Role of Strategic Interactions in Corporate Sustainability Decisions: An Empirical Investigation

There is a large amount of empirical literature on the relationship between corporate sustainability and corporate financial performance. However, the literature considers company-specific aspects affecting the link but omits the influence of the competition. A firm’s gains from its sustainability efforts, however, depend on whether its industry competitors also perform sustainable actions—whether similar in type or different. Thus, we consider the sustainability decision making of companies to be of a strategic nature and show that strategic motives, typically ignored in the literature, can be an important factor in the process. We estimate an Instrumental Variable (IV) Probit model using inclusion in the MSCI KLD 400 Social Index and draw on financial information from the Wharton Research Data Services COMPUSTAT dataset in order to identify the effect of competition. We find that the effect of competition on the likelihood of entry into the sustainability market is negative, but this is only true if the endogeneity is correctly taken into account. Probit estimates present an upward bias, which means that results from raw models can be misleading in designing policies on sustainability. Overall evidence suggests a central role for strategic motives in management’s sustainability decisions.

There is a large amount of empirical literature on the relationship between corporate sustainability and corporate financial performance. However, the literature considers company-specific aspects affecting the link but omits the influence of the competition. A firm’s gains from its sustainability efforts, however, depend on whether its industry competitors also perform sustainable actions—whether similar in type or different. Thus, we consider the sustainability decision making of companies to be of a strategic nature and show that strategic motives, typically ignored in the literature, can be an important factor in the process. We estimate an Instrumental Variable (IV) Probit model using inclusion in the MSCI KLD 400 Social Index and draw on financial information from the Wharton Research Data Services COMPUSTAT dataset in order to identify the effect of competition. We find that the effect of competition on the likelihood of entry into the sustainability market is negative, but this is only true if the endogeneity is correctly taken into account. Probit estimates present an upward bias, which means that results from raw models can be misleading in designing policies on sustainability. Overall evidence suggests a central role for strategic motives in management’s sustainability decisions.