Corporate social responsibility and stock price crash risk

Abstract

This study investigates whether corporate social responsibility (CSR) mitigates or contributes to stock price crash risk. Crash risk, defined as the conditional skewness of return distribution, captures asymmetry in risk and is important for investment decisions and risk management. If socially responsible firms commit to a high standard of transparency and engage in less bad news hoarding, they would have lower crash risk. However, if managers engage in CSR to cover up bad news and divert shareholder scrutiny, CSR would be associated with higher crash risk. Our findings support the mitigating effect of CSR on crash risk. We find that firms' CSR performance is negatively associated with future crash risk after controlling for other predictors of crash risk. The result holds after we account for potential endogeneity. Moreover, the mitigating effect of CSR on crash risk is more pronounced when firms have less effective corporate governance or a lower level of institutional ownership. The results are consistent with the notion that firms that actively engage in CSR also refrain from bad news hoarding behavior and thus reducing crash risk. This role of CSR is particularly important when governance mechanisms, such as monitoring by boards or institutional investors, are weak.

The effect of environmental performance and preference disclosure on financial performance: Empirical evidence from unbalanced panel data of heavy-pollution industries in China

“…However, if managers engage in CSR to cover up bad news and divert shareholder scrutiny, CSR would be associated with higher crash risk (Kim, Li & Li, 2014). To the extent, better environmental propensity has a positive impact on financial performance.…”

On the Informational Role of Delayed Good News: A Firm-Level Crash Risk Evidence from Egypt

“…They proved that Firms with internal control weakness problems tend to facilitate managers' bad news hoarding behavior, and therefore, are more prone to experience stock price crashes relative to firms with no such problem. Kim, Li, and Li (2014) found a significant negative association between firms' CSR performance and stock price crash risk revealing that if socially responsible firms commit to a high standard of transparency and engage in less bad news hoarding, they would have lower crash risk. Biddle, Ma, and Song (2012), Mohammadi and Salehirad (2012), and Dimitrios V. Kousenidisa, Anestis C. Ladasb, and Christos I. Negakis (2014) examined conservatism's informational properties and the impact of conservatism that has been found to improve financial reporting efficiency on the prediction of stock price crash risk.…”

The Relationship between Social Responsibility and Majority Shareholders’ Stock Selling: Considering the Mediation of Investors Tendency

“…Similarly, the majority shareholders of listed companies will also feel the pursuit of abandonment and abandonment from market investors, they will find that the behavior of social responsibility can be recognized by market investors. In particular, this behavior will also generate value in the stock price and enhance the company's share price (Kim et al, 2014). As a result, under the strength of securities investors, the inhibiting effect of social responsibility on the main reduction of majority shareholders will be amplified invisibly.…”