Reputation-Building Actions After Corporate Social Irresponsibility

We examine the nature of firms’ reputation-building actions in response to major violations of environmental and social (labor and consumer safety) laws. To do so, we construct a novel dataset of potential reputation-building actions taken by firms, based on hand-classification of 21,932 press releases, in the years preceding and after a major violation (e.g., an oil spill or a major labor lawsuit verdict). We find that while firms do take more reputation-building actions after being exposed for engaging in serious environmental or social misconduct, these actions typically do not benefit the stakeholders affected by the underlying violation. Instead, firms appear to target reputation-building actions at consumers irrespective of the underlying type of violation, and target employees and shareholders after environmental (but not social) violations. In terms of consequences, we find that taking more environmental (social) actions is associated with lower future reductions in penalties for environmental (social) violations. Finally, the stock market responds positively to reputation-building actions targeted at shareholders and customers but not at other stakeholder groups, consistent with investors’ motives on aggregate being financial rather than prosocial.