Corporate Social Responsibility as a Swap for Reducing Firm Risk: Evidence from Stock Market Reaction to FDI Announcements

Previous studies propose that corporate social responsibility (CSR) activities have insurance- or option-like property in corporate risk management, protecting shareholder value against downward changes caused by negative events. This study tests these proposals by examining (1) the relationship between CSR performance and firm risk around foreign direct investment (FDI) announcements and (2) the impact of CSR performance on increases in shareholder value caused by positive events and decreases in shareholder value caused by negative events. Using a sample of 20,275 FDI deals by 2488 firms from 48 home countries investing in 121 host countries during 2003–2014, we find that firms with high CSR performance have significantly lower volatility in their cumulative returns around FDI announcements. This risk reduction is driven principally by social CSR and secondarily by corporate governance CSR. Environmental CSR appears to have only a minor role. CSR activities not only mitigate decreases in shareholder value caused by negative events but also attenuate increases in shareholder value caused by positive events. Our present results suggest that CSR activities have a swap-like property, which exchanges riskier assets for less risky ones, rather than an insurance- or option-like property for reducing firm risk.