DOES CORPORATE SOCIAL IRRESPONSIBILITY REPUTATION AFFECT ACCOUNTING-RELATED LIQUIDITY RISK?

Abstract

ABSTRACT This study examines whether a firm’s CSIR reputation affects accounting-related liquidity risk in the stock market. Following Liu (2006)’s liquidity-augmented capital asset pricing model (LCAPM) and Chen et al. (2007) accounting-related liquidity risk, we find that a firm’s CSIR coverage is positively associated with accounting-related liquidity risk, indicating that investors expect higher compensation for liquidity risks that they bear when they invest in firms that have worsened CSIR reputation. The sensitivity tests show evidence that is consistent with the notion that high-risk firms tend to distribute more information to investors by engaging in CSR activities to retain a good reputation, decreasing information asymmetry between insiders and outsiders. This study provides a better understanding of the link between CSR performance and information asymmetry. Keywords CSIR reputation, liquidity risk, accounting quality, information asymmetry