Fishing the Corporate Social Responsibility Risk Factors

Abstract

A typical argument in the literature is that Corporate Social Responsibility (CSR) reduces the risk of conflicts with stakeholders. By considering the multidimensional nature of corporate responsible performances we create domain specific (size interacted) CSR portfolios and test if the CSR risk-reduction effects: i) generate pricing anomalies that could be captured by the introduction of risk factors accounting for the exposition to stakeholder risk, ii) are priced in the cross-section of expected returns.

Our findings document that, with the exception of the corporate governance domain, corporate stock returns decrease as firm responsibility levels increase. This pattern indeed is related to the existence of pricing anomalies and the higher returns for companies with lower responsibility levels are justified by their higher exposition to stakeholder risk. Even if our domain specific CSR risk factors are not able to capture all the pricing anomalies, the higher exposition to stakeholder risk is actually priced in the cross-section of returns. Firms with lower responsibility levels pay a premium to investors in equilibrium.

Keywords: corporate social responsibility, risk factor, multi factor model

JEL Classification: G12; C51