CSR Reputation Protects Share Price During Market Crises
A good CSR strategy acts as a buffer for depreciating share prices during market turmoil.
The degree to which your firm has built up its CSR reputation may be a protective feature against stock dips in times of market crisis.
Though managers are focusing more attention on CSR, there remains little persuasive evidence that investments in CSR can actually benefit firms financially. A study by Karen E. Schnietz
of Graziadio School of Business and Management at Pepperdine University
, and Marc J. Epstein
of the Jones Graduate School of Management at Rice University
make a contribution to the existing literature by examining CSR reputation and financial benefits yielded by that reputation.
There is mixed evidence to date on the relationship between CSR and financial performance, partly because most studies focus on CSR reputation's impact on positive news and media. The impact of a firm's CSR reputation on financial performance during corporate crises is generally ignored.
Using an event study methodology, the authors investigate whether CSR reputation garners financial value during a corporate crisis by examining investor reaction to the 1999 Seattle World Trade Organization failure. They determine differences in market reactions by using secondary data from 416 Fortune 500 companies in the U.S.: this is supplemented with OLS regression to rule out trade policy impacts from the failed meetings as a possible explanation of market returns. The results - share price declines in firms without reputations for CSR were significantly greater than in firms with a strong CSR strategy.
The authors find that a strong CSR reputation in fact yields financial benefits for a firm's bottom line - by protecting your stock price from substantial drops.
During the crisis of the Seattle WTO meeting, the returns of firms with a CSR reputation did not decline significantly in response to the crisis, whereas the returns of firms without a CSR reputation declined by almost 2.4 per cent. CSR reputation provides the greatest benefit to firms in industries with poor CSR reputations. In those industries, firms with reputations for CSR again experienced no significant declines, while firms without such reputation experienced declines of over 3 per cent. (Read the work of Janney & Gove for similar findings in the NBS article How to Manage Your Company's Reputation Through a Crisis and Come Out on Top
As a manager, you can leverage these results to justify investments in CSR and advance your sustainability agenda, while debunking the skepticism of shareholders, employees, and boards. The market declines reported in the study resulted, on average, in a market capitalization loss of $378 million per firm.
This study provides at least two opportunities for future research: (1) the reasoning behind investor reaction (in particular, the event methodology rests on two unrealistic assumptions that investors are perfectly rational and markets perfectly efficient) and; (2) effects for other types of crises and contexts to determine any boundary conditions on the results reported here.