On Corporate Social Issues, U.S. Consumers Do Not Put Their Money Where Their Mouths Are

Despite an increasing focus on corporations that profit from social injustices and misconduct, governments and international agencies have had limited success in addressing these issues. Advocates for change suggest that stakeholders, particularly retail consumers, could help, given that their purchasing decisions directly affect a company’s profits and can influence its conduct. In a new paper, however, we find that, consumers’ responses to revelations of corporate social irresponsibility (CSI) have been modest – even though surveys have shown that consumers prefer socially responsible corporations and are willing to pay more for ethical products.

These results are, perhaps, not surprising. First, consumers are not necessarily aware of CSI events at a particular company, depending largely on the media to tell them. Second, despite the surveys on consumer preference, it is not clear that consumers will alter their purchasing behavior when doing so comes at a personal cost. Finally, even if consumers are aware of firms’ corporate social responsibility (CSR) activities, with thousands of CSI events revealed each year, they face the challenge of integrating this information into their numerous purchasing decisions.

Our empirical analysis uses several data sources. First, we obtain data on CSI events from RepRisk, a data provider that covers over 200,000 public and private companies from around the world and collects firm-specific news of negative ESG incidents from over 100,000 public sources. We focus on social (S) incidents pertaining to both public and private firms, reported in English, over our sample period from 2012 to 2019. We examine three samples of CSI that reflect various degrees of media coverage in terms of sentiment and visibility. We construct an initial sample of 2,439 CSI events that RepRisk classifies as “severe” or “highly severe.” We then focus on events with greater potential to change consumer purchasing decisions and restrict our initial sample to incidents that also exhibit strong negative sentiment in the news media during the three-day window centered around the revelation date. This procedure yields our second sample of 402 CSI events. We then further refine our sample and select only incidents with abnormally high media coverage around the public revelation of their CSI and end up with 76 highly visible negative CSI events.

Second, we measure consumer purchases using micro-level data on weekly brand-level sales from Nielsen Retail Scanner Data (RMS). This allows us to pin down actual consumer purchases. Nielsen RMS collects weekly point-of-sale data from approximately 50,000 participating retail store locations across all US markets.

Using this data, we find that in the broadest sample of CSI issues there is no consistent evidence of a significant change in consumer behavior. However, when focusing on the narrower sample of 76 highly visible negative CSI events, we observe a 5.8 percent reduction in weekly brand sales for a four-week period following the revelation. This highlights the importance of disseminating CSI news to drive consumer reactions. We provide additional analysis to support the notion that the reduction in sales was primarily driven by a decrease in consumer demand rather than supply-related factors (e.g., product recalls stemming from the CSI revelation). We also find that U.S. consumers place similar weights on domestic and foreign CSI incidents but react more strongly to certain CSI events, such as human rights abuses.

Overall, these findings suggest that consumer reaction to the revelation of CSI is modest and relatively short-lived. They also cast doubt on the survey and experimental evidence showing consumers care about CSI and are willing to alter purchasing decisions accordingly. Moreover, our findings call into question whether this important group of stakeholders can function as a disciplining mechanism to reduce corporate social misconduct.

Despite the findings, CSI events probably have economic consequences beyond direct changes in consumer purchasing behavior. For instance, corporations accused of CSI may respond with costly actions to alleviate (i) the immediate or anticipated reduction in sales with, for example, social responsibility commitments and (ii) possible regulatory action. Moreover, potential employees, supply-chain partners or other stakeholders may also influence managers’ response to negative consumer reactions and impose longer-term costs on firms accused of CSI. Such actions could reduce long-term earnings growth but do not necessarily manifest through large and prolonged reductions in sales. Under this scenario, the modest consumer reactions we document may not represent the full economic impact of CSI on firms.

To shed light on this issue, and provide a more complete set of findings, we also explore the long-term consequences for firms by examining financial analysts’ forecast revisions and the frequency of CSI discussions in earnings conference calls. We find that long-term earnings growth forecasts and price targets are downgraded more frequently following the revelation CSI events but only those that are highly visible with negative media tone. Additionally, CSI issues are more frequently discussed in earnings conference calls after they are revealed, which helps in attributing analysts’ reactions to the CSI events. These findings suggest that analysts anticipate additional costly actions by firms in response.

Our study expands the literature on consumer behavior-related social issues by quantifying consumers’ responses to CSI events using large-scale archival data. We also contribute to the broader literature on stakeholder responses to corporate social responsibility (CSR) by demonstrating that the potential impact of consumers in prompting companies to take costly actions is limited. Finally, while our study reveals that consumer responses to CSI events are limited and depend on visibility and media coverage, we also emphasize economic consequences that extend beyond changes in consumer purchases. Corporations facing allegations of irresponsible behavior may respond with costly actions to mitigate sales declines and rebuild trust.

This piece comes to us from Hans Bonde Christensen at the University of Chicago’s Booth School of Business and Emmanuel T. De George, Anthony Joffre, and Daniele Macciocchi at the University of Miami. It is based on their recent paper, “Consumer Responses to the Revelation of Corporate Social Irresponsibility,” available here