Corporate Social Responsibility, Stakeholder Risk, and Idiosyncratic Volatility

Abstract

Idiosyncratic volatility (IV) is regarded as a measure of firm specific information and has been shown to be correlated with ex post lower stock returns. We explore the nexus between IV and corporate social responsibility (CSR) and document that IV is positively correlated with net aggregate CSR and is negatively correlated with a CSR specific risk factor (namely stakeholder risk). Our findings show that: (i) less (more) reliance on market information (firm specific information) implies more difficulty in predictive accuracy; (ii) negative correlation between IV and exposure to the above mentioned CSR risk dimension contributes to explain the puzzle of the negative excess returns of high IV portfolios widely documented in the literature. Our findings are consistent with the hypothesis that CSR reduces flexibility in answering to productive shocks via reduction of stakeholders’ wellbeing, thereby making earnings less predictable in conventional ways, even though they are less exposed to risk of conflicts with stakeholders.