This panel study of 863 firms offers a theoretical exploration of the proposed curvilinear relationship between firms’ (in)consistency in environmental, social, and governance practices and corporate risk. We hypothesize a U-shaped relationship between corporate risk and corporate social inconsistency (CSI), defined as the internal variability of a firm’s performance with respect to different environmental, social, and governance practices at one point in time. Low and moderate levels of CSI are found to be inversely related with corporate risk up to a point because of the latent benefits of CSI (more prudent allocation of resources, greater management efficiency). Beyond that point, though, CSI incurs net costs because of increasing pressure from stakeholder groups, leading to an increase of risk at high levels of CSI. Furthermore, the risk-enhancing characteristics of CSI can largely be avoided by pairing CSI with high investments in R&D.
Written by: Limin Fu, University of Adelaide – Business School, Dirk Boehe, University of Adelaide – Business School, Marc Orlitzky, University of South Australia – School of Management, and Diane Swanson, Kansas State University
See the SSRN article here