The Impact of Corporate Social Responsibility on Investment Recommendations: Analysts' Perceptions and Shifting Institutional Logics

We explore the impact of corporate social responsibility (CSR) ratings on sell-side analysts' assessments of firms' future financial performance. We suggest that when analysts perceive CSR as an agency cost, due to the prevalence of an agency logic, they produce pessimistic recommendations for firms with high CSR ratings. Moreover, we theorize that over time, the emergence of a stakeholder focus, and the gradual weakening of the agency logic, shifts the analysts' perceptions of CSR ratings and results in increasingly less pessimistic recommendations for firms with high CSR ratings. Using a large sample of publicly traded U.S. firms over 15 years, we confirm that in the early 1990s, analysts issue more pessimistic recommendations for firms with high CSR ratings. However, in more recent years analysts progressively assess these firms less pessimistically, and eventually they assess them optimistically. Furthermore, we find that more experienced analysts and analysts at higher-status brokerage houses are the first to shift the relation between CSR ratings and investment recommendation optimism. We find no significant link between firms' CSR ratings and analysts' forecast errors, indicating that learning is unlikely to account for the observed shifts in recommendations.