The influence of entrepreneurial orientation on firms' corporate social responsibility ratings and idiosyncratic risk

Abstract

This research discusses empirical testing of 20 separate hypotheses regarding relationships between entrepreneurial orientation factors and two key business characteristics. The first essay examines the degree to which the entrepreneurial orientation factors of autonomy, competitive aggressiveness, innovation, proactiveness, and risk-taking each relate to three corporate social responsibility ratings, those in the environmental, social, and governance (ESG) categories. The second essay investigates relationships between those five entrepreneurial orientation factors and firms’ idiosyncratic stock price risk. These issues have been discussed in the theoretical entrepreneurial orientation literature, but they have had little empirical investigation. Both essays address intellectual conflicts that have arisen in that context. Some have suggested that being entrepreneurially focused and striving to advance social progress are antithetical objectives, while others have suggested these concepts can co-exist within an organization. Furthermore, some have suggested that firms that adopt an entrepreneurial orientation manifest higher risk levels, while others have suggested that the increase in innovation that typically occurs in entrepreneurial settings leads firms to lower, not higher, risk profiles. Both debates can benefit from additional empirical analysis. The sample for the first essay included 395 companies, mostly large capitalization firms as they are the only ones with reported social responsibility ratings. Due to wider availability of risk-based data, the sample for the second essay included 1,010 companies, including small-cap, mid-cap, and large-cap firms. For both essays, computer-assisted text analysis (CATA) of quarterly earnings call transcripts was used to estimate the entrepreneurial orientation factor levels for each firm. The individual entrepreneurial orientation factors affected corporate social responsibility ratings and firm-level risk in different ways. Autonomy was not related to any of the corporate social responsibility ratings, nor was it related to firm-level risk. Competitive aggressiveness was negatively related to ratings in the social and governance categories but was not related to the environmental rating nor to firm-level risk. Innovation was positively related to a firm’s environmental rating and negatively related to its risk level but not related to the social or governance scores. Proactiveness was positively related to all three social responsibility ratings but not related to firm-level risk. Risk-taking was positively related to firm-level risk but not related to any of the social responsibility ratings. These differential effects reinforce the notion that the entrepreneurial orientation factors are independent. This research revealed that whether entrepreneurial firms can advance social progress and whether entrepreneurial orientation increases risk are not simple questions but ones that have nuanced answers.