Corporate social performance and financial risk: Further empirical evidence using higher frequency data

Using a unique dataset of corporate social responsibility rating - available on a monthly basis - we shed new light on the relationship between corporate social performance (CSP) and firm risk. Where previous studies use annual (at best) measures of CSP, assuming that a change in CSP leads a change in risk, we formally test the direction of the relationship using Granger causality. Looking at large UK companies over 2002-2018 (for a total number of 19,832 firm-months), we reject any causality (either way) between CSP and financial risk (both systematic and idiosyncratic risk). This shows that the CSP-risk relationship is not an endogenous one, contrary to what previous evidence has found. Given the structure of our panel data (long T and short N), we apply GLS based estimator to correct for serial correlation in our panel regressions. We find strong evidence that CSP has a negative impact on idiosyncratic risk; however, the effect of CSP on systematic risk is not statistically significant. The existence of a contemporaneous, rather than lagged relationship doesn't fare well with established CSP theories. Overall, our original approach has opened a new door to further the study of the link between CSP, financial performance and financial risk.

Automated summary

This study utilizes a unique dataset of monthly corporate social responsibility ratings to examine the relationship between CSP and firm risk. The findings reveal that there is no causal relationship between CSP and financial risk, with CSP having a more significant impact on idiosyncratic risk compared to systematic risk. This research opens up new possibilities for further exploring the linkages between CSP, financial performance, and financial risk.