CSR Destroys Value When Firms Stop Leading by Example

The financial economic literature has described corporate social responsibility (CSR) as a sort of panacea, capable of invariably providing an insurance-like stock price protection to firms against the effects of negative news events. New research by Bocconi Department of Accounting scholars Antonio Marra and Francesco Momenté, along with Eli Bartov (NYU - Stern School of Business), shows that higher CSR performance may exacerbate, rather than alleviate, the market response to negative events and destroy firm value, if the event is due to fraudulent management conduct that contradicts CSR principles.

"CSR performance translates into a hard-earned reputational premium in a company's stock," Professor Marra says. "And once the trust is broken, investors are no longer willing to pay such a premium, as we see analyzing hundreds of restatement cases in the US."

A restatement is the revision of one or more of a company's previously released financial statements and may be caused by either an inadvertent error or by a fraudulent misstatement resulting from misappropriations or intentional accounting violations. In their article published in The Accounting Review, the three scholars analyze a broad sample of 560 restatement announcements spanning the 12-year period, January 2005 to December 2016: 461 inadvertent errors, and 99 fraudulent misstatements.

"We find that when the restatement is due to an inadvertent error, the announcement return relates positively to the restating company's CSR performance. When the restatement stems from accounting fraud, on the contrary, the higher a company's CSR performance is, the more negative the stock price response to the restatement announcement," Professor Momenté says.

The immediate stock price response (in a three-day window) in the fraudulent sample (-3.2%) is stronger than the response in the inadvertent sample (-1.8%), and the difference is highly significant.

Dividing the companies into CSR levels, the authors observe that in the inadvertent category high CSR firms exhibit a lower stock-price decline than low CSR ones (-1.4% vs -2.1%), while in the fraudulent category high CSR performance amplifies the loss (-4.2% vs -2%).

Interestingly, when considering the whole sample, CSR performance seems to invariably alleviate the negative stock price effect of restatement announcements, thus confirming conventional wisdom. "But this is due to the fact that inadvertent errors are much more frequent than fraud," Prof. Marra explains, "and their positive effect overwhelms and hides the negative effect of CSR performance in case of fraud."

Eli Bartov, Antonio Marra, Francesco Momenté, "Corporate Social Responsibility and the Market Reaction to Negative Events: Evidence from Inadvertent and Fraudulent Restatement Announcements", The Accounting Review, DOI: 10.2308/tar-2018-0281.