Do firms use corporate social responsibility to insure against stock price risk? Evidence from a natural experiment

Abstract

Research Summary: To examine whether firms use corporate social responsibility (CSR) to insure against stock price risk, we exploit an exogenous shock in stock price risk associated with Regulation SHO whereby the SEC randomly selected pilot firms for which the uptick restriction on short sales no longer applied. A difference-in-differences test reveals that pilot firms increased CSR more than nonpilot firms and that in particular they reduced CSR concerns and increased CSR that impacts stakeholders involved in direct resource exchange. We also find that pilot firm CSR reduced short positions against them and that the effect is stronger for CSR concerns and CSR that impacts directly connected stakeholders. Overall, we document a causal effect of stock price risk on managerial incentives to invest in CSR for risk management. Managerial Summary: Corporate social responsibility has many purported benefits, one of which is that it can insure against the adverse stock price effects of negative events.But do managers purposefully use CSR in this way and do such investments provide intended insurance-like benefits?By taking advantage of a natural experiment where a randomly selected set of pilot firms were exposed to elevated short-sale risk unleashed by the SEC regulation, we find evidence that they do. Once the SEC initiated the regulatory

How Main Street Drives Wall Street: Customer (Dis)satisfaction, Short Sellers, and Abnormal Returns

“…Theoretically, we build on the motivation, ability, and opportunity (MAO) framework (Heider 1958; Wang, Gupta, and Grewal 2017) to argue that short sellers (1) are motivated to exploit any informational advantage in the stock market (Diamond and Verrecchia 1987), (2) possess superior ability in detecting investment opportunities (e.g., Engelberg, Reed, and Ringgenberg 2012), and (3) use the opportunity to gain an informational advantage relative to average investors (e.g., Denev and Amen 2020). This approach is consistent with academic and business literature that documents a link between short selling and firm’s operations, strategy, and abnormal stock returns (Jia, Gao, and Julian 2020; Melloy and Rooney 2019; Shi, Connelly, and Cirik 2018) (see Table W2 of the Web Appendix). Our core argument is that an increase in customer satisfaction (dissatisfaction) lowers (elevates) short selling intensity in a firm’s stock, which affects abnormal stock returns.…”

Are socially responsible firms in the U.S. tourism and hospitality industry better off during COVID-19?

“…That is, CSR activities help firms generate competitive advantages by maintaining positive relationships with diverse stakeholders. Recent studies have put forward the idea that CSR performance is important for building firm resilience, a capability to adjust to and recover from unexpected shock, from an investor perspective (e.g., Albuquerque et al, 2020 ; Jia et al, 2020 ). On the other hand, several studies suggest that CSR investments may impose high costs on firms (e.g., Aupperle et al, 1985 ; Barnett & Salomon, 2012 ).…”

Investigating the Impact of Corporate Social Responsibility (CSR) on Risk Management Practices

“…Researchers have previously noted the influence of CSR practices on risk reduction (Boutin-Dufresne & Savaria, 2004;Jia et al, 2020;Orlitzky & Benjamin, 2001), in terms of both an ex ante and ex post impacts. An ex ante effect is proposed because CSR activities should lead to early signals of emerging risks and reduce the frequency of risks via better managerial capabilities (Waddock & Graves, 1997).…”

“…In particular, good CSR practices should lead to a lower systematic risk (Albuquerque et al, 2019;Cheung, 2016), a lower unsystematic total risk , and a lower financial risk (Cheng et al, 2014). However, CSR activities should also create an ex post reduction of severity of risk (Godfrey et al, 2009;Jia et al, 2020;Muller & Kräussl, 2011;Shiu & Yang, 2017). Effective CSR programs lead to a positive corporate reputation and build moral capital (Godfrey, 2005), which provides an ex post "insurance-like effect" to minimize the impact of a negative event (Godfrey et al, 2009;Shiu & Yang, 2017).…”