Does CSR engender trust? Evidence from investor reactions to corporate disclosures

Jonathan Berkovitch, Doron Israeli, Atanu Rakshit, Suhas A. Sridharan

Research output: Working paper

Abstract

We investigate whether a firm’s corporate social responsibility (CSR) activities engender investor trust. Motivated by the observation that investor trust facilitates greater informational efficiency of security prices, we address our question by examining the relation between CSR and three dimensions of stock price discovery: (1) the speed with which stock prices reflect earnings news, (2) the level of investor uncertainty before and during earnings announcements, and (3) earnings response coefficients. We find robust evidence in support of the hypothesis that CSR enhances investor trust in firms. Specifically, we find that firms with higher levels of CSR enjoy greater intraperiod timeliness and efficiency of reported earnings, lower investor uncertainty before and during earnings announcements, and higher earnings response coefficients. Using regression discontinuity design, we identify a causal effect of the passage of CSR-related initiatives on the speed with which stock prices reflect earnings news. Our inferences are robust to controls for characteristics of reported earnings, firm information environment, and alternative measures of CSR. Our study provides direct evidence that CSR affects stock price informativeness and sheds light on a desirable capital market consequence of CSR.
Original languageEnglish
Number of pages54
Publication statusIn preparation - 2021

Keywords

  • Corporate social responsibility (CSR)
  • investor trust
  • informational efficiency
  • corporate disclosures

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