Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence
Rui A. Albuquerque
Boston University - Questrom School of Business; 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
The Wharton School - University of Pennsylvania
June 1, 2014
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 show that CSR decreases systematic risk and increases firm value. These effects are stronger for firms producing differentiated goods and when consumers’ expenditure share on CSR goods is small. We find supporting evidence for our predictions. In our 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: 70
Keywords: corporate social responsibility, systematic risk, expected return, corporate valuation, customer loyalty, industry equilibrium
JEL Classification: G12, G32, D43, L13, M14
Date posted: January 2, 2012 ; Last revised: June 13, 2014
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