Abstract

This paper investigates the relation between firm characteristics and corporate social
responsibility (CSR) with the purpose to understand the reason for investment activities
in CSR. We develop a principal component based approach to categorize the KLD
fourteen-dimensions of CSR activities into two groups, namely, reactive CSR, which
firms would apply to counter any potential fallout from CSR concerns, and proactive
CSR, which stands for not reactive CSR activities. We find evidence supporting that (1)
financially strong firms, older firms, and firms with more R&D expenditures are more
likely to invest in CSR; (2) firms operating in multiple markets tend to invest more in
reactive CSR while do the same as single market firms in proactive CSR; (3) firms tend
to increase their investment in both CSR as the level of competition decreases but reduce
proactive CSR more in extreme high level of concentration; and (4) better corporate
governance leads to lower reactive CSR but higher proactive CSR.