When Do Corporate Good Deeds Become a Burden?

Abstract

We study the effects of corporate social responsibility (CSR) on the stock market reaction to media reports of firms’ negative events. In general, prior literature has documented an insurance-like protection or risk-tempering effect of good CSR on firms following negative events. Building on and extending recent development in reputation and trust literatures, we propose that while the risk-tempering effect exists for good CSR toward secondary stakeholders, good CSR toward primary stakeholders amplifies the unfavourable market response to negative events. Further, both the risk-tempering and risk- amplifying effects are expected to vary with the type of negative events. The risk-amplifying effect of CSR toward primary stakeholders is mainly driven by negative events associated with the same group (primary) stakeholders. The risk tempering effect driven by CSR toward secondary stakeholders holds for negative events associated with both primary and secondary stakeholders. Based on RepRisk, a systematically collected database covering media coverage of various corporate negative events from 2007 to 2014, we find general support for these arguments.