Firm Strategies and Competencies Determine When CSR Investments Pay Off

Firm Strategies and Competencies Determine When CSR Investments Pay Off

When done strategically, investments in social and environmental activities can reduce market risk by stabilizing the volatility of your firm's stock price.
Mitchell Praw August 27, 2010
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: 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:

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. 

additional resources

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