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Journal of Services Marketing

The impact of corporate social responsibility (CSR) and customer trust on the restoration of loyalty after service failure
and recovery
Beomjoon Choi Suna La

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To cite this document:
Beomjoon Choi Suna La , (2013),"The impact of corporate social responsibility (CSR) and customer trust on the restoration of loyalty after
service failure and recovery", Journal of Services Marketing, Vol. 27 Iss 3 pp. 223 - 233
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(2015),"Corporate social responsibility and customer loyalty: exploring the role of identification, satisfaction and type of company", Journal of
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(2014),"The impact of corporate social responsibility (CSR) performance and perceived brand quality on customer-based brand preference",
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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

Downloaded by Trisakti School of Management, STIE Trisakti At 16:32 01 November 2016 (PT)

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
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Journal of Services Marketing


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

223

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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 firms 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 firms trustworthiness based on their level
of satisfaction with the service recovery process (Aaker et al.
2004). The firms 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 firms 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 customers best
interest (Berry, 1999; Delgado-Ballester and MunueraAleman, 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; Gronroos, 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 partys 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 (Gronroos, 1988). Because a companys
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 customers 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 providers 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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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

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 firms 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
Tobins 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; Gurhan-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
firms 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 companys 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 firms 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 providers 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.

225

There will be a positive relationship between customer


perceptions of CSR and loyalty after service failure and
successful recovery.

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

Research methodology

AMOS 18.0. The overall measurement model fit indices


indicate that the comprehensive confirmatory factor model
fits the data well (chi square 134:364, df 48, p 0:000,
CFI 0:986,
TLI 0:980,
NFI 0:978,
RMSR
(standardized RMR 0:019, RMSEA 0:070).
Cronbachs 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).

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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 firms
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 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 132:276, df 49, p 0:000). The
data for all other relevant fit indices are also within an
acceptable range (CFI 0:986, TLI 0:980, NF 0:978,
RMSR 0:020, RMSEA 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 COMPANYs 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 COMPANYs 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 Garca 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)

226

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

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

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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 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

227

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

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
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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 0:716, p , 0:01) in accordance with H3. Perceived CSR


has a significant positive impact on customer trust
(b 0:647, p , 0:01); hence, H4 is supported. The link
between perceived CSR and loyalty (b 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 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 recovery satisfaction; CT 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 corporate social responsibility; CT customer


trust; Model 2 does not include the mediator of customer trust; Model 3
includes the mediator of customer trust

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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

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 companys 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
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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

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 firms 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


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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: bchoi@csus.edu

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
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Beomjoon Choi and Suna La

Volume 27 Number 3 2013 223 233

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 companys 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 firms 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

(A precis of the article The impact of corporate social


responsibility (CSR) and customer trust on the restoration of
loyalty after service failure and recovery. Supplied by Marketing
Consultants for Emerald.)

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