Theoretically speaking, corporate social responsibility (CSR) refers to managerial behavior that internalizes firms’ material externalities on stakeholders to promote social welfare. Its measurement in practice, however, is challenging and the performance metrics may fail to reflect the actual social impact. We analyze whether firms with higher CSR ratings indeed internalize their material externality better, by examining banks’ Main Street lending during the Great Recession. We find that, contrary to what the measure suggests, banks with higher ratings more actively pulled back funds from local borrowers that needed liquidity. On the other hand, these banks spent more operating expenses pre-crisis which were curtailed afterward, suggesting a tradeoff between immediate expenditures to acquire better ratings in good times and conservation of operational or financial slack to maintain the flow of credit in bad times. We also find a potential conflict among different stakeholders, i.e., promoting employee benefits in good times limits capacity to serve local communities in bad times. Our results suggest that social welfare can even decrease without a reliable metric for assessing firms’ social value creation.​

Keyword: Corporate social responsibility, stakeholder theory, ESG assessment, bank lending, credit crunch