Keeping up with the CSR Joneses: The impact of industry peers on focal firms' CSR performance

Corporate Social Responsibility (CSR), encompassing a firm's commitment to societal, economic, and environmental well-being, is increasingly influential in business decisions. While CSR offers numerous benefits, including enhanced reputation, brand loyalty, and potentially improved financial performance, its impact on shareholder wealth remains debated. Some argue that prioritizing societal good may reduce shareholder value. However, a prevailing view suggests that firms can achieve both financial success and positive social impact. This study focuses on peer effects in CSR decision-making, examining how the actions of firms within the same industry (peers) influence a focal firm's CSR performance. Peer effects are common in corporate decision-making, affecting areas such as financial policies, dividend payments, and philanthropy. This research applies institutional theory, suggesting that managers in the same industry are incentivized to mimic each other's CSR strategies to gain legitimacy and resources. The study uses US-listed firms from 2000 to 2015 to test the hypothesis that industry peers' CSR performance positively affects focal firms' CSR performance. The researchers utilize a fixed-effects regression model to analyze the data and explore various factors that moderate this relationship.

Early research often viewed CSR as a burden, potentially benefiting stakeholders at the expense of shareholders. More recent studies emphasize CSR as a strategic component, capable of improving reputation and potentially impacting financial outcomes. The actual effect, however, remains contentious. Furthermore, pressure from various stakeholders, including shareholders, consumers, media, and communities, influences CSR engagement. The level of CSR involvement has been linked to stakeholder characteristics and dependencies. Firms, while sometimes making independent decisions, are also significantly influenced by their industry peers, sharing economic links and facing similar pressures. The institutional theory posits that firms conform to industry norms to gain legitimacy and resources. Three institutional forces—mimetic, normative, and coercive isomorphism—influence firm decision-making, with peer effects largely operating through mimetic isomorphism (mimicry). Executives also consider reputation, and CSR is viewed as a way to build reputation and gain competitive advantage. The existing literature has documented peer effects in CSR but often lacks generalizability due to small sample sizes or limited focus. This study aims to address these gaps by examining a broader sample and exploring the determinants of CSR performance.

The study employs a sample of US-listed firms from 2000 to 2015, excluding financial and utility industries. CSR data were obtained from MSCI ESG Stats, which includes 13 categories of corporate governance. The authors selected five stakeholder-oriented categories (community, diversity, employee relationships, environment, and human rights) to construct a CSR measure. Each category combines strength and concern scores, creating an index ranging from -5 to 5. Peer firms are defined using the 3-digit Standard Industrial Classification (SIC) code and, for robustness checks, 2-digit SIC codes and Text-based Network Industry Classifications (TNIC) codes (TNIC-2 and TNIC-3) were also used. Peer CSR is calculated as the average CSR score of firms in the same industry, excluding the focal firm. The main regression model examines the impact of Peer CSR on CSR_i,t+1 (the focal firm's CSR in year t+1), controlling for year and firm fixed effects and other control variables (firm size, financial leverage, cash holdings, dividend payments, capital expenditure, institutional shareholding, market-to-book ratio, return on assets, sales growth rate, and analyst coverage). Further analyses explore how peer firm characteristics (geographic distance, inclusion in the SP500 index, relative size) and focal firm characteristics (industry leadership, profitability, analyst following, product market share, international business) moderate the peer effect. Robustness checks included alternative measures of peer CSR, alternative CSR measures, instrumental variable regression to address endogeneity (using peer firm idiosyncratic returns as an instrument), quantile regression, and dynamic analysis using changes in CSR and control variables. The authors also analyze the economic consequences of following peer firms' CSR policies by examining the impact on product market share, ROA, and Tobin's Q.

The baseline regression results confirm a significant and positive relationship between peer CSR and focal firm CSR. A one standard deviation increase in peer CSR is associated with a 10.15% standard deviation increase in focal firm CSR. This positive peer effect is robust across various robustness checks. The analysis of moderating factors revealed that the peer effect is stronger when: * Peer firms are geographically closer to focal firms. * At least one peer firm is included in the SP500 index. * Peer firms are relatively larger than focal firms. Conversely, the peer effect is weaker when: * Focal firms are industry leaders. * Focal firms have stronger earnings capacity. * Focal firms operate internationally. * Focal firms receive fewer analyst followings. The interaction of industry competition with peer CSR showed a positive and significant relationship, suggesting that the peer effect is stronger in more competitive industries. The study found no significant impact of CEO tenure (a proxy for CEO reputation) on the peer effect. Finally, the analysis of the economic consequences revealed that while following peer firms in CSR investments led to lower product market share and ROA, it resulted in a higher firm value. The robustness checks using alternative measures of peer CSR, different CSR measures, instrumental variables, quantile regression, and dynamic analysis all supported the main findings.

The findings strongly support the hypothesis that industry peer effects significantly influence focal firms' CSR performance. The positive peer effect is consistent with institutional theory, highlighting the role of mimetic isomorphism in driving firms to adopt similar CSR practices for legitimacy and resource acquisition. The moderating effects of firm and peer characteristics further refine our understanding of this phenomenon. The results demonstrate that while mimicking peers might lead to short-term costs in terms of market share and profitability, it can ultimately enhance long-term firm value. The study contributes to the literature by providing comprehensive evidence on the determinants of CSR peer effects and offering insights into the strategic implications of CSR adoption for managers. The results extend the understanding of peer effects beyond financial policies and into the realm of social responsibility.

This paper provides robust evidence of a significant positive peer effect on firms' CSR performance. This effect is influenced by several firm and peer characteristics and is particularly pronounced in competitive industries. While following peers' CSR strategies may initially impact market share and profitability, it ultimately contributes to higher firm value. Future research could investigate the role of specific CSR initiatives within particular industries, exploring the heterogeneity of peer effects across various CSR dimensions. Additionally, examining the mechanisms through which CSR investments affect long-term value creation would be a worthwhile endeavor.

The study relies on a specific measure of CSR from MSCI ESG Stats, which might not fully capture the complexity of CSR practices. The use of industry classifications to define peer groups could introduce some limitations due to industry heterogeneity. The study primarily focuses on US-listed firms, and the generalizability to other contexts might be limited. While the instrumental variable approach addresses endogeneity concerns to some extent, potential unobserved confounding factors could still remain. Future research may consider including other measures of CSR and expanding the geographic scope to improve the generalizability of findings.