This paper extends our knowledge on corporate corruption risk by examining whether and to what extent corporate social responsibility (CSR) affects firm-level corruption risk. Using a cross-country sample of major multinational firms, we find that firm-level CSR mitigates corruption risk. On closer examination, we find that the relationship between CSR and corruption risk is mediated by country-level variables such as institutional quality, protection of minority shareholders’ rights, stock market development and freedom of the press. Further, we find that in emerging countries, CSR mitigates corruption risk only when the country-level institutional quality is high and citizens enjoy press freedom. Our findings suggest that both formal institutions and the quality of civil society inflence the effect of CSR on corruption risk. Our results remain robust to controls for endogeneity and potential sample selection bias.

INTRODUCTION

A number of researchers suggest that corporate social responsibility (CSR) represents a commitment to social good (Fombrun, 1996) and also creates a positive image of the firm resulting in various advantages. However, this commitment to social good also restricts managers’ greed. Gao et al. (2014) suggest that CSR-conscious firms engage less in informed insider trading activity, often considered to be an act of greed and illegal expropriation of uninformed investors, due to the negative publicity arising from insider trading. Likewise, Kim et al. (2012) find evidence consistent with the view that socially responsible firms are more likely to avoid earnings and or real activities’ manipulation and are less likely to face SEC investigations of GAAP violations. According to World Bank, bribes paid by individuals and firms amount to $1 trillion annually accounting for 5% of GDP (Healy and Serafeim, 2016). Thus the risk of corruption in the corporate sector is a very significant issue that needs to be tackled. Corruption risk is defined by Transparency International (TI) as the potential probability that corruption may occur and the costs associated with such corruption. Increased corruption risk means a higher potential for corruption or higher potential cost or both. Decreased corruption risk means the lower potential for corruption or lower potential cost or both. The CSR studies (Gao et al., 2014; Kim et al., 2012) suggest that firms that engage in socially responsible activities are less prone to corruption risk. However, no prior studies have examined this relationship. In this study, we, therefore, examine the association between a firm’s CSR’s engagement and its corruption risk. Following Kim et al. (2012) and Gao et al. (2014), we suggest that ethical concerns drive managerial behavior and inhibit managerial self-serving activities. Thus, the primary research question we address is whether a firm’s CSR engagement is associated with a reduction in its corruption risk. Firms could institute systems and processes to mitigate corruption risk.