Controversial industry sectors, such as alcohol, gambling, tobacco, and firearms, have long been suffered from organizational legitimacy problems. This paper examines whether corporate social responsibility (CSR) activities reduce the level of risk for firms in controversial industries in an attempt to seek organizational legitimacyaround the world. Using data covering 32 countries, this study finds that both the systematic and total risk for firms in controversial industries are generally higher than those for firms in uncontroversial industries due to their inherent harmful image. We then show that controversial industry firms’ engagement in CSR initiatives and policies has a substantial risk-decreasing effect, and that might increase the probability of obtaining and maintaining the social license to operate. The documented effect of CSR on firm risk, however, is more pronounced for firms in Europe and North America than in the Asia-Pacific region, suggesting differential CSR-risk association in different regions These findings significant and robust even after potential endogeneity problems are mitigated.We conclude that our results are supportive of the “harmful image”, “social license to operate”, and“differential recognition” hypotheses.
Keywords: Corporate social responsibility; Risk management; Controversial industry; Differential recognition;Social license to operate.
