CSR, audit quality and firm performance during COVID-19: an organizational legitimacy perspective

Purpose - COVID-19 induced uncertainty in the firms’ business transactions, product-market competition and financial market cause severe organizational legitimacy crisis. Using the organizational legitimacy perspective, we study the relationship between corporate social responsibility (CSR) activities, audit quality, and firm performance. Design/methodology/approach – We use a quarterly panel of 89,185 firm observations (15,955 unique firms) from 131 countries from July 2018 to December 2020 for 10 quarters. We use a Difference-in-Difference (DiD) method to estimate the effect of CSR activities and audit quality on firm performance during the COVID-19 period. Findings - We find a U-shaped relationship between CSR and firm performance. This relationship is strengthened during COVID-19. In contrast, we find an inverted U-shaped relationship between firm audit quality (audit fee) and firm performance. However, this relationship is weakened during the pandemic. Originality/value – Our study makes important contributions to theory and practice on maintaining organizational legitimacy during the pandemic. During the crisis, managers need to focus on strategies increasing firm value for the time period. This study shows that firms’ temporal legitimacy gaining practices such as CSR activities and audit quality provides an opportunity to increase firm value. Firm managers also need to identify the optimal level of CSR activities and audit fees to balance the cost of agency and the benefits of legitimacy.