Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence
59 Pages Posted: 7 Feb 2013 Last revised: 9 Jul 2013
Date Written: May 1, 2013
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
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