Corporate Social Responsibility and Firm Idiosyncratic Risk in Different Market States

Abstract

This study explored the influence of corporate social responsibility (CSR) on idiosyncratic risk. Referring to an approach used by Pagan and Sossounov, we separated the sample period into up-market, down-market, and correction conditions and observed the changes in the influence of CSR on idiosyncratic risk in different market states. The results find that firms with better CSR performance can reduce their idiosyncratic risk. Furthermore, in different market states, CSR can significantly decrease idiosyncratic risk, whereas firms with poorer CSR performance have more idiosyncratic risk. Our findings are beneficial for firms that can use CSR engagement to adjust their business strategy and reduce operational uncertainty. Therefore, CSR engagement can function as a tool for risk management. engagement positively influences consumer preferences, leading to increased sales. Guenster et al. (2011) confirmed that investors prefer to invest in companies with good CSR performance. In addition, Duran and Bajo (2014) pointed out that over 80% of multinational enterprises have listed CSR as one of their global management strategies. Marti et al. (2015) conducted research into the relationship between CSR and financial performance during periods of financial crisis. They discovered that those companies with higher levels of CSR engagement exhibited more stable financial performance. Such findings imply that companies with higher levels of CSR engagement experience lower operating risks. Su et al. (2016) studied firms targeting emerging markets and found that those participating in CSR activities exhibited better reputations, as well as increased operating and revenue performance. Therefore, it seems that not only does fulfilment of CSR exert positive effects on operating and financial performance, but it further lowers operational costs, increases management efficiency, creates new business models, and increases research and development (R&D) budgets as well as opportunities for future growth (Porter and Kramer, 2006;Chen et al., 2013). Ioannon and Serafeim (2015) pointed out that market analysts forecast better financial performance for firms with higher levels of CSR engagement. Kumar et al. (2016) believed that fulfilment of CSR strengthens interaction with a firm's stakeholders and re-adjusts its operating strategies, leading to increases in both capital expenses and profits. further confirmed that integration of CSR into operational and management strategies, as well as corporate governance policies, increases the value of an enterprise. Similarly, Chen and Lee (2017) indicated that when CSR activities over a certain threshold, operating expenses use to decrease and positively affect a firm's value.Moreover, Doh et al.'s (2009) study on the relationship between CSR and stock price performance clearly indicated that firms with better CSR performance have better return on equity (ROE), suggesting that investors have shifted their attention from maximization of a shareholder's profits to the interaction between a company ...

Corporate social responsibility engagement and firm performance in Asia Pacific: The role of enterprise risk management

“…Some empirical studies suggest that active engagement of companies in CSR activities makes them consider the interests of all stakeholders thereby supporting ERM process that also takes into account risks associated with all the stakeholders (Boatright, 2011;Godfrey et al, 2009). Prior studies have shown that better CSR performance reduces the risk level of a firm (Chen, Hung, & Lee, 2018;Cheng et al, 2012;Dhaliwal et al, 2012;Zhang et al, 2015). In this study, we employ an ERM index comprising four components, namely, strategy, operational efficiency, reporting quality, and compliance, to gauge the effectiveness of the ERM process in firms.…”

The effect of corporate social performance on the financial performance of business‐to‐business and business‐to‐consumer firms

“…However, despite suggestions that CSP and sales are related, the CSP‐sales link has remained largely untested (for a notable exception, see Lins, Servaes, & Tamayo, ). Prior studies have instead examined the effects of CSP on other important measures of performance, such as market value (Luo & Bhattacharya, ), returns on assets and equity (Testa, Miroshnychenko, Barontini, & Frey, ), corporate reputation (Melo & Garrido‐Morgado, ), idiosyncratic risk (Chen, Hung, & Lee, ), and cost of capital (Harjoto & Jo, ). Second, prior related research offers opposing predictions concerning the effect of CSP on a firm's top‐line performance.…”

Do corporate social responsibility ratings affect credit default swap spreads?

“…Several studies find evidence consistent with the risk mitigation view, focusing on the cost of equity (El Ghoul, Guedhami, Kwok, & Mishra, 2011), financial risk (Bouslah, Kryzanowski, & M'Zali, 2013;Oikonomou et al, 2012), idiosyncratic risk (Chen et al, 2018), and credit risk (Attig, El Ghoul, Guedhami, & Suh, 2013;Bae et al, 2018;Ge & Liu, 2015;Jiraporn, Jiraporn, Boeprasert, & Chang, 2014;Oikonomou et al, 2014;Stellner et al, 2015).…”

“…The risk mitigation view contends that better CSP may lead to a decrease in firms' idiosyncratic risk, implying a negative relationship between CSR engagement and credit risk (Chen, Hung, & Lee, 2018).…”