Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence

59 Pages Posted: 7 Feb 2013 Last revised: 9 Jul 2013

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Art Durnev

University of Iowa - Henry B. Tippie College of Business

Yrjo Koskinen

Haskayne School of Business, University of Calgary

Date Written: May 1, 2013

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 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.

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

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

Suggested Citation

Albuquerque, Rui A. and Durnev, Art and Koskinen, Yrjo, Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence (May 1, 2013). UCD & CalPERS Sustainability & Finance Symposium 2013. Available at SSRN: https://ssrn.com/abstract=2212814 or http://dx.doi.org/10.2139/ssrn.2212814

Rui A. Albuquerque

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chustnut Hill, MA 02467-3808
United States

HOME PAGE: http://ruialbuquerque.webs.com

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Artyom Durnev (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States
(514) 398-5394 (Phone)
(514) 398-3876 (Fax)

HOME PAGE: http://www.artdurnev.com

Yrjo J Koskinen

Haskayne School of Business, University of Calgary ( email )

SH 154, 2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada
+1-403-220-5540 (Phone)

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