Examining the financial slack–corporate social performance relationship across countries: The influence of formal institutions

Abstract

Research on the relationship between financial slack and corporate social performance (CSP) provides ambiguous findings and is context-dependent. This study employs institutional theory to address this ambiguity and theorizes how formal institutions influence the relationship between financial slack and CSP. We argue that the relationship between financial slack and CSP is not per se positive or negative but depends on critical formal institutions, namely, government integrity, labor freedom, and financial freedom. Formal institutions define a country's incentive structures and, therefore, affect firms' decisions to allocate financial slack to Corporate Social Responsibility (CSR) activities, which impact CSP in turn. Our findings are based on a large dataset of firms across 38 countries. Our multilevel study expands prior research on the financial slack-CSP relationship by demonstrating how the relationship depends on the formal institutional context. Moreover, we contribute to international business research by illustrating how formal institutions in different countries provide incentive structures for firms to allocate financial slack to CSR activities. Finally, our study offers practical implications for firms aiming to improve their CSP and whose operations reach across different country-specific formal institutions across the globe.