The Salience of Corporate Social Responsibility: Evidence from Air Pollution and Firm Performance

Abstract

We examine the impact of air pollution on investors’ valuation of corporate social responsibility (CSR). Utilizing China’s air pollution index, we observe that stocks with high CSR scores exhibit higher returns (accompanied by increased turnover and idiosyncratic risk) during periods of deteriorating local air quality. To delve into causality, we analyze a quasi-experiment involving a government policy that provides free heating (resulting in increased pollution) in the northern region of China during winter. Our results support the notion that investors pay heightened attention to CSR practices of local firms in response to elevated pollution levels. Furthermore, we substantiate this increased attention through an analysis of internet search volumes related to pollution and corporate social responsibility. Overall, our study underscores the salience of CSR when confronted with higher levels of local air pollution, shedding light on both the preference-based and risk-based explanations for investing in socially responsible stocks.

Keywords: air pollution, corporate social responsibility, stock returns and risks, internet search volumes, salience.

JEL Classification: G14, G15, G41.