In this paper, we develop and test a theory of how unintended audiences create reaction costs for firms that use corporate social responsibility (CSR) as a signal. Reaction costs are costs that signal senders incur when unintended audiences react negatively to a true signal that was intended for another audience. We argue that activist hedge funds—an unintended audience—treat CSR as a signal that firms have wasteful intentions and capabilities, which prevent firms from maximizing shareholder value in the short term. On that basis, we hypothesize that activist hedge funds are more likely to target firms with higher levels of CSR, thus imposing reaction costs on these firms. We further argue that this relationship is weaker when firms operate in industries with high levels of CSR, and stronger when firms’ financial communication is vague. Using data on activist hedge fund campaigns in the U.S. between 2000 and 2016, we find supporting results. Our research shows that CSR signals may be costlier than previously assumed and contributes to research on CSR, signaling, and corporate governance.

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Keywords Quantitative orientation (General) < Quantitative Orientation < Research Methods, Traditional (e.g., regression, ANOVA, etc.) < Analysis < Research Methods, Stakeholder management < Upper Echelons/Corporate Governance < Business Policy and Strategy < Topic Areas, Organizations and the Natural Environment < Topic Areas, Corporate social responsibility < Social Issues in Management < Topic Areas
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Journal Academy of Management Journal
DesJardine, M.R., Marti, E.S., & Durand, R. (2020). Why Activist Hedge Funds Target Socially Responsible Firms: The Reaction Costs of Signaling Corporate Social Responsibility. Academy of Management Journal, forthcomin. doi:10.5465/amj.2019.0238