Do firms use corporate social responsibility to insure against stock price risk? Evidence from a natural experiment

Abstract

To examine whether firms use corporate social responsibility (CSR) to insure against stock price risk, we exploit an exogenous shock in stock price risk associated with Regulation SHO whereby the SEC randomly selected pilot firms for which the uptick restriction on short sales no longer applied. A difference-in-differences test reveals that pilot firms increased CSR more than nonpilot firms and that in particular they reduced CSR concerns and increased CSR that impacts stakeholders involved in direct resource exchange. We also find that pilot firm CSR reduced short positions against them and that the effect is stronger for CSR concerns and CSR that impacts directly connected stakeholders. Overall, we document a causal effect of stock price risk on managerial incentives to invest in CSR for risk management. Corporate social responsibility has many purported benefits, one of which is that it can insure against the adverse stock price effects of negative events. But do managers purposefully use CSR in this way and do such investments provide intended insurance-like benefits? By taking advantage of a natural experiment where a randomly selected set of pilot firms were exposed to elevated short-sale risk unleashed by the SEC regulation, we find evidence that they do. Once the SEC initiated the regulatory change, firms that faced greater risk increased CSR more than firms that did not. In addition, increased CSR lowered short interests in pilot firms' stocks and this reduction is attributable to the insurance-like effect of CSR rather than simply prevention of adverse events. A video abstract is available athttps://youtu.be/zajeSbhlwhc