Exploring the Impact of Legal Systems and Financial Structures on Corporate Responsibility

This study investigates how diverse European legal systems and financial structures influence corporate social and environmental responsibility. The argument is developed using a framework that integrates legal systems and financial structures. Hypotheses relating to environmental responsibility have been tested using Innovest data gathered between 2002 and 2007 from 645 companies in 16 countries; hypotheses relating to social responsibility have been tested using Innovest data gathered between 2004 and 2007 from 600 companies. The findings demonstrate that legal systems influence corporate responsibility in both social and environmental spheres. They also support the claim that corporations are more likely to act in environmentally-responsible ways when there are strong and well-enforced state regulations in place to ensure such behavior. Company size is shown to have a greater impact on corporate responsibility than either excess cash or performance. Large companies tend to be more visible than small ones, and society expects them to behave in a more socially and environmentally responsible manner regardless of their financial performance or available cash. Finally, these findings support the hypothesis that capital structure significantly influences corporate responsibility: companies with a high number of publicly held shares and a low percentage of debt are more likely than others to commit themselves to social and environmental activities