Corporate Social Responsibility, Stakeholder Risk, and Idiosyncratic Volatility

30 Pages Posted: 6 Jul 2013 Last revised: 3 Mar 2014

See all articles by Leonardo Becchetti

Leonardo Becchetti

University of Rome Tor Vergata - Faculty of Economics

Rocco Ciciretti

Tor Vergata University of Rome - Department of Economics and Finance

Iftekhar Hasan

Fordham University - Gabelli School of Business; Bank of Finland

Date Written: July 4, 2013

Abstract

Idiosyncratic volatility (IV) is regarded as a measure of firm specific information and has been shown to be correlated with ex post lower stock returns. We explore the nexus between IV and corporate social responsibility (CSR) and document that IV is positively correlated with net aggregate CSR and is negatively correlated with a CSR specific risk factor (namely stakeholder risk). Our findings show that: (i) less (more) reliance on market information (firm specific information) implies more difficulty in predictive accuracy; (ii) negative correlation between IV and exposure to the above mentioned CSR risk dimension contributes to explain the puzzle of the negative excess returns of high IV portfolios widely documented in the literature. Our findings are consistent with the hypothesis that CSR reduces flexibility in answering to productive shocks via reduction of stakeholders’ wellbeing, thereby making earnings less predictable in conventional ways, even though they are less exposed to risk of conflicts with stakeholders.

Keywords: idiosyncratic volatility, corporate social responsibility, stakeholder risk

JEL Classification: D84, E44, F30, G17, C53

Suggested Citation

Becchetti, Leonardo and Ciciretti, Rocco and Hasan, Iftekhar, Corporate Social Responsibility, Stakeholder Risk, and Idiosyncratic Volatility (July 4, 2013). CEIS Working Paper No. 285. Available at SSRN: https://ssrn.com/abstract=2289720 or http://dx.doi.org/10.2139/ssrn.2289720

Leonardo Becchetti

University of Rome Tor Vergata - Faculty of Economics ( email )

Via Columbia, 2
I-00133 Rome
Italy

Rocco Ciciretti (Contact Author)

Tor Vergata University of Rome - Department of Economics and Finance ( email )

Via Columbia, 2
Roma, 00133
Italy
+39 06 72595925 (Phone)

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

Iftekhar Hasan

Fordham University - Gabelli School of Business ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

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