In the evolving landscape of corporate finance and social accountability, a groundbreaking study sheds new light on how firms grappling with excessive debt navigate the precarious balance between economic efficiency and social legitimacy. The research uncovers a paradox at the heart of corporate social responsibility (CSR), revealing that companies burdened with high levels of leverage engage in CSR activities not merely as ethical endeavors but as strategic moves to repair their tarnished legitimacy in the eyes of stakeholders. This investigation offers a nuanced understanding of the complex dynamics between financial distress and social behavior, challenging conventional views on the motivations behind CSR.
At the core of this inquiry lies the concept of legitimacy—a firm’s perceived appropriateness and trustworthiness within its operating environment. When leverage surpasses sustainable levels, companies risk eroding this legitimacy, setting off alarms among investors, customers, regulators, and the wider public. The study posits that in response to such legitimacy deficits caused by financial overextension, firms amplify their CSR efforts, viewing them as vital instruments to restore their credibility and societal standing. This legitimacy repair mechanism underscores CSR as a reactive strategy deeply intertwined with financial health, rather than a purely altruistic commitment.
However, legitimacy is far from uniform across firms and contexts. It is, in fact, a heterogeneous construct influenced by multiple external factors, notably media attention and government intervention. Media acts as a powerful gatekeeper and validator of corporate reputation, wielding the ability to shape stakeholder perceptions dramatically. The study elaborates on this by dissecting media influence into positive and negative coverage, each exerting distinct moderating effects on the relationship between excessive leverage and CSR engagement.
Positive media coverage seemingly plays a neutralizing role, blunting the pressure on over-leveraged firms to intensify CSR. In contrast, negative media attention exacerbates legitimacy loss, effectively strengthening the drive for CSR as a rehabilitative measure. This asymmetry arises from the heightened sensitivity of external stakeholders to negative information, which amplifies scrutiny and demands accountability from financially distressed firms. Negative media thus functions as a catalyst for CSR, compelling firms to visibly commit to social responsibility in an effort to counterbalance adverse publicity.
Complementing the media’s influence is the critical role of government intervention, which is particularly pronounced in the context of Chinese enterprises. The study highlights how government intervention—defined as the state’s allocation of resources and enforcement of social objectives through administrative means—significantly shapes firms’ CSR strategies. This intervention is spatially heterogeneous across provinces in China, leading to varied intensities of governmental influence over firm behavior.
Specifically, where government intervention is robust, firms are incentivized to ramp up CSR to secure favorable official evaluations and avoid punitive repercussions. Local governments, motivated by promotion incentives, often delegate social responsibilities such as environmental stewardship and poverty alleviation to corporations, effectively intertwining political and social objectives. Conversely, in regions where government intervention is weaker, the legitimizing power of CSR diminishes, curtailing its effectiveness as a tool for restoring legitimacy amid financial distress.
To empirically validate these theoretical insights, the researchers employed a sophisticated econometric model. This model incorporates interaction terms between excess leverage and moderators—positive media attention, negative media attention, and government intervention—while controlling for industry, firm-specific, and temporal factors. The analytical approach robustly captures how external contextual forces modulate the leverage-CSR nexus across time and firm boundaries, affording a granular understanding of causality.
The regression results reveal a compelling pattern: the interaction between excessive leverage and negative media attention is statistically significant and positively correlated with CSR intensity. This indicates that the reputational damage inflicted by adverse media coverage prompts over-indebted firms to bolster their socially responsible conduct. Conversely, the interaction between excessive leverage and positive media attention fails to attain significance, suggesting that positive media does not significantly alter the CSR behaviors of financially strained firms.
Moreover, the analysis of government intervention presents an inverse-coded metric to denote intervention strength. The negative interaction coefficient confirms that as government intervention weakens, the positive relationship between excess leverage and CSR slackens. This empirical evidence reinforces the notion that state involvement acts as a pivotal legitimizing mechanism, enhancing CSR’s role in repairing firm legitimacy under financial stress.
These findings carry profound implications for stakeholders across the corporate ecosystem. For policymakers, the research underscores the importance of calibrated government intervention to foster corporate accountability and social engagement. The dynamic between regulation and CSR in financially leveraged firms suggests that policy frameworks can strategically harness government capacity to steer firms toward greater social responsibility when economic pressures mount.
For business leaders and investors, understanding the legitimacy dynamics behind CSR provides a strategic vantage point. Firms can manage CSR not merely as a moral obligation but as a calibrated response to external legitimacy pressures, especially in environments of heightened media scrutiny and governmental oversight. Investors, in turn, might consider how media sentiment and institutional contexts influence firms’ social behavior and reputational risk.
Academically, this study pushes the frontier of CSR research by marrying financial leverage theory with legitimacy and institutional perspectives. It prompts a reevaluation of CSR motives, highlighting the interplay between economic vulnerability and social responsiveness, mediated by powerful external actors such as media and government.
Furthermore, the research methodology exemplifies the rigorous employment of machine learning-based sentiment analysis to differentiate media coverage, leveraging cutting-edge data science tools to capture subtle variations in stakeholder communication with high accuracy. This approach enhances the precision of moderating variable measurement, enabling more nuanced and actionable insights.
The context of China offers unique institutional characteristics that amplify the generalizability and contextual specificity of the results. The gradual transition from a planned to a market economy, coupled with the retained discretionary power of government officials, creates fertile ground to observe how political economy factors shape CSR strategies under financial distress. This setting encapsulates broader lessons for other emerging economies where government-market relations remain fluid and influential.
In conclusion, this study illuminates a paradox wherein firms entangled in the dilemma of excessive debt employ CSR as a dual-edged sword to navigate the tension between economic efficiency and social legitimacy. External forces like media framing and regulatory intervention critically shape this balancing act, underscoring that CSR is not a static virtue but a dynamic strategy responsive to complex environmental stimuli. The insights garnered here pave the way for richer future inquiries into how firms can sustainably integrate financial prudence with genuine social commitment in an era of heightened transparency and stakeholder activism.
Subject of Research:
The study investigates how excessive corporate leverage impacts corporate social responsibility efforts, focusing on the moderating roles of media attention and government intervention in shaping the legitimacy and CSR behavior of over-indebted firms.
Article Title:
The paradox of corporate social responsibility in excessively leveraged firms: legitimacy pursuit vs. economic efficiency dilemma.
Article References:
Huang, G., Huang, Y. & Shen, L. The paradox of corporate social responsibility in excessively leveraged firms: legitimacy pursuit vs. economic efficiency dilemma. Humanit Soc Sci Commun 12, 1922 (2025). https://doi.org/10.1057/s41599-025-06206-8
