The relationship between corporate social responsibility and shareholder value: an empirical test of the risk management hypothesis

TLDR

Corporate social responsibility (CSR) activities may influence shareholder value, but it is unclear whether managers’ allocation of resources to CSR benefits shareholders. The study tests the insurance‑like hypothesis of CSR by examining whether certain types of CSR activities protect firms from negative events and extends the model to differentiate institutional from technical CSR. An event‑study analysis of 178 negative legal or regulatory actions from 1993 to 2003 was conducted, incorporating firm‑ and event‑specific characteristics to assess the CSR‑insurance link. Results show that institutional CSR activities confer an insurance‑like benefit to shareholders, whereas technical CSR activities targeting trading partners do not. © 2008 John Wiley & Sons, Ltd.

Abstract

Abstract Do shareholders gain when managers disperse corporate resources through activities classified as corporate social responsibility (CSR)? Strategy scholars have recently developed a theoretical model that links such activities to shareholder value when a firm suffers a negative event; we test key portions of this theory of the ‘insurance‐like’ property of CSR activity. We posit that such activity leads to positive attributions from stakeholders, who then temper their negative judgments and sanctions toward firms because of this goodwill. We extend the risk management model by theorizing that some types of CSR activities will be more likely to create goodwill and offer insurance‐like protection than other types. We delineate several firm and event specific characteristics that we expect to influence the link between CSR activities and an insurance effect. We then test our model using an event study of 178 negative legal/regulatory actions against firms throughout the 11 years from 1993–2003. We find that participation in institutional CSR activities—those aimed at a firm's secondary stakeholders or society at large—provides an ‘insurance‐like’ benefit, while participation in technical CSRs—those activities targeting a firm's trading partners—yields no such benefits. We conclude by considering the implications of our findings for future theorizing and research into the economic value of CSR engagement. Copyright © 2008 John Wiley & Sons, Ltd.