third
parties (Waddock and Graves, 1997). Furthermore, altruistically driven
rms abstain engaging in certain lucrative courses of action because
they do not wish to prot from unethical or heinous actions (Rosen
et al., 1991).
In the modern corporation, the origin of this corporate philan-
thropy can come either from altruistic managers or directly inspired
by the magnanimity of owner-shareholders. If corporate owners have
altruistic preferences for the social welfare they will commission man-
agers to run the rm in a philanthropic manner. A second possibility is
that investors are selsh, and thus they are unwilling to accept lower
returns in exchange for better rm social performance, but executives
preferences for CSR diverge from those of their principals. According
to this interpretation, CSR is simply an additional managerial perk and
the expression of the traditional agency problem between managers
and shareholders as Friedman (1970) pointed out. Along these same
lines Vogel (2005) notes that the origins of the modern doctrine of CSR
in the United States are inextricably linked to the popularization of
professional managers and the separation of corporate ownership and
control at the beginning of the XX
th
century.
As explained earlier, a large body of empirical literature has
tested whether companies do well by doing good. If this was the
case, one could argue that, independently of any additional altruistic
motivation, CSR can indeed be strategic and studied like any other
prot maximizing strategy. The problem with this approach is that this
literature has not been successful in establishing causality because a
positive correlation between CSR and nancial results is consistent
both with altruistic and strategic theories. In this paper, we take a
novel approach to discerning between both models by looking at the
competitionCSR linkage.
3. Theoretical Framework: Effect of Market
Competition on Altruistic and Strategic CSR
3.1 Effect of Competition on Purely Morally
Based CSR
Under the assumption that philanthropy enters the utility function
of shareholders as a normal good (see plenty evidence of this
in Schervish and Havens, 1998; Nelson, 2001), the total amount of
money that shareholders are willing to sacrice for altruistic reasons
should increase with rm prots. According to this logic, more intense
competition in the marketplace decreases the strength of a rms
economic position and as a result corporations would behave less
philanthropically in more competitive markets.
CSR could be the result of an agency problem in which managers
divert shareholders money to their pet socially responsible projects.
In this case, the CSR competition-linkage will be the same as it
would be with altruistic shareholders. If managers running companies
that operate in noncompetitive markets divert part of their rents to
improve rm social performance at the expense of shareholders, then
competition in the marketplace diminishes the amount of resources
that can be diverted to social issues and hence decreases CSR levels.
This relationship holds independently whether the altruism source is
the legitimate virtue of corporate owners or simply agency problems
that enable managers to divert shareholders money to social causes. In
fact, note that according to this logic, CSR cannot coexist with perfectly
competitive markets because selsh investors would always require
market returns.
3.2 Effect of Market Competition on Strategic CSR
Onthe contrary, models of strategicallydrivenCSRare not incompatible
with a positive relation between competition and socially responsible
behavior, althoughthe theoretical literature that looks at the relationship
between market competition and strategic CSR has found conicting
results regarding the sign of this linkage. This is not surprising because
Industrial Organization economists that have studied theoretically the
effect of competition on other prot maximizing business strategies
like innovation (Aghion and Grifth, 2005) have not found a univocal
effect either. These ambiguous results arise because there are two main
effects of product market competition on a given strategy: the rent
dissipation effect and the escape competition effect (Aghion and
Grifth, 2005), with opposite signs. On one hand, an increase in product
market competition reduces the product prot margin and this in turn
reduces the marginal return of any generic business strategy. This is the
same logic usedby Schumpeter (1943) to defenda negative link between
competition and innovation. According to this rent dissipation effect,
product market competition would reduce CSR. This effect dominates
in Bagnoli and Watts (2003), where the cost disadvantage associated
to the provision of the public good has more pronounced negative
effects for rm protability in more competitive markets. This negative
relation between market competition and CSR is found both when
Bagnoli and Watts (2003) dene intense competition as a larger number
of competitors, and also when they consider Bertrand price competition
instead of the less aggressive Cournot type of models.
Alternatively, in more competitive scenarios, a small advantage
acquired by any of the competitors could easily translate in larger
increases in market share. For example, in a Bertrand competition type
of model any business strategy that leads to a small decrease in price
(or to a small increase in product quality or attributes, given price)
could translate into a 100% market share because consumers would
switch massively to rms that offer a better deal. According to this
escape competition effect product market competition would affect
positively rm levels of CSR. Consistent with this reasoning, Fisman
et al. (2006) present a signaling model of corporate philanthropy in
which the nal consumers value products coming from rms that
engage in CSRactivities because this credibly signals the rms aversion
tosacricingunobservable quality. Fismanet al. (2006) ndthat strategic
CSR activities are more likely to occur in those markets in which
product market competition is more intense, the reason being that
the protability of a differentiation strategy achieved by partaking
in CSR activitiesthe escape competition effectis larger in those
markets in which price competition is strong. In their model, the escape
competition effect is particularly powerful because CSR is the only
product differentiation device in an otherwise homogenous output.
The opposed sign of these two effects explains why a given
strategic theory of CSR is unlikely to predict an unambiguous relation
between the intensity of competition and rms social performance
unless imposing a strict set of assumptions that limit its applicability to
the empirical analysis. Yet, a positive relation can be expected whenever
the escape competition effect dominates the rent dissipation effect.
More important, although a negative relation between market
competition and CSR would be consistent both with strategic and
altruistic models of CSR, a positive association is incompatible with
a purely altruistic motivation and therefore would provide evidence
of CSR undertaken, at least partially, as a prot maximizing strategy.
In this regards, the evidence of a positive linkage that we report later
indicates that the documented positive correlation between CSR and
prots found in the majority of studies in the literature (Margolis
and Walsh, 2003) is driven by CSR boosting prots rather than prots
inducing socially responsible corporate behavior.
So far, we have discussed the relation between competition and
CSR without distinguishing between positive and negative social
actions whereas Mattingly and Berman (2006) clearly establish that
positive and negative social actions are distinct constructs and therefore
should not be combined in a unique dimension. Furthermore, Creyer
and Ross (1996) provide experimental evidence that consumers do
respond to unethical behavior with a demand for lower prices and
that positive social actions have value to consumers only when they
are presented to counteract unethical behavior. However, we claim that
product market competition can both decrease negative social actions
and increase the likelihood of corporate virtue.
First, an increase of competition in the marketplace raises
the expected harm to prots caused by unethical behavior because
the corresponding decrease in market share would be larger given the
importance of substitutes/competitors. In other words, the escape
competition effect increases the incentives not to undertake unethical
acts negatively valued by consumers and this implies a negative
relationshipbetweenthe degree of competitionandbadcorporate social
behavior. Similarly, the payoff or the importance of ethical behavior
to compensate past negative social acts will be greater in these same
situations and therefore we should nd a positive linkage between
increases in competition and good corporate social behavior. Note,
however, that as a second-order effect if competition reduces negative
social actions then there may be less need to undertake positive social
actions, which would imply a negative relation between competition
and ethical behavior. As we will show later, this possibility is not
supported by the data, because all our results point to the same
direction: a positive link between market competition and ethical
behavior.
3.3 The Effect of Market Competition on CSR-driven
Product Differentiation
A positive association between the intensity of competition in the
marketplace and the average level of CSRwould be consistent with CSR
actions that improve the efciency of rms either because of a reduction
in costs or an increase in productivity. Using CSR to attract cheaper
sources of capital, toattract andretaintalent, toenhance the productivity
andmorale of the labor force, or to preempt costly regulatory actions are
examples of this. Indeed, in highly competitive markets the survival of
rms oftendepends onhavingthe right cost of capital or havingthe right
team of workers and attracting talent to the rm. However, if rms use
CSR as a product differentiation device, then we should see a positive
link between product market competition and CSR variance rather than
CSR levels. In this context higher competition will lead some rms to
invest in CSR to differentiate but because by denition all rms cannot
differentiate by doing the same strategy, then we should also see at the
same time some other rms with constant or lower CSR investment
levels. This intuitive reasoning is coherent with the so-called principle
of maximum differentiation to soften price competition reported in the
Industrial Organization literature (Tirole, 1988). This reasoning would
suggest that higher levels of market competition should increase within
industry CSR variance because in equilibrium only some companies
would pursue a CSR-based differentiation strategy.
This positive associationbetweenproduct market competitionand
CSR variance applies to situations in which CSR is both horizontal and
vertical product differentiation. If it is horizontal differentiation and not
all consumers agree that CSR is valuable, then more intense product
competition may induce some companies to look for those consumer
niches in which CSRis highly valued. At the same time other companies
may pursue a socially irresponsible strategy and focus on offering low-
cost goods at low prices to those consumers that do not care about
social performance. Similarly, if CSR constitutes vertical differentiation
and all consumers agree about the superior value of CSR initiatives,
competition will induce some companies to specialize in the upper
segment of the market whereas other companies will get the low end
of the market in a separating equilibrium similar to the one reported in
Baron (2006), Fisman et al. (2006), or Tirole (1988).
4. Data Description and Variable Construction
4.1 Sample Construction
In this paper we combine two data sets: the KLD data set, with
information on the CSR behavior of rms, and Compustat, which
provides accounting statement information of public companies. The
KLD data set comes from Kinder, Lyndenberg and Domini (KLD), a
rm that rates the social performance of public companies with the
purpose of facilitating the integration of environmental, social, and
governance factors into investment decisions. In comparison to other
CSR indicators, KLDs ratings are based on the assessment of experts
outside the focal rm, and therefore the KLD ratings are more objective
than accounts of companies self-reported CSR activities as used in
other indexes. Waddock (2003, p. 369) asserts that KLD data is the de
facto research standard at the moment for measuring CSR in scholarly
research. Furthermore, the KLD data has been found to be consistent
with other commonly used measures of CSR. For example Sharfman
(1996) found that the KLD data correlated very well with the 1991
Fortune reputation score of 300 corporations and the holdings list of 11
ethical funds.
The KLD data covers the period 19912005 and considers seven
broad areas of CSR: community relations, corporate governance, em-
ployee relations, diversity, the environment, human rights, and product
quality and safety. Then, within each of the seven areas, KLD analyzes
the behavior of companies on various aspects or activities, differen-
tiating between good or socially responsible behavior (KLD calls this
a strength) and bad social behavior (KLD calls this a concern). The
number of rms in the KLD sample experiences a substantial increase
in the year 2001 since from that year onward, KLD added CSR ratings
for all rms belonging to the Russell 1000
R
Index. From 2003 onward
KLD additionally reports CSR data on all those companies belonging
to the Russell 2000
R
Index.
In our empirical analysis later, we exclude rms in the Domini 400
Social Index (DS400) to avoid selection bias caused by KLD selecting
specic types of corporations. By doing this we lose 1,014 rm
year observations. However, in nonreported results, we replicate our
specications including companies in the Domini 400 Social Index, and
qualitatively obtain the same results.
Throughout the years KLD has changed the number of activities
that it scrutinizes. In particular, many of the activities rated in years
19942005 were not rated in 19911993, and vice versa. For this reason
years 19911993 are excluded from the analysis. We also dropped those
ratings that appear in some years but not in others, and this resulted
in the exclusion of an average of two strengths and three concerns per
year. Finally, those observations that had no match in the Compustat
data set were left out, which led to the exclusion of 2,870 rm year
observations.
In total, we keep 12,933 rm year observations with an average
of 56 CSR ratings for every rmyear. The resulting unbalanced panel
consists of 3,630 rms, each of them staying an average of 3.56 years
in our sample. However, the distribution of the number of years in the
sample is bimodal, because larger rms in the SP500 stay an average of
8.71 years. An important element of our empirical strategy that we
explain later is the inclusion of rm xed effects. To have enough
within-rm time variability we run regressions using only rms that
are present in the data set for a minimum of 5 years, which reduces our
sample to 6,206 rm year observations. To have comparable results
across specications, we impose the exact same sample restriction in
all the analyses. We have considered other thresholds for the minimum
number of years in the data set and the results are practically identical.
4.2 Dependent Variables: Measures of CSR
Performance
We follow the literature (see, e.g., Siegel and Vitaliano, 2007) and
we compute the difference between total strengths (STR) and total
concerns (CON) across all different CSR areas to get an aggregate
measure of CSR, ACSR, for each rm and year. The analysis later also
studies the linkage with market competition of concerns and strengths
separatelybecause as Creyer andRoss (1996) andMattinglyandBerman
(2006) argue, consumers may value asymmetrically positive rather than
negative CSR-related events. Note that adding raw KLD scores across
domains over weights some domains and underweights others because
the maximum number of strengths and concerns is not equal across
domains. Although for better comparison with previous literature, we
report the regressions done with the raw KLD scores as dependent
variables, we have run alternative models using standardized scores
and the results were unchanged.
The ACSR values range from9 to 12 and the standard deviation
across rms is 1.98. Because of the characteristics of the KLD scores,
27% of the observations have an ACSR score equal to 0, whereas this
percentage jumps to 37% in the case of the concerns (CON) and 41% in
the case of the strengths (STR). Interestingly, as noted by Mattingly and
Berman (2006) there is a positive correlation between social strengths
and concerns (see Table II).
4.3 Independent Variables: Measures of Product
Market Competition
We construct three different market competition proxies. First, we con-
struct the HirschmanHerndahl Index (HHI) for eachindustry dened
at the six-digit NAICS code level. This is a standard index of industry
concentration used profusely in the standard Industrial Organization
literature that is computed by adding the square of the market share of
all players operating in an industry a given year. We compute total sales
in industry i by considering all Compustat nondiversied companies
active solely in industry i as well as those divisions of diversied rms
that report industry i as their primary sector of activity. This is the
same measure of concentration used by Arora and Cason (1995) when
studying the determinants of participation in voluntary environmental
regulation programs.
Note that this HHI is constructed using exclusively information
from public companies in Compustat, and therefore it is an upward-
biased estimator of the real HHI. However, it constitutes a good proxy
for industry concentration because larger rms are usually public and
this limits the importance of the bias. Furthermore, a large number of
small local private companies may not be competing with large national
or international companies evenif theyoperate inthe same NAICS code.
For this reason, our in-sample concentration index might be a better
proxyof the relevant extent of market competitionfor public companies.
The only alternative would consist in using the HHI reported by the US
census. However, the US census only provides concentration indexes
for manufacturing industries and this data is only available one out of
every 5 years. This would complicate the analysis with rm or industry
xed effects, which are so essential to our empirical strategy.
The number of competitors in the same industry is taken as
another proxy for the intensity of competition, again dened at the six-
digit NAICS code level. As earlier, both divisions of diversied rms
and nondiversied rms active in the same sector are considered as
competitors.
For the last measure of competition, we utilize measures of
import penetration and industry tariff protection obtained from the
John Romalis US Tariff Database 19892001 les, the TradeStats Express
National Trade Data, and the US Industry Annual Accounts data
section in the Bureau of Economic Analysis of the US Department of
Commerce as reported in Xu (2006). With it, we construct measures of
import penetration and industry tariff protection, covering a total of
21 manufacturing industries (three-digits NAICS level) for the period
19942001.
A large percentage of rms in our sample (43.23%) are diversied,
and as such they operate in more than one industry. The corresponding
market competition proxy for these companies is constructed as the
weighted average of the market competition in all the industries in
which the company operates, where the weights are given by the
percentage of rm sales in each industry.
All three competition variables display a signicant degree of
variation across industries, across rms, and across time. For example,
for the case of the HHI, its mean is 0.20 and its standard deviation across
rms is 0.19 and 0.06 across time. All three-market competition proxies
correlate negatively with rm protability (see Table II).
4.4 Controls
It might happen that rms subject to more competitive environments
increase their expenditure in R&D or advertisement in addition to
undertaking CSR initiatives. In this case, omitting controls such as R&D
and advertising expenditures would lead to an overestimation of the
impact of competition on CSR. With this in mind, we follow the advice
of McWilliams and Siegel (2000) and all our specications have controls
for R&Dintensity (R&D) andadvertising intensity (ADVER), denedas
R&D expenditures over sales and advertising expenditures over sales.
Because companies are not forced by the SEC to report advertising
and R&D expenditures, there are a large percentage of companies that
have missing values for these two variables in Compustat. Instead of
droppingthose observations, we followthe standardpractice andassign
them a value of zero and at the same time create two dummies, one
for each variable, that have a value equal to 1 if the company reports
each respective type of expenditures, and zero otherwise. These two
dummies are included in all the specications in which these controls
are used.
We are interested in exploring whether market competition could
have an effect on CSR other than decreasing the excess resources
available to invest in socially responsible behavior. According to an
altruistic point of view, all the effect of market competition on CSR
ratings should go through its negative effect on prots. Thus, once this
effect is taking into account market competition should have a zero
effect on rm social performance or a negative effect if competition has
a negative effect on future prots and this induces rms to reduce its
responsible behavior. We take this effect into account by including as a
control variable rmaccounting prots (PROFITS), denedas the rms
operating prots, in all our specications.
We are also concerned about the possibility of a spurious correla-
tion between CSR and competition due to a size effect. This can happen
if CSR has economies of scale and rm size varies with competition
(e.g., in less competitive markets rms have a larger size). Also, large
companies are more likely to have a greater public visibility and, as a
result, larger companies may have higher chances to qualify for any
of the strengths and concerns considered by KLD. For these reasons, a
control for rm size (ASSETS) is included, computed as the log of book
value of rms assets.
We report descriptive statistics and correlations of the variables
we employ in the empirical analysis in Tables I and II. Firms operating
in manufacturing industries, NAICS code between 31 and 33, are
the largest group in our sample followed by rms competing in the
service sector, NAICS 5192. Across time the proportion of rms in
manufacturing decreases, from 51% in the interval 19941997 to 36%
in 20022005; whereas the percent of companies in the service sector
increase from 19% to 34% during the same period of time. This time
variation in the sector composition of our sample is partially due to
the changing universe in the KLD sample reported earlier. The later
added indexes that have a different industry mix because they include
much smaller companies. In addition, the sector combination of the
indexes captured in the whole sample period varies across time. This is
clear in the case of S&P 500 in which the proportion of manufacturing
companies is decreasing. Note also that the mean values of the control
variables change considerably across time. The effect of any potential
time biases in our estimations is taken into account by including year
dummies in all our specications.
V. Empirical Strategy
In our empirical analysis we run a set of linear regressions to estimate
the relation between CSR and market competition. Although we use a
simultaneous specication, as other empirical studies of the relationship
between CSR and prots (Fisman et al., 2006) and the type of goods
(Siegel and Vitaliano, 2007), our results are robust to lagging the
independent variables 1 year. We do not include this estimation to
avoid ooding the paper with tables but the results are available from
the authors upon request.
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.
Note that even if the proxies of market competition, COMP, are by
its nature dened at the industry-level, COMP has rm-level variability
given that each diversied rm has potentially a distinct value for
COMP. Because both STR and CON are left-censored variables, we t
Tobit models whenever using these as dependent variables, whereas
we run standard OLS regressions when using ACSR.
Whenusinga Tobit specicationwe cannot introduce rmxedef-
fects (Wooldridge, 2002) and this is why in all Tobit specications below
individual rmxedeffects are substitutedbyindustrydummies. These
industry dummies represent six-digit NAICS codes in those regressions
with HHI and PLAYERS as independent variables and instead three-
digit NAICS codes for those regressions with IMPORTS as proxy of
market competition (we are consistent with the industry denition used
in each competition variable).
The inclusion of industry dummies is important because of two
separate reasons. First, as Nickell (1996) points out market share-
based measures of market power (such as the HHI) have little value
when utilized in a cross-section but instead are more reliable when
exploiting the explanatory power of their time variability as we do
when introducing industry dummies. Second, Siegel and Vitaliano
(2007) show how CSR levels vary systematically across industries
because they report that companies selling experience goods are more
socially responsible than rms selling search goods. Adding industry
dummies avoids biases caused by the presence of unobserved industry
characteristics that could be correlated at the same time with CSR levels
and market competition proxies. We also estimate regressions with rm
xed effects to take into account generic unobserved rmheterogeneity.
Note that we cannot run regressions with industry dummies and
rm xed effects at the same time because this would require having
enough number of rms that switch industries during the 10-year
period. This does not happen for any of the companies in our sample.
Besides, industry xed effects will also capture time invariant industry
effects.
A potential drawback of our analysis is the potential endogeneity
of HHI and PLAYERS and standard reverse causation arguments. In
particular, it could happen that CSR strategies modify market structure
rather than being the result of competition in the marketplace. This
could be the case if, for example, the CSR strategies implemented by
incumbents act as an entry barrier andreduce the level of competition in
a mechanism similar to the one described in Sutton (1991) for R&D and
Advertising. This issue is addressed by using an exogenous source of
market competition, as is the level of industry trade barriers. We follow
Xu (2006) and Guadalupe (2007) using the time variation of tariffs as
instruments for import penetration across three-digit manufacturing
industries. As seen later, the results will not change qualitatively when
employing this exogenous measure of market competition.
The use of import penetration provides another test of a different
kind. It allows us to be condent that any measurement error in the
social performance variables is not affecting our results. That is, even
though there is a clear possibility that we are measuring the level of
CSR with error, this will bias our results only if the measurement error
is correlated with the competition variables. The fact that our results
are robust to changes in the competition variable suggests that there
is no correlation between CSR measurement error and the degree of
competition (or that CSR measurement error is equally correlated with
all different competition indicators, which is rather unlikely).
In the specications later we use industry tariffs as instrument for
import penetration. The objective is to use an exogenously determined
measure of competition, that is, one that is not affectedbythe intensityof
CSR in the industry. Because the level of tariffs tends to vary for reasons
not strictly related to CSR adoption by rms (e.g., trade agreements or
political reasons), it seems reasonable to use as proxy of competitionthat
part of imports penetrationthat is relatedtochanges intariff levels. More
precisely, this instrumental variables (IV) approach implies a two-steps
estimation procedure. In the rst step, import penetration is regressed
against industry tariffs and the rest of explanatory variables. In this rs-
stage nonreported estimations, industry tariffs always had a negative
impact on import penetration, and the coefcients were signicant at
the 1% level suggesting that indeed import tariffs are good instruments
for import penetration. In the second step, CSR is regressed against
the tted values of import penetration and the rest of right-hand-side
variables. The results of this second stage are reported later.
VI. Preliminary Evidence on the CSR-Market
Competition Linkage
We start byshowingsome anecdotal evidence regardingthe relationship
between product market competition and the CSR measures. Table III
displays the connection between changes in market concentrationas
measured by the change in the HHIand changes in CSR over a 12-
year period from 1994 to 2005. The rst panel in Table III looks at this
relationship at the rm level, whereas panel B takes industry, six-digit
NAICS, as the unit of analysis.
The evidence presented in Table III clearly suggests a positive
relationship between the change in market competition and CSR. Those
Table III.
CSR and Market Concentration (HHI); 19942005
Difference from
12-Year Average
Difference
between 2005
Value and the
12-Year Average
Panel A. Firm-level data. Only rms present all years in the data set. 1,800 observations
Quartile
ACSR HHI Worst ve CSR

performers
ACSR HHI
1
st
(least 0.25 0.10 Fuller Company 4.66 0.13
concentrated)
2
nd
0.14 0.02 Kroger Co. 4.50 0.02
3
rd
0.05 0.01 Albertsons, Inc. 4.16 0.02
4
th
0.33 0.11 Wal-Mart Stores, Inc. 4.00 0.13
Home Depot, Inc. 3.83 0.05
Best ve CSR performers
Unisys Corporation 3.25 0.21
Intel Corporation 3.41 0.01
Ecolab Inc. 3.41 0.05
Advanced Micro
Devices, Inc.
4.33 0.01
General Motors
Corporation
4.58 0.03
Panel B. Industry-level data (six-digits NAICS). 1,356 observations
Worst ve CSR performers
1
st
0.22 0.11 Adhesives and
sealants (325,520)
4.66 0.13
2
nd
0.12 0.02 Pens, pencils, other
ofce material
(339,941)
3.66 0.06
3
rd
0.07 0.01 Plastics, resins and
elastomers (325,211)
3.58 0.04
4
th
0.27 0.12 Grocery stores
(445,110)
3.47 0.02
Convrt papr, paprbrd,
ex boxes (322,222)
3.41 0.10
Best ve CSR performers
Motor vehicles and car
bodies (33,611)
3.79 0.05
Paperboard mills
(322,130)
2.50 0.01
Semiconductor, related
devices (334,413)
2.13 0.01
Special industry
machinery (333,295)
2.08 0.00
Aircraft (336411) 1.91 0.01
Based on HHI distribution.

Notes: Only rms present all years in the data set. CSR is the Corporate Social Responsibility index as reported by KLD.
HHI is the Herndahl Hirshman Index, calculated at the six-digits NAICS industry level and averaged over industries
if a rmis diversied. Worst (best) CSR performers are the rms (Panel A) or industries (Panel B) that have experienced
the largest decrease (increase) in ACSR during the 12-year period that goes from 1994 to 2005.
companies operating in industries in which concentration has lessened
the most, a decrease of 0.10 in the HHI froma mean of 0.20, are those that
have experienced the largest increase in the ACSRratingsa rise of 0.25
where the average of ACSR in the sample is just 0.13. At the same time,
those companies in sectors in which market concentration has increased
the most (increase of 0.11 inthe HHI) are those withthe largest reduction
in ACSR ratings (a decrease of 0.33). Also, those companies that have
undergone the largest decrease of ACSR ratings in 2005 respective to
their historical means (Wal-Mart and Home Depot among them) have
all simultaneously encountered an increase in market concentration;
whereas those companies (like Intel and GM) that have experienced the
largest increase in the ACSR levels are also those operating in sectors in
which market concentration has diminished.
At the industry-level a similar pattern is observed. The quartile
of industries where concentration has fallen the most (a fall of 0.11)
presents the largest increase in ACSR levels (an increase of 0.22). On the
contrary, in the quartile of industries in which market concentration has
grown the most (an increase of 0.12) ACSR levels experience the largest
decrease (0.27 points). Analogously, the worst (best) CSR performers
industries are those that operate in sectors in which concentration has
gone up (down).
7. Empirical Results
7.1 Market Concentration and CSR
Next we investigate the relationship between competition and CSR in
fully-edged econometric specications. Tables IV and V display the
results of a set of regressions with CSRmeasures as dependent variables
against market competition proxies and our control variables. The rst
three columns of both tables display estimated coefcients in which the
unit of observation is industry-year where one industry is dened as
a four-digits NAICS code. On the contrary, columns (4)(9) display the
results of empirical specications in which the unit of observation is
rmyear. Columns (4)(6) exhibit the results when adding rm xed
effects and columns (7)(9) show the results when adding industry
dummies instead.
In the industry-level analysis, CSR is calculated as the average of
CSR ratings across all nondiversied rms operating in that industry
and given year. The reason for excluding diversied companies in
the industry-level analysis is that it would be problematic to assign
different portions of it to each of the industries where a diversied rm
operates. The disadvantage of considering only nondiversied rms is
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that we lose almost half of our sample of rmyear observations when
we perform the industry-level analysis. This is why we had to restrict
our analysis to higher levels of industry aggregation (namely, four-digit
NAICS instead of six-digit NAICS) to have a sufciently big number of
rm-level observations per industry.
1
In all cases, the sign of the coefcients indicates a consistent
pattern: more market competition, lower HHI or more PLAYERS, is
associated with superior social responsibility levels. This happens in the
industry-level analysis, but also in the rm-level analysis with industry
dummies or rmxedeffects. Five out of the six coefcients of the ACSR
variable are statisticallysignicantcolumns (1), (4), and(7) inTables IV
andV. Furthermore, the coefcients on both competition variables, HHI
and PLAYERS, seem to suggest that competition in the marketplace
is positively associated with both higher CSR strengths and lower
CSR concerns: ve out of six coefcients of the competition variable
signicantly affect the number of strengths, whereas for concerns the
same proportion is three out of six. In none of the six specications we
nd that market competition proxies negatively and signicantly affect
the number of CSRstrengths. Also, there is not a single specication that
shows that market competitionhas a positive andstatisticallysignicant
effect on the number of CSR concerns.
The comparison of the industry-level results with the rm-level
results provides a test of whether the inclusion of diversied rms
is having an effect in our results. In general, the direction and the
signicance of the coefcients are the same under both specications
and hence are independent of the inclusion/exclusion of diversied
rms.
Regarding the control variables, both ASSETS and PROFITS are
consistently associated with more CSR strengths but also with more
CSRconcerns. One explanation could be that larger and more protable
corporations have a higher visibility and therefore a larger chance of
being spotted under the radar of KLD both for positive and negative
social practices.
The coefcients on the competition variables presented in
Tables IV and V suggest that the magnitude of the effects of market
competition in the magnitude of CSR ratings is quite important. For
example, the coefcients in column (4) in both tables suggest that
doubling the concentration ratio/number of players of the industries
1. We have performed the analysis at different levels of industry aggregation and
in general we have found similar but noisier results. The 4 digits level of aggregation
seems to offer a good balance between the number of industry level observations (291
different industries) and the number of rm level observations to construct each industry
aggregate (25.9 rms in each industry on average).
Table VI.
Results for Linear IV Models; Competition
Variable: IMPORTS
IV Firm Fixed Effects
IV with Industry Dummies
(Three-Digit NAICS)
ACSR STR CON ACSR STR CON
(1) (2) (3) (4) (5) (6)
Coeff Coeff Coeff Coeff Coeff Coeff
Dependent variable (SE) (SE) (SE) (SE) (SE) (SE)
IMPORTS 0.339
0.141 0.198
0.489
0.366
0.123
(0.183) (0.130) (0.114) (0.143) (0.113) (0.072)

ASSETS 0.061 0.160 0.098 0.554
0.294
0.259
(0.164) (0.116) (0.102) (0.082) (0.065) (0.041)

R&D 2.114 1.235 0.878 3.168 2.313 0.854
(2.232) (1.589) (1.390) (2.011) (1.593) (1.009)
ADVER 0.215 2.868 3.083 4.132 0.276 3.855
(4.811) (3.425) (2.995) (3.096) (2.453) (1.553)

PROFITS 0.015 0.003 0.019
0.041
0.069
0.027
(0.010) (0.007) (0.006) (0.0009) (0.007) (0.004)

R
2
0.791 0.823 .776 .210 0.269 0.353
No. of observations 1,202 1,202 1,202 1,202 1,202 1,202
Signicance at the 10% level.

Regression computed with rms in the data set for a minimum of 5 years. Only manufacturing industries (NAICS
311339). All regressions include year dummies and dummies for missing observations on R&D and ADVERTISING.
Robust standard errorsare computed assuming that observations are independent across rms but not within rms
and across time. CSR is total strengths (STR) minus total concerns (CON). IMPORTS is import penetration calculated
as imports over sales at the three-digit industry level and is calculated as the weighted average of IMPORTS in each
of the industries where the rm operates where the weights are given by the percentage of sales of the rm in each
industry. IMPORTS is instrumented with industry tariffs. ASSETS is the log of the rms assets. R&D and ADVER
are R&D intensity and advertising intensity, respectively, calculated as R&D and advertising expenditures over sales.
PROFITS is the rms operating prots in 00s (data 13).
in which a given rm is competing should lead to a decrease of
1.07/increase of 0.24 points in the ACSR levels. Because the average
of the ACSR variable is just 0.13, this means that if the company had an
average ACSR rating, the effect of dividing the industry concentration
by two would imply a decrease of CSR levels of around 800% whereas
multiplying the number of competitors by two would result in an
increase of ACSR ratings of around 184%.
7.2 Import Penetration and CSR
The results in Table VI show the same pattern as before: an increase
in product market competition (IMPORTS) causes rms to be more
socially responsible measured by higher ACSR levels. These results
hold both for the rm xed effects model and the model with just
industrydummies. As before, market competitionmeasuredbychanges
in import penetration is associated with both more CSR concerns and
less CSR strengths, although the coefcient on CSR strengths is not
statistically signicant when using rm xed effects.
The economic signicance of the coefcients reported in
Table VI is also important. If the level of import penetration doubles
in the industries in which a given rm operates this should translate,
ceteris paribus, into an increase of 0.68 points in the level of ACSRusing
the coefcient of column (1) of Table VI or into an increase of 0.98 points
using the corresponding coefcient in column (3). If we assume that
the rm had an average of 0.13 ACSR rating, this means an increase of
around 623% (853%) in the ACSR ratings.
8. Robustness Tests
In this section we perform three different types of robustness tests.
First, we disaggregate the CSR measures to see if some KLD domains
do not follow the pattern that we have described. Next, we consider the
possible endogeneity of prots and apply a methodology to correct for
this potential bias. Third, we investigate the robustness of our results
when using a measure of CSR performance that do not depend on
the assessment of KLD experts, in particular, the rm level of toxic
emissions. In all three cases, the results we obtain are consistent with
the previous nding that more competition leads to superior social
performance. Finally, we explore the possibility of potential nonlinear
functional forms between CSR and market competition.
8.1 Results for Different CSR Areas
We follow Siegel and Vitaliano (2007) and divide the KLD domains in
two groups: public andnonpublic CSR. The group of public combines
the social responsibility ratings of community relations, environment,
human rights, and diversity. Nonpublic CSR consists of the social
performance indicators of employee relations, corporate governance,
and product quality.
The results indicate that disaggregating our social indicators
does not change the sign or the signicance of the coefcients. More
competition continues to be signicantly associated with more CSR,
with more KLD strengths and (weakly) associated with fewer KLD
concerns. All in all, we do not nd signicant differences across KLD
domains implying that our previous results were not driven by the level
of aggregation of the social performance indicators. We do not include
this estimation to avoid ooding the paper with tables but the results
area available from the authors upon request.
8.2 Endogeneity of Prots
We are concerned with the possibility that prots are correlated with
unobservable variables that also cause CSR. If so, we are not estimating
correctly the coefcient of prots and more importantly this could also
imply that our estimated coefcients of the competition variables are
biased. We address this potential problemby following the procedure of
Siegel and Vitaliano (2007). As a rst step we run a regression in which
the dependent variable is market capitalization and the independent
variables are lagged accounting prots and the rest of controls. In the
second step, the predicted value of market capitalization is included,
instead of prots, as a right-hand-side variable in the specications with
CSR as the dependent variable. The drawback of this procedure is that
we lose 18% of our sample due to missing values for lagged prots.
As earlier we do not include the table with the results to limit the
size of the paper but the tables are also available upon request. The
results indicate that using tted prots instead of rm prots changes
very little the earlier results. All the coefcients of the competition vari-
ables continue to have the same sign and roughly the same signicance
as before. Overall, we interpret these ndings as evidence that our
previous results are not driven by biases caused by the endogeneity of
prots.
8.3 Results for TOXIC Emissions
Next we repeat the analysis of the previous section using as dependent
variable toxic emissions at the rm level rather than KLD ratings.
Pollution levels are good proxies of rm environmental performance,
which is one of the seven areas used to evaluate CSR as explained
in Section 3. The main advantage of this CSR proxy consists in their
objective nature, because rms in SIC codes 20003999 (the entire
manufacturing sector) are legally required by the US Environmental
Protection Agency (USEPA) to report emissions for a 582 individually
listed chemicals in 30 categories into the air, the water, or the ground,
once they exceed certain minimum thresholds. The USEPA web page
(http://www.epa.gov/) provides data to obtain waste composition at
the facility level and we have downloaded this information for the
period 19942005. The procedure to aggregate this facility data to the
rm level and the subsequent matching with nancial information
presents some difculties. First, because the TRI data provides Dun &
Bradstreet (D&B) numbers, we match TRI environmental information
with the D&B million dollar data set. By this, we are able to obtain
the company cusip (cusip is a company identier commonly employed
in Compustat) for all facilities in the TRI data that belong to a public
company. Unfortunately, we only had access to the D&B million dollar
data set for the year 20052006. Because of this reason, we are losing all
environmental information belonging to those companies that were not
public in 2005.
As King and Lenox (2000) note, there are mistakes in the way in
which facilities report the D&B number in the USEPA data. Thus, we
check carefully the matching between TRI data and D&B million dollar
data set usingadditional criteria, other thanthe D&Bnumber, toidentify
a positive match. We follow King and Lenox (2000) and we only match
those facilities with identical D&B number, zip code, four-digit SIC, and
company name. Once we have the company cusip for each facility, we
are in position to aggregate the environmental information at the rm
level and match it with the rest of our variables from Compustat.
We construct our measure of rm environmental performance as
the natural logarithm of the total generation of toxic chemical waste
produced by a rm in a given year also as King and Lenox (2000).
This measure includes all toxic waste emissions as well as toxic wastes
that were treated or recycled. We have weighted the toxic releases by
their relative levels of toxicity as other previous environmental studies
(King and Lenox, 2000, 2002; Toffel and Marshall, 2004). We use two
different set of toxic weights. The rst set we apply was developed
by the EPA to serve as a threshold for reporting accidental spills:
the reportable quantities (RQ) in the Comprehensive Environmental
Response CompensationandLiability Act (CERCLA). According to that
Act, the most toxic chemicals, like the chemical war agent heptachlor or
arsenic compounds, have to be reported if just a pound of the material
is spilled, where spills of the least toxic materials like methanol have
to be reported only if they exceed 5,000 pounds. We use these RQ to
group the different chemicals into the following seven groups: 1 pound
(most toxic), 10 pounds, 100 pounds, 500 pounds, 1,000 pounds, 5,000
pounds, and 10,000 pounds (least toxic) and weight the toxic emissions
by the inverse of RQ.
Toffel and Marshall (2004) criticize the use of these RQ weights
because their discrete scale reduces precision and there is only one RQ
value for each chemical agent regardless of the medium in which it is
released. For this reason, we explore the robustness of the results using
another set of chemical weights called the Human Toxicity Potential
Factor (HTP) developed by Hertwich et al. (2001). These weights
measure toxicity in terms of benzene equivalence (for carcinogens)
or toluene equivalence (for noncarcinogens) and have different value
depending on which medium the toxic is released (air or water). With
this information, we compute a toxicity-weighted measure of waste for
each facility by adding the number of pounds of each type of chemical
waste emitted by a facility weighted by its level of toxicity. In a nal
step, this information is aggregated to our rm-level measure of TOXIC
by summing, for each rm, the toxic waste of all its facilities.
We are able to recover information on toxic emissions, TOXIC,
for 270 companies in the interval 19942005, amounting to a total of
1,281 rm year observations. TOXIC has a mean value of 165,646
and a standard deviation of 1,090,541. A 4.6% of the observations take
the value zero because the level of emissions in those cases was below
the threshold for reporting. As earlier, we t specication using a Tobit
regressionmodel totake intoaccount the left censoringof the dependent
variable. All measures of toxic emissions are negatively correlated with
the aggregated KLD indicators of environmental social responsibility.
These correlations are all statistically signicant at the 1% level.
It seems likely that toxic emissions will depend on the level of
output produced by each manufacturing company. We introduce a
double control of rm size (ASSETS & SALES) to rule out any spu-
rious correlation between our dependent variable and the competition
variables due to omitting output measures.
Next we repeat our previous analysis with these new dependent
variables. Columns (1)(4) in Table VII show the results for the OLS
models with rm xed effects. Columns (5)(8) show the results for
the Tobit models with industry dummies at the six-digits NAICS code
level and columns (9)(12) show the results for the IV rm xed effects
models. In each specication we run the same regressions for each of the
four dependent variables that measure the level of toxic emissions: TO-
TAL TOXIC, NON-CANCER, CANCER-AIR, and CANCER-WATER;
where TOTAL TOXIC measures environmental pollution using the RQ
quantities as toxic weights, CANCER-AIRuses as toxic weights the HTP
cancer Index assuming all toxic is released in the air, CANCER-WATER
uses as toxic weights the HTPcancer Index assuming all toxic is released
in the water and nally NON-CANCER uses as toxic weights the HTP
noncancer index computed as the average of the toxicity when the toxic
is released to air or water.
In total, Table VII presents the results of 12 different regressions. In
all these 12 cases, the sign of the coefcient of the competition variable
(HHI, IMPORTS) conrms the earlier results, that is, more competition
is associated with superior environmental performance, in this case,
a lower level of toxic emissions. We obtain this result regardless of
the measure of toxicity that we use and after controlling for rm and
industry xed effects. In particular, the HHI concentration index is
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.
signicant and positively associated with pollution levels in six out
of eight cases. The only two cases in which HHI is not signicant are the
two specications in which pollution is measured using CANCER_AIR.
The results with import penetration are weaker because for this variable
the effect is only signicant when pollution levels are measured by
CANCER_AIR. Nevertheless note that in the specications with import
penetration as independent variable our sample gets dramatically
reduced just to 242 observations. This small number of observations
prevents us to run specications with just industry dummies at the six-
digits NAICS levels as we have done in previous specications earlier.
Overall, in 7 out of 12 models, the coefcients are statistically
signicant at standard levels. These results are consistent with the
ndings of Arora and Cason (1995) that report that rms belonging
to unconcentrated industries were more likely to voluntarily engage in
pollution reduction programs. We take these results as strong evidence
of the positive relation between competition and environmental perfor-
mance. With respect to the variables that proxy for the size of the rm,
only the level of sales is signicant across the different specications and
not surprisingly is positively correlated with the level of rm pollution.
Finally, in nonreported results we have also investigated whether
the competitionCSR linkage follows a nonlinear functional form in the
same manner that AghionandGrifth(2005) report that the relationship
between product market competition and innovation following an
inverted U-shape functional form. However, we have been unable
to nd robust evidence of a quadratic relation between CSR and
competition (the corresponding tables are available upon request to
the authors).
9. Product Market Competition and CSR Variance
within Industries
As a nal step we investigate whether CSR differentiation strategies
are more likely to be pursued in more competitive markets. For this
purpose, we construct two measures of within industry variation: the
standard deviation of CSR scores within an industry in a given year,
and the difference between the 90
th
and the 10
th
percentile of the CSR
distribution in each industryyear. Preliminary analysis conrms that
there is a high degree of CSR differentiation within each industry
(the within-industry standard deviation of total CSR scores is 1.680,
compared to its mean which is 0.658).
Table VIII presents the results of estimating specications very
similar to the ones used throughout this paper but now using as
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dependent variable a measure of CSR variance in each industryyear
and adding controls that capture other potential sources of variance like
size, prots, R&D, and advertising. The coefcients of the competition
variable indicate that CSR variability across rms is more intense in
more competitive industries, a result that persists regardless of whether
we consider total CSR, total strengths, or total concerns. We interpret
this as evidence that product market competition is associated not only
to better levels of rmsocial performance but also to a wider dispersion
of CSR levels within industry. This suggests that companies might be
utilizing CSR as a differentiation device.
10. Concluding Remarks
In this paper we provide strong empirical evidence that rms in more
competitive markets carry out bigger CSR efforts. Our results indicate
that more competition in the marketplace leads to less negative social
impact and to greater positive social impact initiatives. This has been
reported using measures of both positive and negative social actions.
These results are consistent with a strategic view of CSR in which
consumers, investors, employees, or the government value positively
corporate virtue and as a result a CSR investment can be a prot-
maximizing strategy. On the contrary, the positive association between
competition and CSR is harder to reconcile with a purely altruistic
view of socially responsible corporate initiatives. Although we cannot
claim that all CSR is entirely driven by strategic reasons, the evidence
providedinthis paper indicates that the implications of models basedon
purely altruistic motivations of CSR have a worse t with our estimates
of rm behavior. Note however that we cannot reject all altruistic
reasons for CSR because CSR could be morally motivated and at the
same time strategically chosen to serve the interests of the rm.
As a limitation, in this paper we do not offer precise answers about
how exactly rms are using CSR to their advantage and as a response
of competitive pressure. The results in Table VIII suggest one route of
exploration, namely that some rms react to an increase in competition
by pursuing a CSR differentiation strategy. Yet there are many other
potential reasons that couldexplain why rms behave more responsibly
in more competitive environments. For instance, if employee talent
is more valuable in competitive industries then rms may increase
their CSR investment to retain and attract talented employees. Also,
competition in the marketplace might be related to the relative facility
of attracting new investors. CSR may become an important device
to signal the unobserved quality of the management team that helps
rms to have access to more and cheaper nancial resources precisely
when competition is more intense. All of these are promising venues
for future theoretical and empirical research to study the underlying
causes behind the positive linkage between competition and CSR that
we have documented in this paper.
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When Necessity Becomes a Virtue:

The Effect of Product Market Competition

ACSR HHI Worst ve CSR

Based on HHI distribution.

(0.183) (0.130) (0.114) (0.143) (0.113) (0.072)

(0.164) (0.116) (0.102) (0.082) (0.065) (0.041)

(4.811) (3.425) (2.995) (3.096) (2.453) (1.553)

(0.010) (0.007) (0.006) (0.0009) (0.007) (0.004)

Signicance at the 10% level.

Signicance at the 5% level.

Signicance at the 1% level.

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