Fading virtue, flourishing profits: Corporate social responsibility in the presence of competitor constraints

This paper examines the relationship between focal firms’ corporate social responsibility (CSR) and the financial constraints of their industry peers. We find that focal firms reduce their CSR investments in response to an increase in competitor financial constraints. Our findings are robust to two exogenous shocks: the 2008 financial crisis and the American Jobs Creation Act of 2004. We further show that product market competition drives our results by motivating firms to reallocate resources and prioritize investing in core business activities rather than CSR when peers face difficulty accessing funds. Intriguingly, the fading of such virtues does not necessarily lead to a decline in firm performance. We find that the reduction in CSR induced by peer financial constraints improves the profitability, operating efficiency, and market power of focal firms while attracting more institutional investors.