The Downside of Being Responsible: Corporate Social Responsibility and Tail Risk

Trust and the value of CSR during the global financial crisis

“…It is interesting to reflect on the notion that CSR could be an indicator of a priced risk – with high CSR rating indicating lower exposure to disasters. For this notion to be supported, we expect high CSR firms to underperform low CSR in normal times and outperform low CSR firms during crises (for example, see Kelly and Jiang, 2014 and Diemont et al ., 2016). Clearly, based on the results in Tables 2 and 3, there is no consistent evidence to support this notion, as the performance of the hedge portfolio is insignificant during normal times and the results during the GFC are inconsistent across the US and Japan.…”

Environmental disclosure and idiosyncratic risk in the European manufacturing sector

“…All these studies opine that higher levels of disclosure improve firms' financial performance. On a parallel note, there are also studies that examine whether both corporate social strengths and concerns are linked with idiosyncratic risk (Salama et al, 2011;Bouslah et al, 2013;Mishra and Modi, 2013;Cai et al, 2016;Diemont et al, 2016). These studies underscore that social activities might positively affect the investment climate.…”

“…Our study offers four important contributions. First, although prior studies have examined the effects of environmental disclosure on idiosyncratic risk (Lee and Faff, 2009;Salama et al, 2011;Oikonomou et al, 2012;Cai et al, 2016;Diemont et al, 2016;Utz, 2017;Linciano et al, 2018), we test the said relationship under the competing theories, and we shed light on the relevance of these theories. Second, in contrast to previous literature that uses the traditional capital asset pricing model, and on some occasions the Carhart four factor model (Mishra and Modi, 2013;Bouslah et al, 2013), we utilize both the four-and five-factor models to estimate idiosyncratic risk.…”

Do Affiliated Bankers on Board Enhance Corporate Social Responsibility? US Evidence

“…Banks are known to be the fixed claimants who bear high downside risk, as residual claimants have an incentive to increase the riskiness of a firm's existing assets, even when doing so would reduce firm value [49]. Several studies that examine the link between CSR and firm risk find that high CSR firms are less vulnerable to firm-specific adverse events [3] and, as a result, have lower downside tail risks [21,22]. The focus on downside tail risk is germane to banks since the risk of default impacts the ability of a firm to repay creditors.…”

“…Affiliated banker directors have clear economic incentives from their employing banks to reduce risk of firms [19,20]. Existing literature has documented that engaging in CSR activities could reduce firms' downside risks [21,22]. In this sense, affiliated banker directors may exert their influence on firm CSR investments to reduce the risk exposures of the lending portfolios of their employing banks.…”