CSR, Monitoring Cost and Firm Performance during COVID-19: Balancing Organizational Legitimacy and Agency Cost

Journal: Research Journal 

Abstract: COVID-19 induced uncertainty in the firms’ business transactions, financial markets, and product-market competition, causing a severe organizational legitimacy crisis. Using the organizational legitimacy perspective and agency theory, the authors study the relationship between prior corporate social responsibility (CSR) activities, monitoring cost, and firm performance. They use a quarterly panel (16,924 firm-quarter observations from 61 countries for CSR and 53,345 firm-quarter observations from 55 countries for monitoring cost) for 14 quarters from January 2018 to June 2021. They use panel fixed-effect regression models to estimate the effect of CSR activities and monitoring cost (measured as audit fees) on firm performance during the COVID-19 period. They find a U-shaped relationship between CSR and firm performance. This relationship is strengthened during COVID-19. In contrast, they find an inverted U-shaped relationship between firm monitoring cost and firm performance. However, this relationship is weakened during the pandemic. This study contributes to theory and practice on maintaining organizational legitimacy and reducing agency costs during the pandemic. This study shows that firms’ prior legitimacy-gaining practices, such as CSR activities and monitoring cost provide an opportunity to increase firm value. To balance agency costs and legitimacy benefits, firm managers also need to identify the optimal level of CSR activities and monitoring cost.