Interest in the topic of corporate social irresponsibility (CSI) has burgeoned in recent years. CSI covers organizational activities that have an adverse impact on investors, employees, customers, suppliers, or the local communities. This set of organizations and individuals represent the stakeholders of a firm whose expectations of a certain behavioral standard are not met when firms cause harm through their actions and do not take steps to rectify the situation. Information about firm actions that may have compromised sustainability objectives can have a multifaceted outcome. Given that negative news receives more attention and deliberation, CSI can not only shape the sentiments of customers and media but also affect firm performance from the reaction of customers and stakeholders. At the same time, as stakeholders may be more focused on other performance measures such as cost and quality, instances of CSI may also end up receiving low to moderate attention, thereby reducing their negative effects. If this is indeed the case, firms can misbehave on the sustainability front with little consequences. As such, undertaking further research investigation is important to discern the impact of CSI on sentiment formation and financial outcome. Drawing on stakeholder theory and attribution theory, in this study we investigate the association of firms’ environmentally irresponsible actions with social media sentiments and abnormal stock returns.
In our research we examine how corporations’ environmental impact influences social media sentiment and firm value. To address this important question, we analyze a large-scale dataset collected from five sources (Trucost, Infegy Atlas, Center for Research in Security Prices, COMPUSTAT, and Harris Interactive). We find that environmental impact results in less favorable social media sentiment toward the firm. Natural resource usage and land, water, and air pollution have the most profound effect on social media sentiment of the various types of environmental impacts. However, brand equity helps insulate the negative effect of environmental impact and simultaneously strengthens the positive relationship between social media sentiment and the firm’s long-term abnormal returns; by contrast, market competition weakens this relationship. The results further show that social media sentiment mediates the link between environmental impact and firm value.
The research findings provide useful implications to aid firms in managing their environmental impact so as to avoid negative social media response and, in turn, enhance firm value. Ultimately, this study calls for the careful management of investments in activities detrimental to the environment, because consequent negative comments on social media can negatively affect firm value. Furthermore, firms lacking brand equity and facing intense market competition need to be especially vigilant with their activities that can be construed as socially irresponsible.
Source: Nair, A., Nguyen, H. Environmental Impact, Social Media, and Abnormal Returns: The Moderating Role of Brand Equity and Competition. Working paper.