The Performance of Environmental and Social Activities in a Crisis

Abstract

The financial crisis induced by covid-19 pandemic presents a unique exogenous setting to test the relationship between corporate social responsibility (CSR) and corporate financial performance (CFP). We analyze this relationship in the travel and leisure industry, being the most affected during this period, using both stock returns and risk measures. Consistent with stakeholder salience theory, our results suggest that the effect of CSR activities on financial performance depends on the salience of the stakeholders involved. Firms that invest more in activities that benefit the most salient stakeholders (i.e., customers and the environment) have higher stock returns and lower idiosyncratic risk. On the contrary, pre-crisis investments in human rights actions and community engagement are negatively related to firm value. Moreover, we find a concave relationship between CSR and CFP suggesting an optimal level of CSR. These two results provide an explanation for the mixed findings in the literature, in fact, when we exclude the two hypotheses of a contingent and non-linear relationship, we find a neutral relationship, consistent with recent articles