Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence

Abstract

This paper presents an industry equilibrium model where firms have a choice to engage in corporate social responsibility (CSR) activities. We model CSR activities as a product differentiation strategy allowing firms to benefit from higher profit margins. The model predicts that CSR decreases systematic risk and increases firm value and that these effects are stronger for firms with high product differentiation. We find supporting evidence for our predictions. We address a potential endogeneity problem by instrumenting CSR using data on the political affiliation of the firm’s home state.

Keywords: beta, corporate social responsibility, firm value, industry equilibrium, product differentiation, systematic risk

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