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Firm litigation risk and the insurance value of corporate social performance

Authors

  • Ping-Sheng Koh,

    1. Department of Accounting, School of Business and Management, Hong Kong University of Science and Technology, Hong Kong, China
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  • Cuili Qian,

    Corresponding author
    1. Department of Management, College of Business, City University of Hong Kong, Tai Chee Avenue, Kowloon, Hong Kong, China
    • Correspondence to: Cuili Qian, Department of Management , College of Business, City University of Hong Kong, Tai Chee Avenue, Kowloon, Hong Kong, China. E-mail: Cuili.Qian@cityu.edu.hk. Authorship is listed alphabetically with equal contribution.

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  • Heli Wang

    1. Strategy and Organization, Lee Kong Chian School of Business, Singapore Management University, Singapore, Singapore
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Abstract

This paper advances the risk management perspective that superior social performance enhances firm value by serving as an ex ante valuable insurance mechanism. We posit that good social performance is more valuable as an insurance mechanism for firms with higher litigation risks. Moreover, value generation of corporate social performance (CSP) depends on whether a firm has gained pragmatic legitimacy (i.e., a firm's financial health) and moral legitimacy (i.e., whether or not a firm operates in a socially contested industry) among its stakeholders. We find that the value of CSP as insurance against litigation risk is practically significant, adding 2 to 4 percent to firm value. But CSP is less likely to create value if the firm is in financial distress or is operating in socially contested industries. Copyright © 2013 John Wiley & Sons, Ltd.

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