From an economic perspective, corporate social responsibility (CSR) refers to managerial behavior that internalizes material externalities on stakeholders to increase social welfare. However, its performance metrics do not necessarily reflect the scale of its social impact. We analyze whether firms with higher CSR ratings indeed internalize their social impacts 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 cut back their lending to local borrowers. These banks spent more operating expenses pre-crisis which were curtailed afterward, suggesting a tradeoff between immediate expenditures to acquire better ratings and conservation of operational or financial slack. We also find a potential conflict among different stakeholders, i.e., promoting employee benefits limits capacity to serve local communities. Our results suggest that inaccurate ESG metrics can worsen resource misallocation.

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