The Value of Trust: Corporate Social Responsibility Ratings and Stock Returns during the 2008-2009 Financial Crisis

We study the extent to which trustworthiness, as measured by the intensity of a firm’s corporate social responsibility (CSR) activities, affects valuation during the 2008-2009 financial crisis. We find that high-CSR firms have crisis-period stock returns that are four to five percentage points higher than low-CSR firms, all else equal. Further, while in the booming-economy years leading up to the crisis high-CSR firms underperformed low-CSR firms, the difference in return performance between the high and low-CSR firms disappears in the post-crisis recovery period. Overall, our evidence is consistent with a theme in which the need for investors to explicitly understand the trustworthiness of the firms they invest in depends upon the prevailing economic conditions and investors’ assessment of risk. A firm’s investments in, and positive attitudes toward, a broad set of stakeholders that accrue through its CSR activities are not viewed as value-enhancing by investors when firms are delivering high performance in aggregate. However, when firms are subject to an unexpected shock to confidence that causes a systematic reassessment of trust, as happened during the crisis, CSR activities are viewed positively by investors as a signal that (i) the company can be trusted as not being fraudulent, and (ii) stakeholders will trust and support the company throughout the crisis as a reward for its broader social objectives. Our post-crisis evidence indicates that investors now view the long-term valuation benefits of engagement with a range of internal and external stakeholders as being commensurate with the costs.

This event is an Erasmus Finance Seminar. The Erasmus Finance Seminar series brings prominent researchers in Finance from all over the world to Rotterdam.