Benefitting from CSR in Times of Crisis? Testing Different Measures of Engagement in CSR Activities

Abstract

This thesis aims to determine whether firms engaging in Corporate Social Responsibility (CSR) activities can benefit from insurance-like protection against firm value loss in firm-specific crisis situations of environmental-, social-, and governance-violating nature. A sample of 168 corporate scandals across 108 global companies from 2004 to 2019 was investigated. As a first step, the event study methodology was applied to examine the market reaction to news of corporate scandals. Significant negative abnormal returns were found. Following, regression analyses were conducted to further assess whether these negative stock price returns would be less severe for firms engaged in CSR activities. More specifically, three different proxies to measure this firm engagement in CSR activities were employed: (1) the ESG Level, which is the level of a firm’s ESG score; (2) the ESG Momentum, which is the one-year change of a firm’s ESG score; and (3) the ESG Combinatory Proxy, which is the combination of the initial level of a firm’s ESG score and the ensuing ESG Momentum. The results show a positive relationship between each of the three proxy variables and the negative abnormal returns, yet significance could only be found for the ESG Level and the ESG Momentum. This means that firms with a high level of CSR efforts and firms with improvements in their CSR efforts benefit from less negative market reactions in the context of a corporate scandal. Furthermore, it was found that this insurance-like protection persists more for firms that exhibit improvements in their CSR efforts than for firms with a high level of CSR efforts. Due to the insignificant results of the ESG Combinatory Proxy variable in the regression analyses, no such inferences could be made for this measure of firm engagement in CSR activities.