Participating in good corporate social responsibility may buffer your firm's stock price against volatile market swings.

Firm Risk and Stock Price Volatility

Critics suggest CSR activities don’t benefit companies over the long term because they compete for dollars that could be spent on other initiatives, like advertising or R&D. While previous research examined the role of corporate social performance (CSP) on stock growth, risk remains a relatively unstudied outcome.

Researchers Xueming Luo (University of Texas at Arlington)  and C.B. Bhattacharya (European School of Management and Technology) examine the link between a company’s social performance and the volatility of its stock price. The authors hypothesize CSP will reduce the volatility of stock prices due to a reputation or insurance effect.

The authors test their hypotheses using data on CSP from Fortune’s Most Admired Companies and sources. CSP was defined as overall performance in a variety of programs (cause-related marketing, corporate philanthropy, etc.) relative to leading competitors in the industry. Stock prices were taken from the Centre for Research in Security Prices (CRSP). The authors used a set of regression models to test their hypotheses.

CSP Protects Against Firm-Specific Risk

The authors distilled four critical findings from their research:

  • CSP reduces stock volatility when advertising levels are high. The authors suggest this is because firms with more advertising have greater market awareness and more channels to communicate initiatives of all sorts to investors and other stakeholders.
  • CSP reduces stock volatility when R&D levels are high. Innovation is important to stakeholders. If they aren’t confident in a firm’s products and management priorities, CSR can backfire, reducing confidence. The firm may be seen as investing in sustainability at the cost of other key programs.
  • When combined with both increased advertising and R&D, CSP leads to increased stock volatility. It’s difficult, if not impossible, to invest extensively in all strategic priorities at once – the initiatives may be perceived with skepticism, or stakeholders may suspect the firm is misallocating resources.
  • Overall, investments in CSP reduce stock price volatility. This lends further support to the hypothesis that CSP acts as insurance. This reduction in risk holds for both firm-idiosyncratic factors and systematic (i.e., market-wide) factors.

The benefits are meaningful – a one-standard deviation increase in CSP from the average can cut firm-specific risk by 10 per cent.

What Managers Need to Know:

  • Leverage your social performance to insulate your firm: Expect you’ll do better if your firm is invested in innovation or advertising.
  • Understand your stakeholders before taking on new sustainability initiatives: Your investors and customers are the ones who determine whether your CSP ‘pays off.’
  • Don’t be “cause exploitative”: Doing everything at once, like pushing simultaneously for social performance, innovation, and advertising, can be seen as irresponsible or just plain ineffective.
  • Consider CSP in the context of other strategic investments: The payoff from sustainability is not proportionate or unconditional; social performance works in tandem with other instruments.

Investments in CSP reduce firm risk, measured by stock volatility. However, risk reduction is present only when a firm pursues a strategy of high R&D or advertising. When your firm invests in CSP, R&D, and advertising simultaneously, be aware that risk can in fact increase.

This study extends the research linking marketing and finance, highlighting the potential for marketing tools combined with CSP to reduce financial risk. The authors also quantify the risk reduction benefits of CSP. Future researchers can use this to quantify marketing levers and their relationships to CSP, and its contingent impact on firm financial performance.


Luo, X., and Bhattacharya, C.B. 2009. “The Debate Over Doing Good: Corporate Social Performance, Strategic Marketing Levers, and Firm-idiosyncratic Risk. Journal of Marketing. 73:198-213.