Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence

By Rui A. Albuquerque, Yrjö Koskinen, Chendi Zhang. Management Sciences, 2019

1,698 citations recorded by the source corpus.

This paper presents an industry equilibrium model where firms can choose to engage in corporate social responsibility (CSR) activities. We model CSR activities as an investment in customer loyalty and show that CSR decreases systematic risk and increases firm value. These effects are stronger for firms producing differentiated goods and when consumers' expenditure share on CSR goods is small. We find supporting evidence for our predictions. In our empirical tests, we address a potential endogeneity problem by instrumenting CSR using data on the political affiliation of the firm's home state, and data on environmental and engineering disasters and product recalls.

Subfields: Economics and Econometrics, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/fb2704b2eeb306bf9dab852c45e909f928645be3

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Citations in the corpus

Dissecting Climate Risks: Are they Reflected in Stock Prices? (2021, background): “Albuquerque et al. (2021) show a mechanism through which corporate social responsibility affects systematic risk.”
Going to Haven? Corporate Social Responsibility and Tax Avoidance (2019, background): “Albuquerque et al. (2014) relate CSR to firm value and systematic risk. Jamali et al. (2008) study the overlap between CSR and firms’ corporate governance. Masulis and Reza (2015) study how agency problems affect corporate philanthropy. Barnea and Rubin (2010) examine the relation between firms’ CSR”
Does responsible investing pay during economic downturns: Evidence from the COVID-19 pandemic (2020, background): “Hence, sustainability creates brand equity and brand loyalty for responsible businesses (see, e.g., Heal 2005; Flammer 2015; Albuquerque et al. 2019; Albuquerque et al. 2020).”
A Theory of Socially Responsible Investment (2020, background): “, 2019, Albuquerque et al., 2019). Moreover, we allow for the technology-specific social cost parameter ⌧ to be negative, in which case the technology generates a positive externality (a social good). 26This idea is related to Morgan and Tumlinson (2019) who provide a model in which shareholders of ”
Exploring environmental, social, and governance disclosure effects on the S&P 500 financial performance (2019, methodology): “Investors use the ESG score as an indicator of “ residual risk ” (Sharfman & Fernando, 2008), image maintenance (Albuquerque, Durnev, & Koskinen, 2012), and means to lower the cost of capital (El, Guedhami, Kwok, & Mishra, 2011).”
Understanding the Impact of ESG Practices in Corporate Finance (2021, background): “Albuquerque, Koskinen, and Zhang [17] found that CSR factor decreases systematic risk and improves ﬁrm value.”
Corporate immunity to the COVID-19 pandemic (2020, positive): “Influential theories view the firm as a nexus of formal and informal contracts between shareholders and other stakeholders, in which firm performance depends on the strength of those contracts ( Coase, 1937 ; Alchian and Demsetz, 1972 ; Jensen and Meckling, 1976 ).”