Role of Strategic Interactions in Corporate Sustainability Decisions: An Empirical Investigation

There is a large amount of empirical literature on the relationship between corporate sustainability and corporate financial performance. However, theture c onsiders company-specific aspects affecting the link but omits the influence of the competition. A firm’s gains from its sustainability efforts, however, depend on whether its industry competitors also perform sustainablehether si milar in type or different. Thus, we consider the sustainability decision making of companies to be of a strategic nature and show thatmotives, t ypically ignored in the literature, can be an important factorcess. We estimate an Instrumental Variable (IV) Probit modelsing inclusion in the MSCI KLD 400 Social Index and draw on financialon from the Wharton Research Data Services COMPUSTAT datasettify the effect of competition. We find that the effect of competition on the likelihood of entry into the sustainability market is negative, is only true if the endogeneity is correctly taken into account. Probit estimates present an upward bias, which means that results from raw models can be misleading in designing policies on sustainability. Overall evidence suggests a central role for strategic motives in management’s sustainability decisions.