Corporate social performance and financial risk: Further empirical evidence using higher frequency data

Ayton, Julie, Krasnikova, N. and Malki, I. 2022. Corporate social performance and financial risk: Further empirical evidence using higher frequency data. International Review of Financial Analysis. 80 (March) 102030. https://doi.org/10.1016/j.irfa.2022.102030

TitleCorporate social performance and financial risk: Further empirical evidence using higher frequency data
TypeJournal article
AuthorsAyton, Julie, Krasnikova, N. and Malki, I.
Abstract

Using a unique dataset of corporate social responsibility rating – available on a monthly basis – we shed new light on the relationship between corporate social performance (CSP) and firm risk. Where previous studies use annual (at best) measures of CSP, assuming that a change in CSP leads a change in risk, we formally test the direction of the relationship using Granger causality. Looking at large UK companies over 2002-2018 (for a total number of 19,832 firm-months), we reject any causality (either way) between CSP and financial risk (both systematic and idiosyncratic risk). This shows that the CSP-risk relationship is not an endogenous one, contrary to what previous evidence has found. Given the structure of our panel data (long T and short N), we apply GLS based estimator to correct for serial correlation in our panel regressions. We find strong evidence that CSP has a negative impact on idiosyncratic risk; however, the effect of CSP on systematic risk is not statistically significant. The existence of a contemporaneous, rather than lagged relationship doesn’t fare well with established CSP theories. Overall, our original approach has opened a new door to further the study of the link between CSP, financial performance and financial risk.

KeywordsCorporate social performance
Financial risk
Granger causality
Panel regression
UK companies
Article number102030
JournalInternational Review of Financial Analysis
Journal citation80 (March)
ISSN1057-5219
Year2022
PublisherElsevier
Accepted author manuscript
License
CC BY-NC-ND 4.0
File Access Level
Open (open metadata and files)
Digital Object Identifier (DOI)https://doi.org/10.1016/j.irfa.2022.102030
Web address (URL)https://www.sciencedirect.com/science/article/pii/S1057521922000102?via%3Dihub
Publication dates
Published in print01 Mar 2022
Published online17 Jan 2022

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