Should We Invest in Socially Responsible Firms? How Does a Firm’s Corporate Social Responsibility Rating Impact Its Stock Performance?

27 Pages Posted: 20 May 2019 Last revised: 1 Jun 2021

See all articles by Ray Yang

Ray Yang

IronHawk Research Ltd.

Date Written: March 10, 2021

Abstract

As our society progresses, social responsibilities have gain more tractions in the recent decade, especially social responsibilities of publicly traded corporations. Corporations play a crucial role in our society where they have the power to redistribute important resources such as wealth. So it is the corporation’s responsibility to lead people to build a world with better values. The global capital markets are also trying to integrate and quantify the efforts spent on social responsibilities by corporations and governments, and compensate accordingly. Then a rating system is created to help quantifying it: the Corporate Social Responsibility rating (CSR). The CSR rating is concerned with the relationship between a corporation and the local society in which it resides and operates. It is calculated by the sum of the firm’s contribution to community, diversity, environment, diversity, human right and product strength.
In this study, I am trying to answer one question that every investor are asking: Should we invest in firms with higher Corporate Social Responsibility Rating (CSR) because these firms have been performing generally well in the past 10 years. This paper tests the relationship between a firm’s CSR rating and its stock performance. Stock performance is measured by using simply the log of closed price at the end of fiscal year of the firm. The result shows that the CSR rating has a positive relationship but very small impact on performance of a stock. Furthermore, each CSR factor is tested individually and I found the following:
1. Community, employee relations and diversity are positively related with stock returns. This matches with my initial expectation. Given the fact that the amount of efforts spent by governments and corporations on promoting them, there should be some benefits to firm’s financial performance.
2. Environment, human rights and product strength are negatively related with stock returns. This result contradicts with my initial expectation, again, I was expecting these factors should benefit the firm’s performance.
An increase in fluctuation of CSR rating in the recent years has been observed. The reason behind this increasing fluctuation could be more and more corporations are joining the ‘CSR club’ and making improvements on their company’s status.

Keywords: Corporate Social Responsibility, CSR, Stock Prices, Stock Returns, Performance, Community Strength, Community, Diversify, Environmental, Human Right, Product Strength

Suggested Citation

Yang, Ray, Should We Invest in Socially Responsible Firms? How Does a Firm’s Corporate Social Responsibility Rating Impact Its Stock Performance? (March 10, 2021). Available at SSRN: https://ssrn.com/abstract=3375513 or http://dx.doi.org/10.2139/ssrn.3375513

Ray Yang (Contact Author)

IronHawk Research Ltd. ( email )

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HOME PAGE: http://https://www.ironhawkresearch.com/

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