External Governance Shocks and Legitimacy Repair Through CSR

ABSTRACT Research Question/Issue This study examines how firms adjust their corporate social responsibility (CSR) performance when product market competitors experience forced chief executive officer (CEO) turnover. Specifically, this study investigates whether peer CEO dismissals, as governance shocks signaling intensified board monitoring, trigger strategic CSR responses among rival firms. Research Findings/Insights Using US firm‐year observations from 2003 to 2020, this research documents that peer dismissals significantly increase firms' CSR performance, with effects concentrated in the social dimension rather than the environmental or governance dimensions. The positive relationship is stronger for firms with greater analyst coverage and for firms operating in more competitive markets, indicating that external scrutiny and competitive pressure strengthen strategic CSR adoption. Value‐creation tests demonstrate that CSR engagement in response to peer dismissals is associated with improved subsequent accounting performance, particularly in the social dimension. Theoretical/Academic Implications The findings support legitimacy theory over agency theory in explaining CSR motivations under governance pressure. This research demonstrates that CSR serves as an active legitimacy‐building mechanism rather than being constrained by governance discipline when firms face institutional pressures from peer governance failures. This research enriches the peer spillover literature by moving the focus from passive information transfer to active legitimacy management and extends executive turnover research by identifying CSR as a strategic response channel to external governance shocks. Practitioner/Policy Implications Boards and executives should recognize that peer governance failures create reputational risks requiring strategic stakeholder engagement. The evidence suggests that CSR practices can effectively mitigate legitimacy threats following industry‐wide governance shocks. Policymakers should recognize that governance failures in one firm create industry‐wide legitimacy threats that extend beyond the affected company and that the information environment plays a critical role in shaping how these threats spread across product markets.