Corporate Environmental Responsibility and Corporate Risk

Abstract

The scope of this chapter is to examine the impact of CER related performance on firms’ systematic risk, by controlling for potential endogeneity between CER and systematic risk and by distinguishing sample firms between common law and code law countries, evidenced as significant factors for the inconsistency of empirical results by previous studies. Empirical results indicated that CER performance provides a negative and significant impact on firm systematic risk (beta) verifying existing evidence on the literature that CER investments reduce the firm’s systematic risk, so leading us to accept the risk reduction hypothesis. In addition, firms with more stakeholder oriented CER activities are associated with more risk aversion and ethical behavior, especially towards its employees and the environment, thus perceived as having less uncertainty and risk, so investors require a smaller risk premium to invest in such corporations. Moreover, after separating sample firms based on their country’s legal origin we found that CER performing firms in common law countries are associated with higher systematic risk.