An Investor Perspective on the Black Box of Corporate Social Responsibility

15 Pages Posted: 1 Mar 2023

See all articles by Chitru S. Fernando

Chitru S. Fernando

University of Oklahoma - Michael F. Price College of Business

Vahap Bülent Uysal

DePaul University

Amal Abeysekera

Hofstra University

Date Written: Spring 2019

Abstract

In summarizing the findings of their recent study, the authors report findings that suggest that not all socially responsible corporate policies are likely to have the same effect on a company's ownership and value. Using environmental policy as their proxy for CSR activities, the authors classify corporate environmental practices into two categories: (1) actions that reduce the likelihood of harmful outcomes by reducing the corporate exposure to environmental risk; and (2) actions that enhance companies' perceived ‘greenness’ through investments that go beyond both legal requirements and any conceivable risk management rationale. Although both groups of environmental practices are likely to be viewed as socially beneficial, corporate expenditures that reduce a firm's environmental risk exposure are more likely to benefit shareholders by limiting the risk of losses arising from environmental accidents, lawsuits, and fines—and possibly thereby reducing the firm's cost of capital. By contrast, corporate expenditures that enhance the firm's perceived greenness by going beyond legal requirements and risk management rationales could actually reduce shareholder value. Consistent with this hypothesis, the authors find that institutional investors tend to own smaller than average percentages of both companies the authors identify as ‘toxic’ and make limited efforts to manage their environmental risk, and companies they label ‘green’ with low environmental risk exposure but relatively high CSR spending on the environment. At the same time, such investors hold larger‐than‐average positions in ‘neutral’ companies with relatively low, or effectively managed, environmental risk exposures and limited investment in ‘greenness’ programs. The authors also find that both toxic and green companies have lower (Tobin's Q) valuations than neutral companies, and that otherwise toxic companies that effectively manage their environmental risk exposures have higher valuations.

Suggested Citation

Fernando, Chitru S. and Uysal, Vahap B. and Abeysekera, Amal, An Investor Perspective on the Black Box of Corporate Social Responsibility (Spring 2019). Journal of Applied Corporate Finance, Vol. 31, Issue 2, pp. 92-104, 2019, Available at SSRN: https://ssrn.com/abstract=3604420 or http://dx.doi.org/10.1111/jacf.12351

Chitru S. Fernando (Contact Author)

University of Oklahoma - Michael F. Price College of Business ( email )

Adams Hall
307 West Brooks Street
Norman, OK 73019-4004
United States
405-325-2906 (Phone)
405-325-7688 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/F/Chitru.Fernando-1/

Vahap B. Uysal

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

HOME PAGE: http://https://business.depaul.edu/faculty/faculty-a-z/Pages/vahap-uysal.aspx

Amal Abeysekera

Hofstra University ( email )

Hempstead, NY 11549
United States

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