Corporate Social Responsibility, Risk Diversification, and Firm Value: Does Corporate Social Responsibility Diversify Risk

Abstract

The purpose of this study is to explore whether firms that employ corporate social responsibility tactics see bottom-line improvements to their firm’s performance through risk diversification. The literature review of this topic shows that “internal firm diversification” contributes positively to the reduction of idiosyncratic risk which in turn contributes to positive financial performance, and as such, this paper posits that investing in corporate social responsibility is a form of “internal firm diversification.” Using a corporate social responsibility rating as well as its lagged value as independent variables (Li, Class, 2016) and control variables for idiosyncratic risk (Mishra, and Modi, 2012) we observe that corporate social responsibility contributes positively to a firm’s financial performance in a variety of measures.