The relationship between corporate diversification and corporate social performance

Jingoo Kang

Korea University Business School

  Does diversification affect firm response to stakeholder demands and social issues? Despite extensive interest in corporate diversification in the strategy literature, the relationship between diversification and corporate social performance (CSP) remains largely unexplored. Bothe product and geographic diversification increase the range of stakeholder demands and social issues that firms face. In addition, according to findings of the diversification and stakeholder management literature, diversified firms have several reasons to respond to increasing stakeholder demands and social issues. Based on these observations, i propose that the level of diversification will be positively related to the CSP of firms. However, when diversified firms have a strong focus on short-term profit, it may discourage firm response to stakeholder demands and investment in social issues, thereby negatively moderating the positive relationship between the level of diversification and CSP. The sample for this study starts from 1,000 of the largest US firms in terms of market capitalization. I chose large firms for my sample because these firms are more likely to pursue diversification, both product-wise and geographically. The social performance date for sample firms were collected from the Kinder, Lydenberg, Domini (KLD) Social Ratings database, which is a popular source of CSP measure in academic research. To construct other explanatory and control variables, I collected financial data from Compustat's North America database and Compustat's Executive Compensation (Execucomp) database. Since the Execucomp database provides data from 1993 to 2006, the sample period is limited, accordingly. After the three databases were matched, the effective sample size was reduced to 511 firms. The effective sample size in the analysis was 3,044 observations. Empirical testing shows that the levels of unrelated and international diversification have a positive relationship with CSP, and that strong short-term profitability of diversified firms partially and negatively moderates the positive relationship between the level of diversification and CSP.

Strategic Management Journal Volume 34, Issue 1, pages 94109, January 2013