CSR, monitoring cost and firm performance during COVID-19: balancing organizational legitimacy and agency cost

Abstract

Purpose COVID-19 induced uncertainty in the firms’ business transactions, financial markets and product-market competition, causing a severe organizational legitimacy crisis. Using the organizational legitimacy perspective and agency theory, this paper aims to study the relationship between prior corporate social responsibility (CSR) activities, monitoring cost (MC) and firm performance. Design/methodology/approach This study uses a quarterly panel (16,924 firm-quarter observations from 61 countries for CSR and 53,345 firm-quarter observations from 55 countries for MC) for 14 quarters from January 2018 to June 2021. This study uses panel fixed-effect regression models to estimate the effect of CSR activities and MC (measured as audit fees) on firm performance during the COVID-19 period. Findings This study finds a U-shaped relationship between CSR and firm performance. This relationship is strengthened during COVID-19. In contrast, this study finds an inverted U-shaped relationship between firm MC and firm performance. However, this relationship is weakened during the pandemic. Originality/value This study contributes to theory and practice on maintaining organizational legitimacy and reducing agency costs during the pandemic. This study shows that firms’ prior legitimacy-gaining practices, such as CSR activities and MC, provide an opportunity to increase firm value. To balance agency costs and legitimacy benefits, firm managers also need to identify the optimal level of CSR activities and MC.

The role of management accounting on the relationship between corporate social responsibility and performance in SMEs

“…This research contributes to the current literature by shedding light on current CSR practices in SMEs and the role of MAPs in facilitating a direct link between CSR and enhanced performance. It responds to recent calls in the literature for research into the contribution of MAPs in the transformation of organisational practices that support environmental and societal agendas (Oppi et al , 2020; Yadav and Srivastava, 2023). Moreover, this research provides valuable understanding regarding the overall performance of SMEs by examining various financial and non-financial indicators; thus, helps to diminish the uncertainty surrounding the relationship between CSR and overall firm performance in the SME context.…”

“…This in line with the stakeholder theory that suggests firms should consider the effects of their actions on various stakeholders and to evaluate tasks that generate profits and those that are consistent with shareholders’ social interests (Freeman et al , 2018). Despite this, the extant literature on the relationship of CSR activities and management accounting practices (MAPs) with firm performance within the SMEs context remains scarce (Yadav and Srivastava, 2023).…”