Stock Analysts and Corporate Social Responsibility

Abstract

This paper investigates the informational motive of corporate policy in corporate social responsibility (CSR), as managers’ assessments of cost-benefit tradeoff of social goodness are likely to be influenced by the information supply from stock analysts. We exploit the exogenous changes in analyst coverage to measure variations in firms’ information supply, using brokerage closures and mergers as natural experiments. The results show that a drop in analyst coverage and the consequently reduced information supply cause a firm to engage in less socially responsible activities. And the results cannot be explained by the variations in financial constraints, through which analysts influence other corporate investments. Taken together, our findings suggest that firms are more likely to “do good” if the market has been provided with more information to value corporate social goodness.

Keywords: Analyst coverage; Information production; Corporate social responsibility

JEL Classification: G24; G30