Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence

Award Winner: 
Winner of the 2014 Standard Life Investments Finance Prize (Best paper in the Finance Working Paper series)

Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence

Rui Albuquerque, Chendi Zhang, Yrjö Koskinen

Series number :

Serial Number: 
359/2013

Date posted :

June 01 2013

Last revised :

December 05 2017
SSRN Share

Keywords

  • Corporate Social Responsibility • 
  • systematic risk • 
  • corporate valuation • 
  • customer loyalty • 
  • industry equilibrium

This paper presents an industry equilibrium model where firms have a choice to engage in corporate social responsibility (CSR) activities. We model CSR as an investment to increase product differentiation that allows firms to benefit from higher profit margins.

The model predicts that CSR decreases systematic risk and increases firm value and that these effects are stronger for firms with high product differentiation. We find supporting evidence for our predictions. We address a potential endogeneity problem by instrumenting CSR using data on the political affiliation of the firm's home state.

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Authors

Real name:
Chendi Zhang