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 affeects 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 differentiated 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: 65

Keywords: corporate social responsibility, customer loyalty, systematic risk

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

working papers series