We hypothesize that firms are incentivized to manage corporate social responsibility (CSR) strategically as a result of social pressure, uncertain value implications, and investors' reliance on delimited measures of CSR performance. To test our hypotheses, we analyze Korean firms, whose ratings for environmental, social, and governance (ESG) performance, considered individually and collectively, are public information, while numeric scores on which the ratings are based remain private information controlled by firms. We find that numeric scores for performance in categories near rating cutoffs improve significantly each year. In addition, firms improve in the lowest-rated category, likely at the expense of performance in the highest-rated category. These behaviors have been more pronounced since ESG began attracting significant public attention, in firms with more ESG-demanding shareholders, among firms that are especially concerned about their reputations, and when the value implications of ESG are more uncertain. The results overall are consistent with the proposition that firms manage ESG performance strategically in the face of social pressure and uncertain value implications.

Keywords: Corporate social responsibility, environmental, social, and governance (ESG)

JEL classification: G30, G32​