Does CSR Engender Trust? Evidence From Investor Reactions to Corporate Disclosures

Abstract

We investigate whether a firm’s corporate social responsibility activity (CSR) affects investor trust. Motivated by the observation that trust increases disclosure credibility and thereby facilitates greater informational price efficiency, we address our question by examining the relation between levels of and changes in CSR and stock price discovery. We find robust evidence that CSR enhances investor trust as reflected in disclosure credibility; firms with more CSR enjoy faster incorporation of earnings news into stock prices, and lower investor uncertainty around earnings announcements. Using a regression discontinuity design, we strengthen our identification of the effect of CSR on the speed with which stock prices reflect earnings news. Consistent with this effect arising from greater investor trust, we find that CSR is associated with faster price discovery only for positive news. This asymmetry reinforces the perspective that CSR leads investors to maintain a positive view of the firm, even when the firm delivers negative news.

Keywords: Corporate social responsibility activity (CSR), investor trust, informational price efficiency, price discovery

JEL Classification: G24, M14, M41, Q56