Hostname: page-component-cd9895bd7-7cvxr Total loading time: 0 Render date: 2024-12-25T20:55:22.941Z Has data issue: false hasContentIssue false
  • English
  • Français

Standing Out from the Crowd via CSR Engagement: Evidence from Non-Fundamental-Driven Price Pressure

Published online by Cambridge University Press:  11 May 2023

Lei Gao Open the ORCID record for Lei Gao [Opens in a new window] ,
Jie (Jack) He Open the ORCID record for Jie (Jack) He [Opens in a new window]  and
Juan (Julie) Wu
Lei Gao
Affiliation:
George Mason University, School of Business lgao9@gmu.edu
Jie (Jack) He*
Affiliation:
University of Georgia Terry, College of Business
Juan (Julie) Wu
Affiliation:
University of Nebraska – Lincoln, College of Business juliewu@unl.edu
*
jiehe@uga.edu (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We test the signaling view of corporate social responsibility (CSR) engagement using two complementary quasi-natural experiments that impose exogenous negative pressure on stock prices. Firms under such adverse price pressure increase CSR activities compared to otherwise similar firms. This effect concentrates among firms with stronger signaling incentives, namely, those facing greater information asymmetry, more product market competition, higher shareholder litigation risk, and higher stock price crash risk. Firms under the exogenous negative price pressure mainly improve CSR strengths, including costly environmental investments. We also find that CSR engagement attracts socially responsible investors and lowers the cost of capital for signaling firms.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 1 , February 2024 , pp. 39 - 67
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee, Jie Cao, Jon Garfinkel, Stu Gillan, Itay Goldstein, Jarrad Harford (the editor), Rawley Heimer, Michael Hertzel, Sara Holland, John Hund, Hoje Jo, Hao Liang, Sébastien Michenaud, Harold Mulherin, Brad Paye, Tao Shu, Tom Smith, James Weston, Eric Yeung, Ming Yuan, Hao Zhang, Jingran Zhao, Shan Zhao, conference participants at the FARS 2016 Midyear Conference, the 2016 Midwest Finance Association Meetings, the 2016 Financial Management Association Meetings, the 2017 Conference on Financial Economics and Accounting, the 2018 Financial Management Association Asia/Pacific Meetings (Best Paper Finalist), and the 2019 European Finance Association Meetings, and seminar participants at Central University of Finance and Economics, George Mason University, Iowa State University, Macquarie University, Peking University, Renmin University, Tsinghua University, University of Georgia, University of International Business and Economics, University of Iowa, University of Kansas, University of Tasmania, and Wilfrid Laurier University for valuable comments. We are solely responsible for any remaining errors.

References

Albuquerque, R.; Koskinen, Y.; and Zhang, C.. “Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence.” Management Science, 65 (2019), 4451–4469.CrossRefGoogle Scholar
Alexander, G., and Peterson, M.. “The Effect of the Uptick Rule On Spreads, Depths, and Short Sale Prices.” Journal of Trading, 3 (2008), 38–44.CrossRefGoogle Scholar
Amihud, Y. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.CrossRefGoogle Scholar
Arnold, M.; Horner, C.; Martin, P.; and Moser, D.. “Investment Professionals’ Use of Corporate Social Responsibility Disclosures.” Working Paper, Indiana University (2017).CrossRefGoogle Scholar
Baron, D. “Private Politics, Corporate Social Responsibility, and Integrated Strategy.” Journal of Economics & Management Strategy, 10 (2001), 7–45.Google Scholar
Baron, D. “Managerial Contracting and Corporate Social Responsibility.” Journal of Public Economics, 92 (2008), 268–288.CrossRefGoogle Scholar
Bebchuk, L.; Cohen, A.; and Ferrell, A.. “What Matters In Corporate Governance?” Review of Financial Studies, 22 (2009), 783–827.CrossRefGoogle Scholar
Bénabou, R., and Tirole, J.. “Individual and Corporate Social Responsibility.” Economica, 77 (2010), 1–19.CrossRefGoogle Scholar
Berger, E. “Selection Bias in Mutual Fund Fire Sales.” Journal of Financial and Quantitative Analysis, 58 (2023), 1039–1077.CrossRefGoogle Scholar
Bertrand, M., and Mullainathan, S.. “Enjoying the Quiet Life? Corporate Governance and Managerial Preferences.” Journal of Political Economy, 111 (2003), 1043–1075.CrossRefGoogle Scholar
Bolton, P., and Kacperczyk, M.. “Signaling Through Carbon Disclosure.” Working Paper, Columbia University (2021).CrossRefGoogle Scholar
Cao, J.; Liang, H., and Zhan, X.. “Peer Effects of Corporate Social Responsibility.” Management Science, 65 (2019), 5487–5503.CrossRefGoogle Scholar
Cao, J.; Titman, S.; Zhan, X. E.; and Zhang, W. E.. “ESG Preference, Institutional Trading, and Stock Return Patterns.” Journal of Financial and Quantitative Analysis, 58 (2023), 1–35.CrossRefGoogle Scholar
Chang, X.; Dasgupta, S.; and Hilary, G.. “Analyst Coverage and Financing Decisions.” Journal of Finance, 61 (2006), 3009–3048.CrossRefGoogle Scholar
Chatterji, A. K.; Durand, R.; Levine, D. I.; and Touboul, S.. “Do Ratings of Firms Converge? Implications for Managers, Investors and Strategy Researchers.” Strategic Management Journal, 37 (2016), 1597–1614.CrossRefGoogle Scholar
Chemmanur, T.; He, J.; He, S.; and Nandy, D.K.. “Product Market Characteristics and the Choice Between IPOs and Acquisitions.” Journal of Financial and Quantitative Analysis, 53 (2018), 681–721.CrossRefGoogle Scholar
Chen, J.; Hong, H.; and Stein, J.. “Forecasting Crashes: Trading Volume, Past Returns, and Conditional Skewness in Stock Prices.” Journal of Financial Economics, 61 (2001), 345–381.CrossRefGoogle Scholar
Coval, J., and Stafford, E.. “Asset Fire Sales (and Purchases) in Equity Markets.” Journal of Financial Economics, 86 (2007), 479–512.CrossRefGoogle Scholar
Cronqvist, H., and Yu, F.. “Shaped by Their Daughters: Executives, Female Socialization, and Corporate Social Responsibility.” Journal of Financial Economics, 126 (2017), 543–562.CrossRefGoogle Scholar
Dai, R.; Liang, H.; and Ng, L.. “Socially Responsible Corporate Customers.” Journal of Financial Economics, 142 (2021), 598–626.CrossRefGoogle Scholar
Deng, X.; Kang, J.; and Low, B.. “Corporate Social Responsibility and Stakeholder Value Maximization: Evidence from Mergers.” Journal of Financial Economics, 110 (2013), 87–109.CrossRefGoogle Scholar
Diether, K.; Lee, K.; and Werner, I.. “It’s SHO Time! Short‐Sale Price Tests and Market Quality.” Journal of Finance, 64 (2009), 37–73.CrossRefGoogle Scholar
Edmans, A. “Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices.” Journal of Financial Economics, 101 (2011), 621–640.CrossRefGoogle Scholar
Edmans, A.; Goldstein, I.; and Jiang, W.. “The Real Effects of Financial Markets: The Impact of Prices on Takeovers.” Journal of Finance, 67 (2012), 933–971.CrossRefGoogle Scholar
Fang, V.; Huang, A.; and Karpoff, J.. “Short Selling and Earnings Management: A Controlled Experiment.” Journal of Finance, 71 (2015), 1251–1294.CrossRefGoogle Scholar
Ferrell, A.; Liang, H.; and Renneboog, L.. “Socially Responsible Firms.” Journal of Financial Economics, 122 (2016), 585–606.CrossRefGoogle Scholar
Flammer, C., and Kacperczyk, A. J.. “Corporate Social Responsibility as a Defense Against Knowledge Spillovers: Evidence from the Inevitable Disclosure Doctrine.” Strategic Management Journal, 40 (2019), 1243–1267.CrossRefGoogle Scholar
Fong, K. Y.; Holden, C. W.; and Trzcinka, C. A.. “What Are the Best Liquidity Proxies for Global Research?” Review of Finance, 21 (2017), 1355–1401.CrossRefGoogle Scholar
Friedman, M. “The Social Responsibility of Business is to Increase its Profits.” New York Times Magazine, Sept. 13 (1970), 122–126.Google Scholar
Glazer, A., and Konrad, K.. “A Signaling Explanation for Charity.” American Economic Review, 86 (1996), 1019–1028.Google Scholar
Goldstein, I., and Guembel, A.. “Manipulation and the Allocational Role of Prices.” Review of Economic Studies, 75 (2008), 133–164.CrossRefGoogle Scholar
Gordon, J. and Gordon, M.. “The Finite Horizon Expected Return Model.” Financial Analysts Journal, May/June (1997), 52–61.CrossRefGoogle Scholar
Greening, D. W., and Turban, D. B.. “Corporate Social Performance as a Competitive Advantage in Attracting a Quality Workforce.” Business & Society, 39 (2000), 254–280.CrossRefGoogle Scholar
Hadlock, C. J., and Pierce, J. R.. “New Evidence on Measuring Financial Constraints: Moving Beyond the Kz Index.” Review of Financial Studies, 23 (2010), 1909–1940.CrossRefGoogle Scholar
Hainmueller, J. “Entropy Balancing for Causal Effects: A Multivariate Reweighting Method to Produce Balanced Samples in Observational Studies.” Political Analysis, 20 (2012), 25–46.CrossRefGoogle Scholar
He, J.; Ren, X.; and Tian, X.. “Do Short Sellers Affect Corporate Innovation? Evidence From a Policy Experiment.” Review of Corporate Finance Studies, forthcoming (2023).CrossRefGoogle Scholar
Heinkel, R., Kraus, A.; and Zechner, J.. “The Effect of Green Investment on Corporate Behavior.” Journal of Financial and Quantitative Analysis, 36 (2001), 431–449.CrossRefGoogle Scholar
Hoepner, A. G.; Oikonomou, I.; Sautner, Z.; Starks, L. T.; and Zhou, X.. “ESG Shareholder Engagement and Downside Risk.” Working Paper, University College Dublin (2020).Google Scholar
Hoi, C.; Wu, Q.; and Zhang, H.. “Is Corporate Social Responsibility (CSR) Associated with Tax Avoidance? Evidence From Irresponsible CSR Activities.” Accounting Review, 88 (2013), 2025–2059.CrossRefGoogle Scholar
Hong, H., and Liskovich, I.. “Crime, Punishment and the Halo Effect of Corporate Social Responsibility.” Working Paper, Princeton University (2015).CrossRefGoogle Scholar
Hope, O. K.; Hu, D.; and Zhao, W.. “Third-Party Consequences of Short-Selling Threats: The Case of Auditor Behavior.” Journal of Accounting and Economics, 63 (2017), 479–498.CrossRefGoogle Scholar
Hou, K.; Van Dijk, M.; and Zhang, Y.. “The Implied Cost of Equity Capital: A New Approach.” Journal of Accounting and Economics, 53 (2012), 504–526.CrossRefGoogle Scholar
Hwang, C. Y.; Titman, S.; and Wang, Y.. “Investor Tastes, Corporate Behavior, and Stock Returns: An Analysis of Corporate Social Responsibility.” Management Science, 68 (2021), 7065–7791.Google Scholar
Ioannou, I., and Serafeim, G.. “Corporate Sustainability: A Strategy?” Harvard Business School Accounting & Management Unit Working Paper 19-065 (2019).CrossRefGoogle Scholar
Karpoff, J.; Lott, J.; and Wehrly, E.. “The Reputational Penalties for Environmental Violations: Empirical Evidence.” Journal of Law and Economics, 48 (2005), 653–675.CrossRefGoogle Scholar
Karpoff, J., and Lou, X.. “Short Sellers and Financial Misconduct.” Journal of Finance, 65 (2010), 1879–1913.CrossRefGoogle Scholar
Khan, M.; Serafeim, G.; and Yoon, A.. “Corporate Sustainability: First Evidence on Materiality.” Accounting Review, 91 (2016), 1697–1724.CrossRefGoogle Scholar
Kim, I., and Skinner, D. J.. “Measuring Securities Litigation Risk.” Journal of Accounting and Economics, 53 (2012), 290–310.CrossRefGoogle Scholar
Kim, I.; Wan, H.; Wang, B.; and Yang, T.. “Institutional Investors and Corporate Environmental, Social, and Governance Policies: Evidence from Toxics Release Data.” Management Science, 65 (2019), 4901–4926.CrossRefGoogle Scholar
Krueger, P. “CSR and Shareholder Wealth.” Journal of Financial Economics, 115 (2015), 304–329.CrossRefGoogle Scholar
Leland, H., and Pyle, D.. “Informational Asymmetries, Financial Structure, and Financial Intermediation.” Journal of Finance, 32 (1977), 371–387.CrossRefGoogle Scholar
Liang, H., and Renneboog, L.. “Corporate Social Responsibility and Sustainable Finance.” Oxford Research Encyclopedia of Economics and Finance (2021).CrossRefGoogle Scholar
Lins, K. V.; Servaes, H.; and Tamayo, A.. “Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility During the Financial Crisis.” Journal of Finance, 72 (2017), 1785–1824.CrossRefGoogle Scholar
Livnat, J., and Mendenhall, R. R.. “Comparing the Post-Earnings Announcement Drift for Surprises Calculated from Analyst and Time Series Forecasts.” Journal of Accounting Research, 44 (2006), 177–205.CrossRefGoogle Scholar
Lou, X., and Wang, A. Y.. “Flow-Induced Trading Pressure and Corporate Investment.” Journal of Financial and Quantitative Analysis, 53 (2018), 171–201.CrossRefGoogle Scholar
Masulis, R., and Reza, S.. “Agency Problems of Corporate Philanthropy.” Review of Financial Studies, 28 (2015), 592–636.CrossRefGoogle Scholar
Pástor, L., Stambaugh, R. F.; and Taylor, L. A.. “Sustainable Investing in Equilibrium.” Journal of Financial Economics, 142 (2021), 550–571.CrossRefGoogle Scholar
Servaes, H. and Tamayo, A.. “The Impact of Corporate Social Responsibility on Firm Value: The Role of Customer Awareness.” Management Science, 59 (2013), 1045–1061.CrossRefGoogle Scholar
Spence, M. “Job Market Signaling.” Quarterly Journal of Economics, 87 (1973), 355–374.CrossRefGoogle Scholar
Starks, L. T.; Venkat, P.; and Zhu, Q.. “Corporate ESG Profiles and Investor Horizons.” Working Paper, University of Texas at Austin (2020).Google Scholar
Sulaeman, J., and Wei, K. D.. “Sell-Side Analysts and Stock Mispricing: Evidence from Mutual Fund Flow-Driven Trading Pressure.” Management Science, 65 (2019), 5427–5448.CrossRefGoogle Scholar
Wardlaw, M. “Measuring Mutual Fund Flow Pressure as Shock to Stock Returns.” Journal of Finance, 75 (2020), 3221–3243.CrossRefGoogle Scholar
Whited, T.M., and Wu, G.. “Financial Constraints Risk.” Review of Financial Studies, 19 (2006) 531–559.CrossRefGoogle Scholar
Supplementary material: PDF

Gao et al. supplementary material

Gao et al. supplementary material

Download Gao et al. supplementary material(PDF)
PDF 251 KB