Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence

Abstract:     
This paper presents an industry equilibrium model where firms can choose to engage
in corporate social responsibility (CSR). We model CSR activities as an investment in
customer loyalty and derive predictions for how CSR affects systematic risk and firm
value. The paper tests the predictions empirically and finds evidence consistent with
the following: CSR firms exhibit lower systematic risk and this effect is stronger in
di§erentiated goods industries, in consumer goods industries and in industries where
the market capitalization of CSR firms is lowest; CSR firms have higher firm value; and,
the ratio of CSR profits to non-CSR profits is countercyclical. In the empirical tests,
we address a potential endogeneity problem by instrumenting CSR using data on the
political affiliation of the firm’s home state, and data on environmental and engineering
disasters and product recalls.

Number of Pages in PDF File: 59

Keywords: corporate social responsibility, customer loyalty, systematic risk, expected return, industry equilibrium

JEL Classification: G12, G32, D43, L13, M14

working papers series