The firm under the spotlight: How stakeholder scrutiny drives CSR and reinforces financial performance

Abstract

Literature extensively recognizes the role of stakeholders in shaping firm corporate social responsibility (CSR) and its link with corporate firm performance (CFP). Nevertheless, stakeholder scrutiny, or the overall degree of exposition of a particular organization to different stakeholder groups, is missing in this analysis. We argue that stakeholder scrutiny reduces asymmetric information in the market for CSR and improves reciprocation between stakeholders and the firm through improved CSR signal reliability. More specifically, stakeholder scrutiny enhances CFP through two different, and simultaneous, channels. First, stakeholder scrutiny indirectly enhances CFP through its impact on CSR. Second, stakeholder scrutiny reinforces the impact of CSR on CFP. To examine the simultaneous direct and indirect effects of stakeholder scrutiny on the CSR-CFP linkage we apply. We comprehensively analyze stakeholder scrutiny at the organizational, industry, and macro levels using structural equation models. Our sample covers more than 2,200 firms across several sectors from 23 developed countries during the period 2013–2017. We find that the bidirectional information exchange between highly scrutinized firms and their stakeholders drives their CSR and reinforces its transformation into enhanced CFP. Our conclusions contribute to the stakeholder theory by showing the instrumental outcomes of external control of organizations.

Literature extensively recognizes the role of stakeholders in shaping firm corporate social responsibility (CSR) and its link with corporate firm performance (CFP). Nevertheless, stakeholder scrutiny, or the overall degree of exposition of a particular organization to different stakeholder groups, is missing in this analysis. We argue that stakeholder scrutiny reduces asymmetric information in the market for CSR and improves reciprocation between stakeholders and the firm through improved CSR signal reliability. More specifically, stakeholder scrutiny enhances CFP through two different, and simultaneous, channels. First, stakeholder scrutiny indirectly enhances CFP through its impact on CSR. Second, stakeholder scrutiny reinforces the impact of CSR on CFP. To examine the simultaneous direct and indirect effects of stakeholder scrutiny on the CSR-CFP linkage we apply. We comprehensively analyze stakeholder scrutiny at the organizational, industry, and macro levels using structural equation models. Our sample covers more than 2,200 firms across several sectors from 23 developed countries during the period 2013–2017. We find that the bidirectional information exchange between highly scrutinized firms and their stakeholders drives their CSR and reinforces its transformation into enhanced CFP. Our conclusions contribute to the stakeholder theory by showing the instrumental outcomes of external control of organizations.