Studies differ on whether corporate social responsibility (CSR) constrains or enables firms to undertake strategically necessary yet socially disruptive actions, as CSR can both provide reputational insurance and create perceptions of hypocrisy. We show that high-CSR firms receive press coverage with more negative sentiment for layoffs and undertake fewer layoffs and divestitures in response to unexpected negative industry shocks. This CSR-induced rigidity increases the persistence of low performance. Our findings highlight how CSR can create a tradeoff between employee-level productivity benefits and corporate-level rigidity costs, presenting a more cautious and balanced business case for CSR. More broadly, our study cautions that enfranchising employees and other stakeholders can create rigidity and amplify downside risks, particularly when industry disruptions require reconfiguring existing stakeholder relations, providing insights into when and how to design firm social efforts.
