Corporate Social Responsibility and Litigation Risk

Abstract

Litigation is costly to firms, and so is, allegedly, corporate social responsibility (CSR) activities. This paper investigates whether CSR helps reduce a firm's class-action securities litigation risk. We hypothesize that firms strategically invest in CSR to build moral capital to reduce the probability of securities litigation. Correcting for the endogeneity of CSR activities, we find robust evidence that CSR reduces the probability that a firm faces securities class-action lawsuits. Furthermore, we show that a higher CSR score reduces the size of the abnormal market reaction following the revelation of suspected fraud. These findings suggest that strategic philanthropy increases (or at least preserves) firm wealth by reducing the costs related to securities litigation.