Stock Liquidity and Corporate Social Responsibility
53 Pages Posted: 6 Mar 2018 Last revised: 4 May 2019
Date Written: April 2019
We show that stock liquidity negatively affects firms’ corporate social responsibility (CSR) ratings. To identify the causal effect, we use the decimalization of stock trading as an exogenous shock to liquidity. The negative CSR effect of liquidity is more pronounced for firms where short-term institutional ownership is higher, CEOs’ wealth is more sensitive to firm value, CEOs approach the retirement age, analyst coverage is higher, or there are more covenants on firms’ bank debt. These findings suggest that high stock liquidity increases short-termism pressure and discourages firms from engaging in CSR activities, which are long-term in nature. Overall, our analysis reveals the potential disincentives created by stock liquidity in aligning the interest of shareholders and other stakeholders.
Keywords: Stock Liquidity, Corporate Social Responsibility (CSR), Investor Horizon, Short-Termism
JEL Classification: G12, G14, G32, M14
Suggested Citation: Suggested Citation