The impact of corporate social responsibility (CSR) and customer trust ...

The impact of corporate social responsibility (CSR) and customer trust on the restoration of loyalty after service failure and recovery Beomjoon Choi California State University, Sacramento, California, USA, and

Suna La Korea National Open University, Seoul, Republic of Korea Abstract Purpose – This study seeks to examine perceived corporate social responsibility (CSR) with a focus on ethical and legal questions, related to the constructs such as recovery satisfaction, customer trust, and loyalty after a service failure. Design/methodology/approach – An empirical test was conducted on this relationship in the context of service failure and recovery. A structural equation model was employed to test the hypotheses. Findings – Results indicate that perceived CSR has a significant impact on customer trust and loyalty and that customer trust serves as a key mediating variable in service recovery. Research limitations/implications – This study provides a theoretical implication for the relationship between perceived CSR and the relationship constructs such as service recovery satisfaction, customer trust, and loyalty. Practical implications – The results suggest that managers may need to be aware of perceived CSR as a key variable in restoring customer loyalty. The results further suggest that perceived CSR has a direct and indirect positive effect on loyalty; perceived CSR has a direct impact on loyalty, but it also has an indirect influence on loyalty through customer trust. Originality/value – In an attempt to deepen the understanding of how customer perceptions of firm CSR are connected with other customer-related outcomes during service recovery, the present research proposes a comprehensive model which encompasses CSR and other key relationship constructs after a service failure and recovery. Keywords Corporate social responsibility, Customer trust, Service failures, Service recovery, Customer loyalty Paper type Research paper

attempt to extend previous research on the outcomes of service recovery performance, we suggest that customer attitudes regarding corporate social responsibility (CSR) can change as a result of service recovery performance and that this is especially true for customer perceptions of the ethical and legal dimensions of CSR. If a firm does not respond appropriately to service failure (e.g. responds in a dishonest or irresponsible manner), this will negatively influence customer perceptions of company ethics and may have negative consequences such as complaints or customer defection. For instance, inaccurate charges or improper treatment in the healthcare industry may constitute service failure, and insufficient or inappropriate responses to such issues will exacerbate the problem, causing consumers to perceive the firm in question as unethical. Examples of poor responses to service failure may include an unreasonably long wait time for related appointments and dishonest or irresponsible handling of service failure. Corporate social responsibility (CSR) is known to have multiple dimensions (Carroll, 1991; Salmones et al., 2005), and most previous research has focused on the philanthropic component of CSR, which is a component of cause-related marketing (Barone et al. 2000; Berger and Kanetkar, 1995; Creyer and Ross, 1997). However, as compared to the philanthropic component, the ethical-legal component of CSR is more closely related to company ethics, and service failure and recovery constitute one context in which firms’ sense of ethical responsibility may be tested. Therefore, we

An executive summary for managers and executive readers can be found at the end of this article. Many service organizations may aim for “perfect” service delivery, but such perfection is extremely difficult to attain. Service failures occur even for the firms known for providing the best service. Hence, it is imperative that firms learn how to cope with service failure (Bitner et al., 1990). Successful service recovery is critical because service recovery encounters provide opportunities for firms to communicate with customers and therefore to strengthen relationships (Berry and Parasuraman, 1991). Successful service recovery can also yield positive outcomes, including customer satisfaction, repurchasing, and the spread of positive word-of-mouth (Gelbrich and Roschk, 2011; Harris et al., 2006; Maxham and Netemeyer, 2002; Orsingher et al., 2010; Stauss, 2002). However, if mishandled, service failures may become very costly because customers may spread negative word-of-mouth or switch service providers (Blodgett et al., 1997). In an The current issue and full text archive of this journal is available at www.emeraldinsight.com/0887-6045.htm

Journal of Services Marketing 27/3 (2013) 223– 233 q Emerald Group Publishing Limited [ISSN 0887-6045] [DOI 10.1108/08876041311330717]

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The restoration of loyalty after service failure and recovery

Journal of Services Marketing

Beomjoon Choi and Suna La

Volume 27 · Number 3 · 2013 · 223 –233

narrow our focus to the ethical-legal component of CSR in investigating perceived CSR and other key constructs associated with service recovery. In an attempt to deepen our understanding of how customer perceptions of firm CSR are connected with other customer-related outcomes during service recovery, the present research proposes a comprehensive model that encompasses CSR (with a focus on the ethical-legal dimension) and other key constructs such as recovery satisfaction, customer trust, and loyalty. The aim of our research is to investigate the relationships among those factors. More specifically, our research questions are as follows:

experience with a firm. Past experience provides customers with numerous opportunities to evaluate a firm’s ability, benevolence, and integrity (Berry, 1999). A service recovery attempt may include direct or indirect interactions between customers and firms, and customers are likely to reassess the firm’s trustworthiness based on their level of satisfaction with the service recovery process (Aaker et al. 2004). The firm’s perceived trustworthiness, in turn, leads to customer trust (Mayer et al., 1995). As a result, satisfaction with service recovery is expected to create a higher level of customer trust. Consistent with previous research that supported the relationship between satisfaction and commitment during service recovery (Tax et al., 1998), we argue that there is a positive relationship between satisfaction with a firm’s service recovery efforts and customer trust. Therefore, we hypothesize that:

RQ1. How is customers’ perception of CSR, of which focus is on ethical-legal dimension, related to recovery satisfaction, customer trust, and loyalty in a service failure and recovery context? RQ2. Does customer trust serve as an intermediate variable in service recovery? More specifically, does customer trust mediate the relationship between recovery satisfaction and loyalty during service recovery? Also, does customer trust mediate the relationship between perceived CSR and loyalty?

H1.

There will be a positive relationship between recovery satisfaction and customer trust after a service failure and successful recovery.

Customer trust is typically formed based on accumulated satisfaction, the consistent delivery of quality service, the fulfillment of customer needs, honest and fair treatment, and confidence that the firm intends to act in the customer’s best interest (Berry, 1999; Delgado-Ballester and MunueraAlemań, 2001; Liljander and Roos, 2002; Morgan and Hunt, 1994). This construct is regarded as a critical factor in the evaluation and selection of service providers (Liljander and Roos, 2002; Singh and Sirdeshmukh, 2000), and as a key determinant of relationship durability and customer loyalty (Berry, 1999; Garbarino and Johnson, 1999; Gro¨nroos, 1995; Morgan and Hunt, 1994). Essentially, customer trust serves as a principal component of enduring long-term relationships between customers and service firms (Molm et al., 2000). The link between customer trust and loyalty is also likely to endure in a service failure context. Feelings of trust help the trusting party to accept a position of situational or temporary vulnerability based on that party’s positive expectations regarding the other parties involved (Fournier, 1998; Rousseau et al., 1998; Singh and Sirdeshmukh, 2000). In a similar vein, provided that a service failure is likely to cause a breakdown in the firm-customer relationship, the restoration of customer trust is essential to preserving the relationship and rebuilding loyalty to the service provider. Hence, we argue that customer trust will lead to increased customer loyalty during service failure and recovery. Therefore, we hypothesize that:

The remainder of this paper is organized as follows. We begin by presenting the theoretical background for our work and proposing hypotheses. Then, using survey data, we present an empirical test of our theoretical model using a structural equation modeling approach. A discussion of these results and their theoretical and managerial implications follows. The present study concludes by discussion limitations and suggestions for future research.

Theoretical background Recovery satisfaction, customer trust, and loyalty Service recovery refers to firm actions intended as a response to service failure (Gro¨nroos, 1988). Because a company’s response has the potential to strengthen the relationship between itself and the customers (e.g. through the service recovery paradox) or to aggravate the situation, service recovery encounters are considered critical “moments of truth” that determine customer relationships (Smith and Bolton, 1998), and well-executed service recovery remedies are essential to recovery satisfaction (Fornell and Wernerfelt, 1987). Recovery satisfaction, which also refers to satisfaction with complaint handling (Orsingher et al. 2010; Tax et al. 1998), is the customer’s evaluation of how well a service provider handled a service failure. Recovery satisfaction is critical in that it helps maintain relationships with customers (Fornell and Wernerfelt, 1987). Trust, which is one of key constructs associated with service recovery (La and Choi, 2011), is defined as “a willingness to rely on an exchange partner in whom one has confidence” (Moorman et al. 1993). Further, Coulter and Coulter (2002) conceptualize trust in a service provider as the perception of that service provider’s confidentiality, honesty, integrity, and high ethical standards. Trust is particularly important in service contexts because characteristics of service such as intangibility and heterogeneity make it difficult to select and evaluate service providers (Liljander and Roos, 2002; Singh and Sirdeshmukh, 2000). Customer trust, which refers to trust customers have toward a firm, is formed based on prior

H2.

There will be a positive relationship between customer trust and loyalty after service failure and successful recovery.

Corporate social responsibility (CSR) CSR and ethics are closely related and are often used interchangeably, but it is important to distinguish them from one another. Among the various positions on the differences between CSR and ethics, the most widely supported suggests that CSR has multiple dimensions, one of which is ethics (Carroll, 1991). More specifically, it is suggested that CSR is a broad concept that encompasses four dimensions: economic, legal, ethical, and philanthropic. In an attempt to investigate the benefits of CSR as a marketing tool, Salmones 224




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et al. (2005) investigated the structure and components of the concept of social responsibility. Salmones et al. (2005) pinpoint three dimensions of CSR: economic, ethical-legal, and philanthropic responsibility. The majority of the previous research has focused on the philanthropic component, which is associated with cause-related marketing (Barone et al. 2000; Berger and Kanetkar, 1995; Creyer and Ross, 1997), whereas research on other dimensions has been very scarce. However, as compared to the philanthropic component, the ethical-legal component is more relevant to the present research; ethical and legal considerations are more closely related to company ethics and service failure and recovery because these are situations in which the firm’s ethical reputation is at stake. For these reasons, we turn our focus to the ethical-legal component of CSR. Over the years, CSR has been increasingly important and hence has been identified as a priority for many companies (Luo and Bhattacharya, 2006). In response to the increasing importance of CSR, several researchers have examined the relationship of CSR to various variables. Previous research shows that CSR influences consumer product responses either directly or indirectly (Brown, 1998; Brown and Dacin, 1997). It can also influence customer-company identification (Sen and Bhattacharya, 2001), customer donations (Lichtenstein et al., 2004), customer attitudes toward a product (Berens et al., 2005), and financial outcomes such as Tobin’s q and stock returns (Luo and Bhattacharya, 2006). Positive consumer perceptions of CSR also result in the favorable evaluation of and favorable attitudes toward firms (Brown and Dacin, 1997; Gu¨rhan-Canli and Batra, 2004; Sen and Bhattacharya, 2001). Furthermore, Luo and Bhattacharya (2006) have demonstrated a direct link between CSR and customer satisfaction, showing that a firm’s CSR initiatives increase customer satisfaction. However, the effect of customer satisfaction on perceived CSR has not been investigated in any previous research, and we examine the impact of recovery satisfaction on perceptions of CSR in the present research. After a service failure, recovery management is critical given its significant impact on recovery satisfaction. Customers are often more dissatisfied by a company’s failure to appropriately recover from an instance of service failure than by the service failure itself (Berry and Parasuraman, 1991; Bitner et al., 1990), and failed recovery efforts are identified as a major reason why customers switch to other service providers (Keaveney, 1995). Consistent with this notion, Spreng et al. (1995) have found that the most important determinant of recovery satisfaction is satisfaction with damage claims personnel. Dissatisfaction due to inappropriate and inadequate responses to service failures is considered a “double deviation” (Bitner et al., 1990) and is known to lead customer defection (Keaveney, 1995) and low repatronage intentions (Smith and Bolton, 1998). As a result, dissatisfaction is likely to have a negative impact on perceived CSR. Because service recovery encounters provide customers with a chance to reassess a service provider based on evaluations of service encounters, customer satisfaction during service recovery encounters will have an influence on perception of CSR. Recovery satisfaction may lead not only to enhanced loyalty and the spread of positive word-of-mouth but also to more positive perception of CSR. A spillover effect of recovery satisfaction on perceived CSR is anticipated

because service failure and recovery encounters provide customers with new information that enables them to update their perceptions regarding firm CSR. For instance, customers that have experienced service failure may encounter dishonest and intimidating behavior by service providers or unwillingness to address the issue in a timely manner. Customers who receive such treatment during service recovery encounters are likely to be dissatisfied with the service recovery process and to develop more negative perceptions of the firm’s CSR. Thus, we predict that satisfaction with service recovery will have a positive influence on customers’ perception of CSR: H3.

There will be a positive relationship between recovery satisfaction and customer-perceived CSR.

Trust in a service provider is highly related to perceptions of service provider’s integrity, honesty, confidentiality, and ethicality (Coulter and Coulter, 2002). The results of a survey of CEOs at the Business Roundtable Institute for Corporate Ethics (2004) indicate that one of top issues in corporate ethics is related the need to regain public trust. Consistent with the survey results, Paine (2000) states that adherence to ethical standards provides the basis for trust, helps to build reputation, and supports the delivery of quality services. In a similar vein, ethical behavior by salespeople has a positive impact on customer trust in the firm in question (Roman, 2003). Furthermore, Svensson and Wood (2004) provide a conceptual framework for corporate ethics and trust in intra-corporate relationships, arguing that corporate ethics affect trust. Hence, we propose that the ethical-legal aspect of perceived CSR has a positive impact on customer trust after service failure and recovery. Therefore, we hypothesize that: H4.

There will be a positive relationship between customer perception of CSR and customer trust after service failure and successful recovery.

Trawick et al. (1991) argue that individuals’ purchase intentions decline when the behavior of a salesperson is perceived as unethical. Whalen et al. (1991) also demonstrate a negative relationship between negative consumer perceptions of firm ethics and purchase intention. Furthermore, Gundlach and Murphy (1993) argue that following ethical principles helps a firm to build long-term relationships with customers, and Roman (2003) demonstrates that customers become more loyal to a company when salesperson behavior is perceived as ethical. As such, previous research provides empirical evidence of the relationship between ethical firm behavior and customer loyalty. Additionally, consumers’ perceptions of CSR are known to influence their behavior and attitude towards companies and their products (Brown and Dacin, 1997; Maignan and Ferrell, 2004) and to positively affect their loyalty toward firms (Maignan and Ferrell, 2004). Because consumers become even more sensitive to firm ethics after service failure, a link between perceived CSR and loyalty is also anticipated after service failure and recovery. Therefore, we argue that perceived CSR will have a positive influence on customer loyalty after service failure and recovery. Therefore, we hypothesize that: H5.

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There will be a positive relationship between customer perceptions of CSR and loyalty after service failure and successful recovery.




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Research methodology

AMOS 18.0. The overall measurement model fit indices indicate that the comprehensive confirmatory factor model fits the data well (chi – square ¼ 134:364, df ¼ 48, p ¼ 0:000, CFI ¼ 0:986, TLI ¼ 0:980, NFI ¼ 0:978, RMSR (standardized RMRÞ ¼ 0:019, RMSEA ¼ 0:070). Cronbach’s alpha was used to assess the internal consistency of the constructs. The range of the Cronbach alpha coefficients for each construct was high (0.925 [CSR] , 0.969 [recovery satisfaction]). Therefore, their composite reliability was deemed satisfactory. T-value and average variance extracted (AVE) were employed to test convergent validity (Fornell and Larcker, 1981). The T-values of the Lambda (l) loadings of each measure were significant (p , 0:01), and the AVEs for each construct were good (all exceeded 0.70). Overall, the measurement model suggested good convergent validity, as shown in Table II. Discriminant validity was assessed by developing a confidence interval of c ^ 2se for each pair of factors and examining whether 1 (one) was included in the confidence interval (c indicates the correlation between two factors, whereas se represents the standard error for the two factors). The high end of the confidence interval did not include 1, providing evidence of discriminant validity (Koufteros, 1999). In addition, as presented in Table III, the AVE values were greater than the squared F coefficients. As a result, we were able to verify the discriminant validity of all measurements used (Anderson and Gerbing, 1988).

Measures Based on the previous literature, we selected measurement items that we deemed appropriate for the present study. We utilized measurement items used in the existing literature to create a sound basis for specifying the constructs to be measured. Either the exact measurement items presented in previous research were used, or they were adjusted as necessary to measure the latent constructs. All measures used for the study are shown in Table I. The participants were asked to respond using a nine-point Likert scale ranging from 1 (strongly disagree) to 9 (strongly agree). The sample The survey was completed by 371 undergraduate business students from a mid-sized west coast university; the students participated in the study for extra credit. A self-completed questionnaire was used. The participants were asked to recall their most recent experience with service failure and recovery in the past 12 months. They were asked to write down the firm’s name and when the service failure occurred to enhance recall accuracy. They were also asked to describe the actual service failure and recovery attempt and to fill out a questionnaire related to both events. The majority of sample was 55.2 percent male, with a mean age of 25 years (SD ¼ 5:1). The service types reported on include restaurants, cable services, financial services, airline services, lodging services, and retailers (including online retailers). The variety of service types was expected to enhance the applicability of the results to most service categories.

Hypotheses testing Structural equation modeling (SEM) was conducted to test the hypothesized relationships. The model fit indices are acceptable. The structural model has a statistically significant chi-square value (x2 ¼ 132:276, df ¼ 49, p ¼ 0:000). The data for all other relevant fit indices are also within an acceptable range (CFI ¼ 0:986, TLI ¼ 0:980, NF ¼ 0:978, RMSR ¼ 0:020, RMSEA ¼ 0:070). Therefore, we concluded that the proposed model fits the data well. The estimated path coefficients are shown in Figure 1. Table IV illustrates the results of the hypothesis test. The estimated standardized structural coefficients for the hypothesized associations among the constructs and their

Analysis and results Assessment of the measures The measurement model was evaluated for overall fit with the data, reliability, and convergent and discriminant validity. First, reliability and validity tests were conducted (Churchill, 1979). The properties of all of the items were located as reflective measures on their respective factors and evaluated via comprehensive confirmatory factor analysis (CFA) using Table I Construct

Measure items

References

Recovery satisfaction

Overall, I was satisfied with the COMPANY’s handling my complaints (v1) In general, I was satisfied with the outcome that I received from the COMPANY (v2) I was happy with the overall process of the COMPANY’s handling my complaints (v3)

Tax et al. (1998); Weun et al. (2004)

Customer trust

Generally speaking, I trust the company (v4) Overall, I can confidently rely on the company (v5) The company is safe to patronize (v6)

Xie and Peng (2009); Moorman et al. (1993)

Perceived corporate social responsibility (CSR)

The company _____________________ Always respected the norms defined in the law when carrying out its activities (v7) Behaved ethically/honestly with its customers (v8) Respected that ethical principles in its relationships has priority over achieving superior economic performance (v9)

Ma del Mar Garcıá de los Salmones et al., (2005)

Loyalty

When choosing the same product category, I considered the company as my first choice (v10) I will continue to visit the company in the future (v11) I intend to visit the company, even if other alternatives are available (v12)

Yim et al. (2008)

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Table II Summary of measurement results Measurement items

Factor loading

t-values

Recovery satisfaction

V1 V2 V3

0.981 0.943 0.944

Customer Trust

V4 V5 V6

Perceived corporate social responsibility (CSR)

Loyalty

Construct

Composite reliabilitya

Average variance extracted (AVE)b

26.09 24.220 24.276

0.970

0.914

0.932 0.950 0.937

23.715 24.522 23.911

0.972

0.886

V7 V8 V9

0.927 0.939 0.828

19.373 23.844 23.329

0.927

0.809

V10 V11 V12

0.922 0.956 0.889

23.177 24.740 21.759

0.945

0.851

Table III Interconstruct correlations Variables Recovery satisfaction Customer trust Perceived CSR Loyalty

Recovery satisfaction – 0.810 0.717 0.712

(0.020) (0.028) (0.028)

Customer trust 0.656 – 0.893 0.914

(0.014) (0.011)

Perceived CSR 0.514 0.797 – 0.861

(0.017)

Loyalty 0.507 0.835 0.741 –

Notes: CSR ¼ Ethical-legal corporate social responsibility; Intercorrelations are presented in the lower triangle of the matrix. Standard errors appear in parentheses. Squared Correlations are given in the upper triangle of the matrix

significance are shown in Figure 1. The parameter estimates were consistent with the proposed direction of the hypothesized paths, and all hypotheses (H1, H2, H3, H4, and H5) were supported. H1 and H2 are related to paths from recovery satisfaction to loyalty via customer trust. In an attempt to investigate whether customer trust mediates the link between recovery satisfaction and loyalty, we conducted a mediation analysis using SEM that allowed us to compare different rival models

and account for measurement effects. We analyzed three models to show the existence of the mediation effect of customer trust on the relationship between recovery satisfaction and loyalty, as Tables V and VI show. To verify the existence of the mediation effect, four conditions should hold (Andrews et al. 2004). First, the predictor variable (recovery satisfaction) should significantly influence the mediating variable (customer trust). Second, the mediator (customer trust) should significantly influence the

Figure 1 Structural equation model with the estimated path coefficients

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Table IV Structural equation model: path coefficients Hypothesized path Recovery satisfaction ! Customer trust Customer trust ! Loyalty Recovery satisfaction ! Perceived CSR Perceived CSR ! Customer trust Perceived CSR ! Loyalty

Hypothesis

Standardized coefficient

t-value

Results

H1 H2 H3 H4 H5

0.343 0.702 0.716 0.647 0.235

9.165 * 10.055 * 15.368 * 14.414 * 3.428 *

Accepted Accepted Accepted Accepted Accepted

Notes: * p , 0:01

Table V SEM results for mediation effect of customer trust on the relationship between recovery satisfaction and loyalty Model specifications Model 1 Model 2 Model 3

x2

df

x2diff (df diff )

CFI

GFI

95.399 15.000 92.34

25 8 24

Comparison base 0.997 3.059(1)a

0.985 0.987 0.985

0.946

(b ¼ 0:716, p , 0:01) in accordance with H3. Perceived CSR has a significant positive impact on customer trust (b ¼ 0:647, p , 0:01); hence, H4 is supported. The link between perceived CSR and loyalty (b ¼ 0:235, p , 0:01) is also significant, creating support for H5. This indicates that positive consumer assessments of CSR lead to a greater firm loyalty. The significant positive relationship between perceived CSR and customer trust (H4) indicates that perceived CSR has a positive impact on customer trust after service recovery. Customer trust, in turn, significantly influences customer loyalty (H4), which indicates that customer trust may mediate the relationship between perceived CSR and loyalty. As a result, we investigated the mediating role of customer trust on perceived CSR and loyalty. We analyzed three models to show the mediating effect of customer trust on the relationship between perceived CSR and loyalty, as Tables VII and VIII show. Consistent with the previous mediation analysis conducted using SEM, four conditions must hold to demonstrate the mediation effect (Andrews et al., 2004). First, the predictor variable (CSR) should significantly influence the mediating variable (customer trust). Second, the mediator (customer trust) should significantly influence the dependent variable (loyalty). Third, the predictor (CSR) should significantly influence the dependent variable (loyalty). Fourth, the impact

0.949

Notes: a The results of the difference between Model 1 and Model 3. The difference was not significant at p ¼ 0:05

Table VI SEM results for mediation effect of customer trust on the relationship between recovery satisfaction and loyalty Model 1 RS ! CT CT ! Loyalty RS ! Loyalty

Full mediation Model 2

Model 3

0.711 *

0.811 * 0.984 * 2 0.090

0.805 * 0.912 *

Notes: * p , 0:01; RS ¼ recovery satisfaction; CT ¼ customer trust; Model 2 does not include the mediator of customer trust; Model 3 includes the mediator of customer trust

dependent variable (loyalty). Third, the predictor (recovery satisfaction) should significantly influence the dependent variable (loyalty). Fourth, the impact of the predictor (perceived CSR) should not be significant (for full mediation) or should be reduced in strength (for partial mediation) after we control for the mediator variable (customer trust). Model 1 meets the first two conditions. According to the results, recovery satisfaction (predictor) has a significant impact on customer trust (mediator), and customer trust also significantly influences loyalty (dependent variable). Model 2 was designed to test the third condition, and the results also indicate that recovery satisfaction (predictor) significantly influences loyalty (dependent variable). Model 3 was conducted with recovery satisfaction and customer trust as the predictor and loyalty as the dependent variable to determine whether the effects of recovery satisfaction on loyalty would become insignificant or less significant. The Model 3 results show that the effects of recovery satisfaction on loyalty become insignificant after the inclusion of the mediator, customer trust. The remaining hypotheses address the relationship between perceived CSR and constructs such as recovery satisfaction, customer trust, and loyalty. Satisfaction with recovery efforts has a significant positive influence on perception of CSR

Table VII SEM results for mediation effect of customer trust on the relationship between perceived CSR and loyalty Model specifications Model 1 Model 2 Model 3

x2

df

x2diff (df diff )

CFI

GFI

81.637 19.176 72.410

25 8 24

Comparison base

0.987 0.995 0.989

0.955 0.983 0.960

9.227 * *(1)a

Note: a The results of the difference between Model 1 and Model 3

Table VIII SEM results for mediation effect of customer trust on the relationship between perceived CSR and loyalty Model 1 Perceived CSR ! CT CT ! Loyalty Perceived CSR ! Loyalty

Full mediation Model 2

Model 3

0.862 *

0 .893 * 0.724 * 0.214 *

0.901 * 0.922 *

Notes: * p , 0:01; CSR ¼ corporate social responsibility; CT ¼ customer trust; Model 2 does not include the mediator of customer trust; Model 3 includes the mediator of customer trust

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of the predictor (CSR) should not be significant (for full mediation) or should be reduced in strength (for partial mediation) after we control for the mediator variable (loyalty). Model 1 was intended to test whether the first two conditions are fulfilled. According to the results, perceived CSR (predictor) has a significant impact on customer trust (mediator), and customer trust also significantly influences loyalty (dependent variable). Model 2 tests whether the third condition is fulfilled, and the results also indicate that perceived CSR (predictor) significantly influences loyalty (dependent variable). Model 3 was conducted using perceived CSR and customer trust as the predictors and loyalty as the dependent variable to determine whether the effects of perceived CSR on loyalty become insignificant or less significant. The Model 3 results show the partial mediating effect of customer trust on the relationship between perceived CSR and loyalty.

and other constructs, the present research focused on the relationships between perceived CSR and other constructs in the context of service failure and recovery. Previous research has suggested that a link exists between trust and perceived CSR. Paine (2000) posits that the maintenance of high ethical standards provides the basis for trust in companies. Ethical employee behavior has also been found to have a positive influence on customer trust (Roman, 2003). The support for H4 demonstrates that there is a positive relationship between the ethical-legal aspects of perceived CSR and customer trust after service failure and recovery. Because service failure is considered to indicate a broken promise between a company and customers (Aaker et al., 2004), the restoration of customer trust is crucial after service failure. The findings of the present study suggest that perceptions of CSR have a positive impact on customer trust after service failure and recovery. Furthermore, the findings presented here provide evidence of the relationship between perceived CSR and loyalty. Previous research has demonstrated the link between customer perception of corporate ethics and loyalty (Gundlach and Murphy, 1993; Roman, 2003). Consistent with previous research, the present research shows that customers’ positive perceptions of firm CSR have a positive influence on loyalty after service failure and recovery. The findings of the present research are particularly noteworthy because this is the first research that proves the link between perceived CSR and customer trust and loyalty in the context of service failure and recovery.

Discussion and implications The present research investigated the role of CSR with a focus on ethical and legal elements considerations and customer trust in the context of recovery satisfaction and loyalty after service failure. First, this research aimed to examine whether recovery satisfaction influences perceptions of CSR. The results of the hypothesis test provide support for the effect of recovery satisfaction on customer perceptions of CSR. Secondly, we investigated the effects of perceptions of CSR on customer trust and loyalty after the provision of a service. Finally, we examined the mediating role of customer trust in improving customer relationships after service failure.

The mediating role of customer trust in service recovery Service failure exposes customer vulnerability, doubt, and uncertainties, which may undermine firm relationships with customers (Boon and Holmes, 1999). Therefore, it is very important that firms restore their relationship with customers after service failure. Nonetheless, there are few empirical studies or theoretical articles that have examined customer trust as a means of restoring relationships after service failure (Tax et al. 1998; La and Choi, 2010). The results show that customer trust serves as a key mediating variable in the relationship between service recovery and loyalty. Successful recovery satisfaction may not be sufficient to guarantee the restoration of loyalty unless customer trust is restored. After a service failure, customers are likely to be more skeptical or cautious in resuming the relationship. This may make rebuilding customer trust challenging. On this basis, how can a service provider regain customer trust? The current findings suggest that CSR initiatives can help to rebuild customer trust. As such, marketers need to design service recovery strategies that can enhance customer trust to rebuild the relationship with customers. Our findings also suggest that customer trust serves as a mediator in the relationship between perceived CSR and loyalty. The findings demonstrate that customer trust partially mediates the relationship between perceived CSR and loyalty, and that the effect of this mediation is strong. The direct path from perceived CSR to loyalty is significant, but the relationship is significantly weaker than that between customer trust to loyalty. The strong partial mediation effect of customer trust indicates that consumers’ positive perceptions of CSR lead to customer trust and that customer trust, in turn, influences loyalty. Regaining customer trust is a critical intermediate step

The effect of recovery satisfaction on perceptions of CSR after service failure and recovery Service recovery encounters following service failure are considered critical “moments of truth” because they determine customer relationships (Smith and Bolton, 1998). A company’s response has a potential to strengthen the relationship or aggravate the situation: customers can become even more loyal after service recovery, but they may also switch service providers (Keaveney, 1995). Therefore, wellimplemented service recovery efforts are essential (Fornell and Wernerfelt, 1987). Satisfaction with service recovery can also lead to outcomes such as enhanced loyalty and positive word-of-mouth (Blodgett et al. 1997; Smith and Bolton, 1998). Extending previous research on outcomes of service recovery, this study presents the empirical evidence of the influence of recovery satisfaction on perceptions of CSR. The spillover effect of recovery satisfaction after service failure is not limited to outcomes such as loyalty and word-of-mouth; rather, it also creates changes in perceptions of CSR, which are also a critical determinant of long-term relationships between customers and companies. The effects of perceptions of CSR on customer trust and loyalty after service failure and recovery Corporate moral conduct has a serious impact on firm relationships with customers (Lagace et al. 1991), and unethical marketing behavior adversely influences consumers’ attitudes (Folkes and Kamins, 1999), satisfaction (Alexander, 2002), and behavioral intentions (Whalen et al. 1991). In an attempt to further deepen our understanding of the relationships between perceived CSR 229




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in the process of service recovery. It mediates not only the relationship between recovery satisfaction and loyalty but also the relationship between perceptions of CSR and loyalty. Therefore, rebuilding customer trust is pivotal in service failure recovery because customer satisfaction with service recovery attempts may not itself rebuild loyalty.

broad concept with various dimensions, which include the economic and philanthropic components in addition to the ethnic-legal component, we recommend that future research analyze the relationship between consumers’ perception of CSR which encompass all three dimensions and the other variables such as recovery satisfaction, customer trust, loyalty, and word-of-mouth. Also, future research may extend the present research by examining the relationship between perceived CSR and customer trust further. Second, recall bias may have affected our survey data. Even though the participants’ responses were based on their memory of firms’ actual recovery performance during the previous year, recall bias may have influenced their responses (Tax et al. 1998). Therefore, we suggest that future research use experimental methods to address this concern. An experimental setting in which participants are asked to respond to imaginary service failure scenarios may yield less biased results. However, this approach may also pose new problems: for instance, participants may feel less involved in imaginary failure situations, and hence, their responses may be less valid than their responses to actual failure situations. Nevertheless, this approach may still provide a complement to the present research. Third, we did not consider the impact of the initial level of customer trust and loyalty toward the service providers in question prior to each instance of service failure. As previously suggested (Berry, 1995), a strong firm-customer relationship may provide a buffer to firms in cases of service failure. Depending on the nature of their relationship with a company, customers may respond differently to service failures and subsequent recovery attempts. Customers who have maintained a long-term, high-quality relationship with a company may be more tolerant of a service failure, more receptive to service recovery efforts and, hence, more likely to remain loyal. We believe considering initial trust and loyalty may help to deepen our understanding of the relationships among various key constructs after service failure and recovery. Last, the model used in the current study was tested using a self-administered survey. Provided that recall bias might have influenced the results (Tax et al. 1998), the additional test using other methods may help enhance the validity of the current findings. However, we believe survey is appropriate in the current context as alternative methods such as laboratory experiments also have pitfalls in that they may not reflect the real world situation appropriately. Nonetheless, we acknowledge that a longitudinal design might be more desirable despite the challenges involved in capturing customer perceptions and responses they form over time. Further, by using students as subjects, this study might have limitations in the generalization of the results. Future studies employing multiple methods (e.g. experiment, quasiexperiment) and other type of respondents may help generalize the current outcomes.

Managerial implications First, managers may need to be aware of perceived CSR as a key variable in restoring customer loyalty. Customer satisfaction with service recovery is known to lead to various outcomes, including enhanced cumulative satisfaction, loyalty, and positive word-of-mouth. In addition to these relationship outcome variables, the results of the present research suggest that customer satisfaction with service recovery efforts has a significant impact on perception of CSR and that perceived CSR, in turn, enhances customer loyalty to firms (Gundlach and Murphy, 1993; Roman, 2003). Previous research reported that CSR influence consumer product responses (Brown, 1998; Brown and Dacin, 1997), customer-company identification (Sen and Bhattacharya, 2001), customers’ product attitude (Berens et al., 2005), and even a firm’s market value (Luo and Bhattacharya, 2006). Our results further suggest that perceived CSR has a direct and indirect positive effect on loyalty; perceived CSR has a direct impact on loyalty, but it also has an indirect influence on loyalty through customer trust. The essential role of perceived CSR as identified in the present research indicates that managers should recognize the influence of perceived CSR and monitor service recovery encounters to ensure that the recovery process improves the customer perceptions of firm CSR. Managers often face tough choices in allocating company resources and in prioritizing strategic initiatives after service failure. Our findings that CSR contributes to loyalty suggest that managers can obtain substantial benefits by integrating CSR initiatives with service recovery strategies. It is also noteworthy that recovery satisfaction does not directly lead to loyalty but instead indirectly influences loyalty through customer trust and/or perceived CSR. Previous research has indicated that satisfaction with a service provider leads to increased customer loyalty. Several researchers state that satisfaction with service encounters greater perceived service quality, which in turn leads to heightened loyalty (Bitner, 1995). On the other hand, the present study indicates that recovery satisfaction may not lead to the restoration of loyalty unless service recovery attempts ensure a higher level of customer trust and perceived CSR. In other words, building customer trust and enhancing consumers’ perceived CSR are important intermediate step in converting recovery satisfaction into customer loyalty. Therefore, in designing and implementing service recovery strategies, managers should carefully plan and manage that service recovery encounters increase not only recovery satisfaction itself, but also enhance customer trust and perceived CSR.

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Limitations and opportunities for future research First, the present research focused on the ethical-legal component of CSR. According to Salmones et al. (2005), organizations often confront ethical dilemmas and decisions, and their response is related to CSR. As such, previous research indicates that the ethical-legal dimension is a primary component of CSR. However, given that CSR is considered a

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Corresponding author Beomjoon Choi can be contacted at: [email protected]

Executive summary and implications for managers and executives This summary has been provided to allow managers and executives a rapid appreciation of the content of this article. Those with a particular interest in the topic covered may then read the article in toto to take advantage of the more comprehensive description of the 232




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research undertaken and its results to get the full benefits of the material present.

suggest that perceptions of CSR have a positive impact on customer trust after service failure and recovery. Furthermore, they provide evidence of the relationship between perceived CSR and loyalty. Customers’ positive perceptions of firm CSR have a positive influence on loyalty after service failure and recovery. The findings are particularly noteworthy because this is thought to be the first research that proves the link between perceived CSR and customer trust and loyalty in the context of service failure and recovery. Because service recovery encounters provide customers with a chance to reassess a service provider, customer satisfaction during service recovery encounters will have an influence on their perception of CSR. Recovery satisfaction may lead not only to enhanced loyalty and the spread of positive word-of-mouth but also to more positive perception of CSR. A spillover effect of recovery satisfaction on perceived CSR is anticipated because service failure and recovery encounters provide customers with new information that enables them to update their perceptions regarding firm CSR. The research further suggests that perceived CSR has a direct and indirect positive effect on loyalty. It has a direct impact on loyalty, but it also has an indirect influence through customer trust. The essential role of perceived CSR indicates that managers should recognize the influence of perceived CSR and monitor service recovery encounters to ensure that the recovery process improves the customer perceptions of firm CSR. It is interesting to note that recovery satisfaction does not directly lead to loyalty. Recovery satisfaction may not lead to the restoration of loyalty unless service recovery attempts ensure a higher level of customer trust and perceived CSR. In other words, building customer trust and enhancing consumers’ perceived CSR are important intermediate step in converting recovery satisfaction into customer loyalty. Therefore, in designing and implementing service recovery strategies, managers should carefully plan and manage to ensure service recovery encounters increase not only recovery satisfaction itself, but also enhance customer trust and perceived CSR. Service failure exposes customer vulnerability, doubt and uncertainties which may undermine the relationship with the firm. Successful recovery satisfaction might not be enough to guarantee the restoration of loyalty unless customer trust is restored. After a service failure customers are likely to be more skeptical or cautious in resuming the relationship. This research suggests that CSR initiatives can help to rebuild that customer trust.

How a company copes when it has bungled a service encounter is one of those “moments of truth” when the organization can either make amends in such a way as to make the relationship with the customer even stronger than it would have been without the screw up – or it can mishandle the opportunity to recover credibility and find itself even deeper in the mire. At a time when more and more consumers are interested in a company’s ethical stance – how it views and accepts its corporate social responsibility – the way in which it handles recovery from a service failure can have additional impact on that relationship with the customer. For instance, customers who have experienced service failure may encounter dishonest and intimidating behavior by service providers or unwillingness to address the issue in a timely manner. Not only are those customers likely to be dissatisfied with the service recovery process, but also to develop more negative perceptions of the firm’s CSR. Managers need to be aware of perceived CSR as a key variable in restoring customer loyalty. Customer satisfaction with service recovery is known to lead to various outcomes, including enhanced cumulative satisfaction, loyalty, and positive word-of-mouth. In “The impact of corporate social responsibility (CSR) and customer trust on the restoration of loyalty after service failure and recovery” Beomjoon Choi and Suna La suggest that customer satisfaction with service recovery efforts also has a significant impact on perception of CSR and that perceived CSR, in turn, enhances customer loyalty to firms. Managers face tough choices in allocating company resources and in prioritizing strategic initiatives after service failure. As CSR contributes to loyalty, it is suggested that they can obtain substantial benefits by integrating CSR initiatives with service recovery strategies. Corporate moral conduct has a serious impact on firm relationships with customers and unethical marketing behavior adversely influences consumers’ attitudes, satisfaction and behavioral intentions. Bearing this in mind, the study focused on the relationships between perceived CSR and other constructs in the context of service failure and recovery. Previous research has suggested that a link exists between trust and perceived CSR and it has been suggested that the maintenance of high ethical standards provides the basis for trust in companies. Ethical employee behavior has also been found to have a positive influence on customer trust. Because service failure is considered to indicate a broken promise between a company and customers, the restoration of customer trust is crucial. The study findings

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