The Effect of Listed Companies’ Social Responsibility on the Market Reaction to Violations

Abstract

This study investigates whether the listed company’s social responsibility will impact investors and regulators after corporate frauds. Does the corporate social responsibility (CSR) performance bring about the “compensation” effect or the “reputation collapse” effect? Using the cumulative abnormal return to characterize the market reaction, our results based on the Chinese listed firms that have committed violations throughout 2010-2020 show that the announcement of violation enforcement will produce significantly negative market reaction, and the more serious the type of violation enforcement, the greater the negative market reaction. Further, we find that the corporate social responsibility (CSR) performance will not directly affect the market reaction of the announcement of punishment for violations, but it will increase the severity of the company’s punishment for violations, thus indirectly bringing more negative market reaction. Overall, our findings suggest that the listed company’s social responsibility (CSR) performance before violation cannot play a “compensation” effect to offset the negative impact caused by its violation, it may bring more serious administrative punishment to the company due to the “reputation avalanche” effect inversely, thus leading to more negative economic consequences, and is not conducive to the sustainable development of the company.