Corporate Social Responsibility and the Market Reaction to Negative Events: Evidence from Inadvertent and Fraudulent Restatement Announcements

Abstract

We advance a theory asserting that CSR performance may exacerbate, not necessarily moderate, a company’s negative stock-price response to negative events. In testing this theory, we hypothesize and find that CSR performance alleviates (magnifies) the immediate negative market response to inadvertent (fraudulent) restatement announcements, and that these findings are robust to specifications that consider alternative CSR measures and a multitude of control variables shown by prior research to have explanatory power for the cross sectional variation in stock returns. Overall, using restatement announcements as a channel through which CSR performance may affect company value, we show, in contrast to prior research, that depending on management conduct leading to the restatement, a company’s CSR performance may destroy, not necessarily enhance, firm value. Our findings may, thus, inform researchers, market participants, and regulators.

Keywords: negative events; accounting restatements; corporate social responsibility; accounting fraud; inadvertent accounting errors.