Normative and Strategic CSR as Responses to Peer Firms’ Financial Misconduct

Prior research has shed much light on the consequences of corporate misbehavior, one of the research streams found the dual interorganizational spillover effects resultant from financial misconduct: a “stigma effect” that pollutes peer firms and a “competition effect” that benefits competing peers. Although the outcomes of these spillover effects are revealed explicitly, little is known about whether and how the innocent firm strategically responds to the legitimacy threat and the competitive opportunity. As corporate social responsibility (CSR) facilitates alleviating institutional and competitive pressures, we propose that an innocent firm can implement two CSR strategies in response to the two spillover effects: normative CSR to uphold legitimacy through conformity and strategic CSR to enhance competitiveness through differentiation. Using a sample of Chinese listed firms from 2009 to 2019, we show that innocent firms will increase normative CSR after peer firms’ financial misconduct, especially firms motivated to repair potentially lost legitimacy. We also find that innocent firms with a motivation to compete with the culpable firms will improve strategic CSR. By investigating two CSR strategies in response to the stigma and competition effects, our research highlights the critical roles of CSR in pursuing business ethics and competitive advantages.