Corporate social responsibility as a common risk factor

Souad Lajili Jarjir, Aya Nasreddine and Marc Desban

Global Finance Journal, 2022, vol. 52, issue C

Abstract: This article challenges factor models widely used to explain stock returns. For European firms involved in corporate social responsibility (CSR) actions, we find a risk premium associated with extra-financial ratings priced by the market (that is, environmental, social, and governance [ESG] ratings). This premium is calculated as the excess return of low-rated firms compared to high-rated firms. To describe rated firms' returns, we propose a parsimonious two-factor model that includes both the market factor and this premium. Unlike the CAPM, three-, or five-factor models, our model is validated by the Gibbons, Ross and Shanken (1989) test. Our results lead to many managerial implications related to portfolio management, asset pricing, and corporate financial and investing decisions.

Keywords: Asset pricing; Risk factors; Three-, four- and five-factor models; ESG criteria; Corporate social responsibility and anomalies (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:52:y:2022:i:c:s1044028320302775

DOI: 10.1016/j.gfj.2020.100577

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