The Information Mechanism in Corporate Citizenship: Evidence from COVID-19

When governments fail to respond quickly and effectively to a crisis, can companies help address the issue? In a recent article, we explore an important mechanism through which firms can do so as corporate citizens: information transmission within organizations. Specifically, we study whether U.S. firms’ business networks with China and Italy, including trade, executive, and branch-office networks, become information networks that can be used to mitigate the negative impacts of COVID-19.

COVID-19 and measures intended to contain its spread resulted in significant societal change and required governments to take unprecedented measures. Meanwhile, for companies, the pandemic made employee safety a top priority. In our article, we define corporate citizenship as the taking of socially responsible actions (regardless of motivation), and we consider firms’ implementation of work-from-home (“WFH”) policies during COVID-19 to safeguard employee health as an example.

In particular, we show that U.S. firms with business networks in China or Italy have better access to information about COVID-19 and have been quicker to implement WFH policies, indicating that information transmission is more effective within these organizations than in other companies. We employ firms’ existing trade, executive, or branch-office networks with China and Italy to measure firms’ comparative information advantage. Because these firms were likely aware of the severity of COVID-19 early on and had implemented safety measures in China and Italy, they had longer to plan their containment strategy in the U.S. For example, in Starbucks’ Q2 earnings conference call, CEO Kevin Johnson said, “based on the experience we gained navigating COVID-19 in China, we have been as well prepared as anyone for this mitigate-and-contain phase in the U.S.”

To study our question, we first show that firms have relevant information through their trade, executive, or branch-office networks with China and Italy. For example, we find that, among S&P 500 firms, firms with these information networks issued COVID-19 press releases earlier and more often than did other firms, as demonstrated in Figure 1. This provides evidence that our measure captures firms with timelier and more relevant information about COVID-19. Additionally, we examine discussions about COVID-19 in the latest earnings conference calls prior to May 1, 2020, and find that firms with earlier information provided more COVID-19 coverage.

We next examine whether firms act on this relevant information as corporate citizens during COVID-19. Specifically, do they impose WFH policies earlier than do local governments in order to preserve employee health? To test this conjecture, we use SafeGraph data on foot traffic to examine changes in the ratio of devices at home in a given day and zip code, a ratio which should increase when firms impose WFH policies. We focus on the period before local governments imposed mobility restrictions to demonstrate firms’ behavior. Specifically, we study whether WFH policies introduced by firms with an information advantage help explain the increase in stay-at-home ratios before the local government responds.

As an example, we randomly select a company, Albemarle Corp, whose exact WFH date we obtained from its investor relations department, and plot the stay-at-home ratio in Figure 2. We use data for zip code 28209, which is where the company’s headquarters are located. The x-axis is March dates, where the solid line on day 12 is when Albemarle Corp announced a WFH policy and the dashed line on day 26 is when the local government’s “stay at home” order went into effect. Figure 2 shows that the stay-at-home ratio starts increasing from 22 percent when Albemarle Corp announced its WFH policy. By the time of the local government’s “stay at home” order, the stay-at-home ratio is already at 35 percent.

In the large-sample analysis, we find that zip codes with more firms that receive information through business networks in China and Italy have more people staying at home before local governments impose any COVID-19 policies. This result suggests that firms act on relevant information to safeguard employee health. We find that people are around 1 percent more likely to stay at home for each additional firm with COVID information in a given zip code.

One concern is that better information networks are correlated with firms’ sophistication, wealth, and risk management experiences, and that other information sources (e.g., social media) may have a confounding effect. To mitigate this concern, we conduct several robustness analyses. To take one example, we use several “economically important but non-early-COVID” placebo countries (i.e., Canada, UK, Belgium, Netherlands, Japan, and India) that experience the spread of COVID-19 much later than do China, Italy, and the U.S. We do not find any effects in areas with a high proportion of placebo information networks but find economically and statistically significant results for areas with a large number of Chinese and Italian connections, supporting our inference that the COVID-19 information from China and Italy is an information mechanism.

To further illustrate the role of the information mechanism in corporate citizenship, we conduct three cross-sectional analyses on industry characteristics, regulators’ information constraints, and trust in information. First, we find our main effect is stronger for firms in an industry where remote work is easier, which is expected given that WFH policies should not significantly affect these firms’ profits, making them less likely to trade employee health for profitability. Second, we find the effect is more pronounced in counties with higher percentages of pro-Trump voters in 2016 and more towns with Republican mayors, which are areas more likely to follow Trump’s delay in implementing policies for containing the virus (Adolph et al. 2020). This suggests that our results are more pronounced when local governments have information constraints related to party affiliation (Gitmez et al. 2020). Third, we find that the effect is stronger when firms can verify and trust the information (i.e., information coming from branches and partnerships in China and Italy) and residents have low levels of trust in alternative information.

Finally, we show that higher WFH ratios contribute to a lower spread of COVID-19. We find that both seven-day and 14-day case growth is lower when the stay-at-home ratio increases, consistent with literature finding that stay-at-home orders reduce COVID-19 cases (Fowler et al. 2020). Our back-of-the-envelope calculation shows a 3 percent decrease in seven-day case growth and a 4 percent decrease in 14-day case growth for firms having one more information network with China or Italy. This result highlights the positive social impacts of corporate citizenship.

Our paper explores how an information mechanism – information transmission within organizations — facilitates companies’ roles as corporate citizens. Specifically, we find that U.S. firms’ business networks in China and Italy are also information networks and that firms use the information they gain from them to mitigate the negative impacts of COVID-19 through WFH policies. However, our effect is a short-run result, meaning that while corporate citizenship can temporarily compensate for local government failures, the two are not complete substitutes.

This post comes to us from Lisa Yao Liu, an assistant professor at Columbia Business School, and from Shirley Lu, a PhD candidate at the University of Chicago’s Booth School of Business. It is based on their recent paper, “The Information Mechanism in Corporate Citizenship: Evidence from COVID-19,” available here.