Corporate social responsibility (CSR) and stock price - An event study approach

Abstract

Corporate Social Responsibility can bring real business benefits by reducing risk, by enhancing brand value, by opening doors and creating good will, and by improving staff efficiency and morale. Nevertheless, there remains a protracted debate about the legitimacy and value of corporate responses to CSR concerns. Knowledge about the effect of Corporate Social Responsibility on corporate financial performance contributes to the debate about whether managers systematically miss profit opportunities if they decide against it. There are different views about a firm’s role in society and disagreements as to whether wealth maximization should be the sole goal of a corporation. Using extensive data over a time period, this study will explore and test the sign of the relationship between corporate social responsibility and financial performance. More specifically, the purpose of this study is to examine whether Corporate Social Responsibility (CSR) announcements or events, have any effect on a firm’s stock returns. The stock market reaction is considered the most effective way to verify this relation and will be tested using the event study methodology. The study will contribute to the existing body of knowledge on CSR and stock prices. The findings of this study will aid corporate executives to understand the importance of CSR in governance and decision making processes. The results aim at persuading managers to implement CSR actions in a greater extent in order to enhance their firm stock value. The first part of this dissertation aims to familiarize the reader with the concept of Corporate Social Responsibility, and formulate an opinion whether Corporate Social Responsibility is positively correlated with real business benefits and identify areas for improvement driving towards financial performance. To achieve this, an in depth review of the available literature is conducted. The second part is the empirical section, and using the event study methodology investigate how Corporate Social Responsibility (CSR) announcements or events affect stock returns. The impact on the stock price may imply negative, neutral or positive linkages.