Using Item Response Theory to Improve Measurement in Strategic Management Research: An Application to Corporate Social Responsibility

Abstract

We introduce item response theory (IRT) to management and strategy research. IRT explicitly models firms’ and individuals’ observable actions in order to measure unobserved, latent characteristics. IRT models have helped researchers improve measures in numerous disciplines. To demonstrate their potential in strategic management, we show how the method improves upon a key measure of corporate social responsibility (CSR) and corporate social performance (CSP), the KLD Index, by creating what we term D-SOCIAL-KLD scores, and associated estimates of their accuracy, from the underlying data. We show, for instance, that firms like Apple may not be as “good” as previously thought, while firms like Walmart may perform better than typically believed. We also show that the D-SOCIAL-KLD measure outperforms the KLD Index and factor analysis in predicting new CSR-related activity.