The Effect of Corporate Social Responsibility Engagement on Cost Stickiness

Abstract

This study investigates the effect of corporate social responsibility (CSR) on cost stickiness in Korea. Whereas some of prior researches evidenced that it is difficult to scale back committed resources immediately even when the activity declines since CSR involvement requires ongoing investments in value-creating activities (Habib and Hasan 2016, Lee and Kim 2015, and Rhee and Woo 2018), it is also inferred that CSR activities reduce the information asymmetry and such reduced information asymmetry likely leads managers to make less cost sticky decisions only for advancing their careers and reputation(Anderson et al. 2003, and Chen et al. 2012). Considering the conflicting inferences, this study revisits whether cost stickiness is affected by CSR activities. In particular, we focus on the Korean Chaebol group and empirically test whether this group impacts the association between CSR and cost stickiness. While most of prior researches show that the firms of the Chaebol group are more flexible in decreasing the committed resources with a decrease in revenues in that the‘control tower’of the Chaebol group may allocate CSR related investments into firms within the group that are performing better (Chang and Hong 2000, Kim et al. 2012, Koo 2011, and Shin et al. 2016), Lee(2014) did not find the evidence thereof. This study revisits the effect of Chaebol. We use Anderson et al.(2003)’s model to estimate cost stickiness and use the KEJI Index for the Korean CSR ratings. For our test, we collect data listed in the Korea Stock Exchange and the KOSDAQ from 2005 to 2012 and use the two-way cluster-robust standard errors method. Using 12,034 firm-year observations, the results support the hypothesis that the firm’s CSR engagement is significantly positively related with cost stickiness and the association between CSR and cost stickiness is less pronounced in the firms of the Chaebol Group. The results of this study are distinct in that it present empirical evidence from the Korean firms showing that CSR engagement is one of the factors affecting asymmetric cost behaviors and the Korean specific governance structure(i.e., Chaebol) affects the relationship between CSR and cost behaviors.