DP9533 Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence

Author(s): Rui Albuquerque, Yrjö Koskinen, Chendi Zhang
Publication Date: July 2013
Date Revised: June 2017
Keyword(s): beta, corporate social responsibility, firm value, industry equilibrium, product differentiation, systematic risk
JEL(s): D43, G12, G32, L13, M14
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9533

This paper presents an industry equilibrium model where firms have a choice to engage in corporate social responsibility (CSR) activities. We model CSR activities as a product differentiation strategy allowing 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.