The Impact of Corporate Social Responsibility on Firm Value - The Role of Shareholder Preferences

Abstract

Whether CSR increases shareholder value is controversially debated and empirical evidence is
mixed. Several theoretical models have recently emerged suggesting that CSR increases value
for certain shareholders. We derive and test two hypotheses: the capital market splits into
submarkets of CSR-preferring and preference-neutral investors, and CSR is appreciated on the
former but not on the latter. Developing a new method to measure shareholder preferences
from observable investment habits, we show that (ir)responsible firms concentrate in
(ir)responsible portfolios, confirming hypothesis one. Confirming hypothesis two, CSR
robustly increases firm value if shareholders have a CSR-preference but not if they are
preference-neutral. The resulting CSR-premium is economically relevant. These findings also
hold in a dynamic analysis. This has important implications for strategic management decisions
as CSR investments only pay off for firms held by responsible investors.

Keywords: firm value, corporate social responsibility, shareholder preferences, environmental performance, capital market separation

JEL Classification: G11, G15, G23, G30, M14