Does doing good pay off or just signal agency problems?
Philipp Krüger identified 2,116 company-specific CSR events spanning various stakeholder issues and measured the abnormal stock return for each incident in « Corporate Goodness and Shareholder Wealth ».
He also controlled for various factors such as the firm’s governance or whether a positive event was correcting a prior CSR failure and showed:
- Investors reacted strongly negatively to news of corporate « bad deeds »: on average, they led to significant stock price declines, especially when they involved harm to communities or the environment.
- When companies announced positive CSR initiatives, the stock market reaction was slightly negative, which suggests that « doing good » was viewed by investors as an expense.
- The median market value loss for a negative event was estimated around $76 million, while altruistic corporate gestures did not translate into immediate shareholder gains in most cases.
- If a firm was less prone to agency problems and had strong governance, investors reacted more favourably to positive CSR news.
- Positive CSR action were also also welcomed by the market when they appeared to offset or remedy prior corporate misdeeds or controversies, with firms’ stock prices rising on average.
- Investors responded more strongly when CSR news had clear financial relevance (for example, a lawsuit or a major cost savings from a green initiative) triggered larger stock adjustments.
- The magnitude of reaction depended on perceived severity: very serious negative events or exceptionally impactful positive ones prompted bigger stock moves than milder incidents.
This study shows corporate irresponsibility clearly erodes shareholder wealth, and investors may be more supportive of CSR efforts in well-governed companies or when such efforts address known problems.
They should however be skeptical of « goodness » that looks like managerial self-indulgence, as CSR initiatives in areas unrelated to core business risks may be met with shareholder indifference or suspicion.
As a limitation, this study captures short-term stock reactions to discrete events, which may not reflect longer-term benefits of sustainability initiatives, and it relies on mid-2000s data predating the recent surge responsible investing.