A publication of the School of Business at Loyola University Chicago
The Relationship Between
Corporate Social Responsibility and Shareholder Value:
An Empirical Test of the Risk Management Hypothesis
Paul C. Godfrey, Craig B. Merril , and Jared M. Hansen
Strategic Management Journal, 30, 2009, 425-445.
This article explores the shareholder wealth ef ects of because the “bad act” wil be seen as an aberration in the
corporate social responsibility (CSR) activities. Specifical- behavior of an otherwise “good actor.”
ly, Godfrey, Merril and Hansen (GMH) address the ques-
GMH present an empirical analysis of 160 firms with
tion: “Do shareholders gain when managers disperse cor- information from 1991-2002 drawn from the Socrates da-
porate resources through activities classified as corporate tabase produced by KLD. Events qualifying as negative
social responsibility (CSR)?” (p. 425) GMH want to deter- events (or “bad acts”) were drawn from negative legal or
mine whether some types of CSR activities create a form regulatory actions as reported in the Wal Street Journal.
of goodwil or moral capital. If so, this moral capital might The measure of impact on stock prices was the excess re-
serve as protection or as an insurance policy against ero- turn around the announcement in the Wal Street Journal of
sion of shareholder value when adverse events occur. The the adverse event.
argument that GMH advance contrasts with the case that
GMH regress this excess return against CSR variables
some try to make on behalf of CSR activities—that they (e.g., various CSR or “social engagement” ratings from the
may generate shareholder wealth. Rather than focusing on KLD database), firm size, and event specific characteristics.
the potential of CSR activities to create wealth, GMH try Further, GMH distinguish technical CSR and institutional
to determine whether CSR activities can preserve wealth.
CSR activities (TCSR and ICSR), with the former being di-
In this view, investing in CSR activities may be con- rected toward primary stakeholders and the second focus-
sidered as a form of risk management—the firm may invest ing on secondary stakeholders. The idea is that TCSR is
in CSR to protect against possible adverse consequences. directed toward those stakeholders that can more directly
Under this insurance view, such CSR investment exceeds af ect the firm, and that such TCSR may be perceived as
the expected payof s from the “insurance” just as is the case more self-interested than ICSR activities. The authors an-
when one buys any kind of insurance policy. Nonetheless, if ticipate that ICSR activities wil be more ef ective in pro-
this kind of insurance protects the firm from non-diversifi- ducing the insurance benefit because such activities seem
able firm-specific risk, such risk management can contrib- less self-interested.
ute to firm value. (A condition of such a contribution is that
GMH find that participating in CSR activities does
markets are not perfect.)
produce an insurance-like benefit, but that this insurance
According to GMH, CSR activities signal that the firm ef ect holds only for ICSR activities, not for TCSR activi-
is not completely self-interested and that the firm consid- ties. (In a large firm subsample, both kinds of CSR activi-
ers the impact of its activities on stakeholders beyond share ties produced a benefit, but the ef ect from ICSR activities
owners. To achieve this benefit, the CSR activity must be was stronger.) On the announcement of the negative event,
known by the public, and it must be perceived as sufficient- firms not engaging in ICSR lost about $72.4 mil ion, but
ly substantial to convey the signal that the firm is other-re- firms that invested in ICSR activities lost only $22.8 mil-
garding to some extent.
lion, for a dif erence of about $50 mil ion measured against
Assume a firm commits a “bad act.” The punishment an average firm size of $32.6 bil ion in market capitaliza-
of the firm’s shares wil be worse if the market regards this tion. Thus, this study finds an explanation of CSR activities
“bad act” as belonging to a “bad actor.” If the firm can use that is consistent with shareholder interest. As GMH say for
CSR activities to signal that it is a “good actor” in general, these firms investing in CSR (especial y ICSR) activities:
then the ef ects of some future “bad act” wil be mitigated “In short, good deeds seem to earn chits.” (p. 442)