The effect of corporate social responsibility on firm risk

Abstract

Purpose – The purpose of this paper is to investigate the link between corporate social responsibility (CSR) and risk for a sample of US firms rated by KLD. Design/methodology/approach – The authors’ approach involves three distinctive features. First, the authors use individual indicators of CSR to highlight which CSR dimension matters most for a firm’s risk. Second, the authors distinguish CSR strengths and concerns to reveal potentially nonlinear relationships. Third, the authors use a measure of risk that takes into account the predictable changes in a firm’s performance and that does not collapse the panel data into a single cross-section. This allows the CSR–risk relationship to be estimated by the variation within each firm and the variation across firms. Findings – Consistent with existing results, the authors find that CSR concerns relating to diversity, employee relations and corporate governance increase the risk to shareholders. More interestingly, the authors show that CSR strengths relating to diversity and employee relations are also associated with higher risk. The positive influence of both CSR strengths and concerns on a firm’s risk is confirmed using aggregate CSR indicators. Research limitations/implications – The results confirm that CSR strengths and concerns represent distinct constructs that should not be aggregated into a single measure. The effect of poor CSR on firm risk is more significant than what would appear to be the case using an aggregate index. Practical implications – Although lack of CSR engagement may not affect (and may even benefit) a firm’s current performance, it may seriously damage its performance in the future. Firms should be aware of this risk. Originality/value – The positive relationship found between CSR and firm risk underscores the inherent conflict between the interests of employees and those of shareholders. By committing to a more favorable treatment of their employees, firms incur a fixed cost that inevitably transfers more risk to their shareholders.

Corporate Social Responsibility (CSR) and Risk Taking: Evidence from Indonesia

“…It means that companies maximize stakeholder's interests when firms have high CSR performance. However, several studies in the U.S. context find a positive direction on the effect of CSR and firm's risk (Ayadi et al, 2014;Nguyen and Nguyen, 2015). In other words, firms are riskier when they implement CSR.…”

“…They indicate that several CSR dimensions (e.g., employee relations, product characteristics, and diversity) are positively associated with risk taking. Nguyen and Nguyen (2015) show that U.S. firms with better CSR implementation experience higher company's risk. Based on the empirical evidence discussed, the findings on the association between CSR and company's risk are mixed and inconclusive, especially in emerging market context.…”

“…Natural log of total Assets (Nguyen and Nguyen, 2015). FAGEYear of Research (2018) reduced by years since listing on the Indonesia Stock Exchange (IDX)(Bliss and Gul, 2012) …”

The Effect of Partnership and Community Development Program on Financial Performance and Firm Risk: Evidence from Indonesian State-Owned Enterprises

“…Other studies also linked CSR to the risks facing the company. Some of these studies were conducted by Nguyen and Nguyen (2013), Lee (2016), Hsu and Chen (2015), Orlitzky and Benjamin (2001), Godfrey (2005), Sen et al (2006), and Melo (2012).…”

Do Credit Ratings Take into Account the Sustainability Performance of Companies?

“…The work in [38][39][40] stated that positive CSR reduces the risk of companies, but [41] concluded that CSR strengths and concerns both increase company risk. The work in [8] found that ESG risks are not valued in stock markets, which leads to negative surprises when ESG incidents occur.…”