Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence
Rui A. Albuquerque
Boston University - School of Management; Católica-Lisbon School of Business and Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
University of Iowa - Henry B. Tippie College of Business
Boston University - School of Management; Centre for Economic Policy Research (CEPR)
ECGI - Finance Working Paper No. 359
This paper presents an industry equilibrium model where firms can choose to engage in corporate social responsibility (CSR) activities. We model CSR activities as an investment in customer loyalty and derive predictions for how CSR affects systematic risk and firm value. The paper predicts the following: CSR firms exhibit lower systematic risk and this effect is stronger for differentiated goods and when consumers’ expenditure share on CSR goods is low; CSR firms have higher firm value; and the ratio of CSR profits to non-CSR profits is countercyclical. We find supporting evidence for all of our predictions. In the empirical tests, we address a potential endogeneity problem by instrumenting CSR using data on the political affliation of the firm’s home state, and data on environmental and engineering disasters and product recalls.
Number of Pages in PDF File: 67
Keywords: corporate social responsibility, systematic risk, corporate valuation, customer loyalty, industry equilibrium
JEL Classification: G12, G32, D43, L13, M14working papers series
Date posted: January 2, 2012 ; Last revised: July 9, 2013
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