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

51 Pages Posted: 8 Jun 2021 Last revised: 28 Aug 2022

See all articles by Jonathan Berkovitch

Jonathan Berkovitch

Luiss Guido Carli University - Department of Business and Management

Doron Israeli

IDC Herzliya - Arison School of Business; Nazarbayev University - Graduate School of Business

Atanu Rakshit

Nazarbayev University - Graduate School of Business

Suhas A. Sridharan

Emory University - Goizueta Business School

Date Written: August 26, 2022

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

Suggested Citation

Berkovitch, Jonathan and Israeli, Doron and Rakshit, Atanu and Sridharan, Suhas A., Does CSR Engender Trust? Evidence From Investor Reactions to Corporate Disclosures (August 26, 2022). Available at SSRN: https://ssrn.com/abstract=3858135 or http://dx.doi.org/10.2139/ssrn.3858135

Jonathan Berkovitch

Luiss Guido Carli University - Department of Business and Management ( email )

Viale Pola 12
Rome, 00198
Italy

Doron Israeli (Contact Author)

IDC Herzliya - Arison School of Business ( email )

P.O. Box 167
Herzliya, 46150
Israel

Nazarbayev University - Graduate School of Business ( email )

53 Kabanbay Batyra Avenue
Nur-Sultan, 010000
Kazakhstan

Atanu Rakshit

Nazarbayev University - Graduate School of Business ( email )

53 Kabanbay Batyra Avenue
Astana, 010000
Kazakhstan

Suhas A. Sridharan

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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