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Limits to Nonmarket Insurance: A Textual Analysis of the Impact of Corporate Social Responsibility on Media Sentiment

Prior research examining the impact of corporate social responsibility (CSR) on stakeholders has largely focused on studying the insurance like effect of CSR outlays and the resulting effect on stock returns, thereby emphasizing the implications for shareholders. Our study examines the following research question: “Do secondary stakeholders perceive the nonmarket insurance effect potentially arising out of a company’s CSR activities in the face of integrity-based negative events?” We use the notion of nonmarket insurance (Arnott & Stiglitz, 1991) to hypothesize a negative relationship between the net-negative sentiment score and investments in CSR. In addition, we predict inverse relationships between the sentiment score and several firm characteristics. Our study focuses on the effects of two of the largest scams in India, the 2G Scam and the Coal Scam, on 13 publicly listed companies (six in the case of one scam and seven in the case of the other). We use text analysis to compute a sentiment score from a total of 9,339 media reports over a seven-year period (2010-14 for the 2G scam and 2012-16 for the coal scam). Our results report a positive relationship between CSR outlays and (net) negative sentiment score, which contradicts the hypothesized inverse relationship and therefore the presence of nonmarket insurance effect, particularly in the context of integrity-based negative events. This suggests that CSR, in the context of our study, does not have the potential to offset the negative reputation accrued as a result of involvement in the scams.