Does CSR Engender Trust? Evidence From Investor Reactions to Corporate Disclosures
51 Pages Posted: 8 Jun 2021 Last revised: 19 Nov 2021
Date Written: November 18, 2021
We investigate whether a firm’s corporate social responsibility (CSR) activities affect 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 CSR and stock price discovery. We find robust evidence that CSR enhances investor trust as manifested in disclosure credibility; firms with more CSR enjoy faster incorporation of earnings news into stock prices, lower investor uncertainty around earnings announcements, and higher earnings response coefficients. 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 good news. Our inferences are robust to controls for characteristics of reported earnings and firms' information environment, as well as alternative measures of CSR.
Keywords: Corporate social responsibility (CSR), investor trust, informational price efficiency, price discovery
JEL Classification: G24, M14, M41, Q56
Suggested Citation: Suggested Citation