Measuring the Unmeasurable: CSR Divergence and Future Stock Price Crash Risk

Abstract

This paper examines the effect of corporate social responsibility (CSR) on the future stock price crash risk using a sample of Chinese listed firms. We employ the divergence of CSR ratings for measuring the unmeasurable outcome uncertainty, and find that conditional on firms’ CSR performance, future stock price crash risk will arise with the CSR divergence. Further results show that the moderating effect is more pronounced for firms with weaker investor protection or higher agency costs. We conclude that firms with higher CSR divergence have more severe agency problem which is complementary to the literature where stakeholders’ theory dominates.

Keywords: CSR divergence, stock price crash risk, outcome uncertainty, agency theory