Local corruption and corporate social responsibility

This paper introduces a new impact of corruption on corporate policies by examining the effect of local corruption on corporate social responsibility (CSR). We propose a novel mechanism governing the local public corruption and CSR relation based on conditional corruption and signal extraction uncertainty. We show that firms located in areas with high corruption rates have lower levels of CSR scores. Furthermore, this result is not captured by corporate governance differences across firms. The negative relationship between local corruption and CSR remains significant after addressing potential endogeneity and using alternative corruption measures. Our findings remain robust after a series of robustness checks. This paper introduces a novel role of local corruption in the firms’ CSR outcomes.