Corporate Environmental Responsibility and Firm Risk

Li Cai (), Jinhua Cui () and Hoje Jo ()
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Li Cai: Illinois Institute of Technology
Jinhua Cui: Korea University
Hoje Jo: Santa Clara University

Journal of Business Ethics, 2016, vol. 139, issue 3, No 10, 563-594

Abstract: Abstract In this study, we examine the relation between corporate environmental responsibility (CER) and risk in U.S. public firms. We develop and test the risk-reduction, resource-constraint, and cross-industry variation hypotheses. Using an extensive U.S. sample during the 1991–2012 period, we find that for U.S. industries as a whole, CER engagement inversely affects firm risk after controlling for various firm characteristics. The result remains robust when we use firm fixed effect or an alternative measure of CER using principal component analysis or downside risk measures. To address the concern of endogeneity bias, we use a system equations approach and dynamic system generalized methods of moment regressions, and continue to find that environmentally responsible firms experience lower risk. These findings support the risk-reduction hypothesis, but not the resource-constraint hypothesis, along with the notion that the top management in U.S. firms is generally risk averse and that their CER engagement facilitates their risk management efforts. Our cross-industry analysis further reveals that the inverse CER-risk association mainly comes from the manufacturing sector, whereas in the service sector, CER tends to increase firm risk.

Keywords: Corporate environmental responsibility; Corporate social responsibility; Risk reduction; Resource constraint (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (107)

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DOI: 10.1007/s10551-015-2630-4

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