Corporate Social Responsibility and Asset Pricing in Industry Equilibrium

Abstract:     
This paper presents an industry equilibrium model of corporate social responsibility (CSR) and its asset pricing effects. We model CSR activities as an investment in higher customer loyalty. The model has predictions for how CSR affects systematic risk and expected returns for the firms making the investment decision. In addition, we study the effects of industry CSR trends on firms that choose not to invest in CSR. The paper tests the model predictions empirically and finds evidence consistent with the following: CSR firms exhibit lower systematic risk and expected returns, systematic risk of CSR firms has increased over time, the ratio of CSR profits to non-CSR profits is countercyclical, and, increased industry CSR adoption lowers systematic risk for non-adopters. In the empirical tests, we address a potential endogeneity problem by instrumenting CSR using data on environmental and engineering disasters and on product recalls.

Number of Pages in PDF File: 56

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

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

working papers series