Corporate giving, competition and the economic cycle

• Author(s): Branca, Ana S. ; Pina, Joaquim ; Lopes, Margarida Catalão
• Date: 2012
• Persistent ID: http://hdl.handle.net/10400.5/4363
• Origin: Repositório da UTL
• Subject(s): Corporate social responsibility; Corporate giving; Economic crisis; Business cycle; Demand sensitivity; Competition
• Document Type: Other
• Language: English

Description

This paper addresses firms' decisions on Corporate Social Responsibility (CSR) investments as a function of the prevailing macroeconomic context, namely under an economic crisis, a relevant scenario for many world economies nowadays. We focus on the corporate giving dimension of CSR. Under unfavorable macroeconomic conditions two possible situations may, a priori, occur: firms decide to restrict their CSR contributions in order to save resources, or they use CSR to differentiate more effectively. To address this issue, we derive a general theoretical framework comprising product differentiation and firm competition in two dimensions: price and corporate giving. Corporate giving as a share of firm’s revenues is found to be lower the less sensitive demand is to rivals’ pricing policies, and the more sensitive demand is to rivals’ CSR. We prove that, in equilibrium, all the rest equal, profit maximizing firms will make less CSR contributions when the business cycle is unfavorable, independently of the market structure. We then provide empirical testing and validation of the theoretical model’s results through a comprehensive battery of econometric tests and real data evidence. We also inspect the business cycle properties of corporate giving, as well as that of receipts, concluding for a procyclical relation with real Gross Domestic Product.