Corporate Social Responsibility and Stock Price Crash Risk

44 Pages Posted: 19 Feb 2014  

Yongtae Kim

Santa Clara University - Leavey School of Business

Haidan Li

Santa Clara University - Leavey School of Business

Siqi Li

Santa Clara University - Leavey School of Business

Date Written: February 18, 2014

Abstract

This study investigates whether corporate social responsibility (CSR) mitigates or contributes to stock price crash risk. Crash risk, defined as the conditional skewness of return distribution, captures asymmetry in risk and is important for investment decisions and risk management. If socially responsible firms commit to a high standard of transparency and engage in less bad news hoarding, they would have lower crash risk. However, if managers engage in CSR to cover up bad news and divert shareholder scrutiny, CSR would be associated with higher crash risk. Our findings support the mitigating effect of CSR on crash risk. We find that firms' CSR performance is negatively associated with future crash risk after controlling for other predictors of crash risk. The result holds after we account for potential endogeneity. Moreover, the mitigating effect of CSR on crash risk is more pronounced when firms have less effective corporate governance or a lower level of institutional ownership. The results are consistent with the notion that firms that actively engage in CSR also refrain from bad news hoarding behavior and thus reducing crash risk. This role of CSR is particularly important when governance mechanisms, such as monitoring by boards or institutional investors, are weak.

Keywords: Corporate Social Responsibility, Crash Risk, Financial Reporting Transparency

JEL Classification: G14, G30, M14, M40

Suggested Citation

Kim, Yongtae and Li, Haidan and Li, Siqi, Corporate Social Responsibility and Stock Price Crash Risk (February 18, 2014). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2397629

Yongtae Kim (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
(408) 554-4667 (Phone)
(408) 554-2331 (Fax)

Haidan Li

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
408-554-5181 (Phone)

Siqi Li

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

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