Corporate Social Responsibility: An Umbrella or a Puddle on a Rainy Day? Evidence Surrounding Corporate Financial Misconduct

Abstract

We examine the way a fraudulent firm’s pre‐ and postmisconduct corporate social responsibility engagement is associated with its stock performance to investigate the reputational role of corporate social responsibility (CSR). In the short term, firms with good CSR performance suffer smaller market penalties upon the revelation of financial wrongdoing, supporting the buffer effect, as opposed to the backfire effect, of a good social image. We also find that the misbehaving firms’ post‐misconduct CSR efforts are negatively associated with delisting probabilities, and positively with stock returns. These findings support the argument that increasing post‐crisis CSR engagement can be an effective remedy for a damaged reputation.

Keywords: corporate social responsibility, financial misconduct, insurance, market penalty, reputation repair

JEL Classification: G30, G41, M14, M41