Taste, Information, and Asset Prices: Implications for the Valuation of CSR

40 Pages Posted: 24 Jul 2015 Last revised: 12 Apr 2016

See all articles by Henry L. Friedman

Henry L. Friedman

University of California, Los Angeles (UCLA) - Accounting Area

Mirko Stanislav Heinle

University of Pennsylvania - Accounting Department

Date Written: November 15, 2015

Abstract

Firms often undertake activities that do not necessarily increase cash flows (e.g., costly investments in corporate social responsibility, or CSR), and some investors value these non-cash activities (i.e., they have a "taste" for these activities). We develop a model to capture this phenomenon and focus on the asset-pricing implications of differences in investors' tastes for firms' activities and outputs. Our model shows that, first, investor taste differences provide a basis for investor clientele effects that are endogenously determined by the shares demanded by different types of investors. Second, because the market must clear at one price, investors' demands are influenced by all dimensions of firm output even if their preferences are only over some dimensions. Third, information releases cause trading volume, even when all investors have the same information. Fourth, investor taste provides a rationale for corporate spin-offs that help firms better target their shareholder bases. Finally, individual social responsibility can lead to corporate social responsibility when managers care about stock price because price reacts to investments in CSR activities.

Keywords: asset pricing, taste, reporting, corporate social responsibility

JEL Classification: G11, G12, L30, M40

Suggested Citation

Friedman, Henry L. and Heinle, Mirko Stanislav, Taste, Information, and Asset Prices: Implications for the Valuation of CSR (November 15, 2015). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2635057 or http://dx.doi.org/10.2139/ssrn.2635057

Henry L. Friedman

University of California, Los Angeles (UCLA) - Accounting Area ( email )

D406 Anderson Complex
Los Angeles, CA 90095-1481
United States

Mirko Stanislav Heinle (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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