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The effect of corporate social responsibility on stock performance: new evidence for the USA and Europe

Urs von Arx and Andreas Ziegler

Quantitative Finance, 2014, vol. 14, issue 6, 977-991

Abstract: This paper provides new empirical evidence for the effect of corporate social responsibility on corporate financial performance. In contrast to former studies, we examine two different regions, namely the USA and Europe, and disentangle firm and sector specific impacts. Our econometric analysis shows that environmental and social activities of a firm compared with other firms within the industry are valued by financial markets in both regions. However, the respective positive effects on average monthly stock returns between 2003 and 2006 are more robust in the USA and, in addition, non-linear. Our analysis furthermore points to biased parameter estimates if incorrectly specified econometric models are applied: the seemingly significantly negative effect of environmental and social performance of the industry to which a firm belongs strongly declines and mostly becomes insignificant if the explanation of stock performance is based on the Fama-French three-factor or the Carhart four-factor models instead of the simple Capital Asset Pricing Model.

Date: 2014
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