Measuring the unmeasurable: CSR divergence and future stock price crash risk

ABSTRACTCorporate social responsibility (CSR) is vital for sustainable growth, while some companies receive quite large variations in CSR assessments. Aiming to measure the unmeasurable social responsibility, this paper investigates the effects of corporate social responsibility (CSR) and its rating divergence on the future stock price crash risk. We use the divergence of CSR ratings as the outcome uncertainty, and find that conditional on firms’ CSR performance, future stock price crash risk will increase with the CSR divergence. Further results show that the moderating effect is more pronounced for firms with weaker investor protection or higher agency costs. We conclude that firms with higher CSR divergence have more severe agency problems, complementary to the CSR literature.KEYWORDS: CSR divergencestock price crash riskoutcome uncertaintycorporate social responsibilityJEL CLASSIFICATION: M14G12G30 Disclosure statementNo potential conflict of interest was reported by the author(s).Notes1 Namely, Hexun rating system (Hexun), Chinese Corporate Social Responsibilities database (CCSR), Bloomberg, and RKS rating agency (RKS).2 More details are in the variable definitions in Appendix B and the detailed sample selection procedure is shown in Appendix C.3 Following extensive prior studies (Hutton, Marcus, and Tehranian Citation2009; Jang and Kang Citation2019), we use three measures of stock price crash risk for each firm-year observation. That is, the negative coefficient of skewness (NcSkew), the volatility of returns (DuVol) and the crash probability (CrashP). Thank one of the anonymous reviewers for the thoughtful comment. The details of calculating the variables are discussed in the Appendix A.4 Specifically, we rescale each agency’s rating from 1 to 10 and calculate the average mean accordingly. The adjusted CSR = (raw score of CSRi,t,j – minimum score provided by rater j in year t)/(maximum score provided by rater j in year t – minimum score provided by rater j in year t). Thank one reviewer for raising the question so we clarify it here.5 It should be noted that the coefficients of CSR_Perf are all significantly negative related with crash risk which is consistent with the prior literature (Feng, Goodell, and Shen Citation2022).6 Following the earlier literature (LaPorta et al. Citation1998; Zhang et al. Citation2017), we construct IP by assign a score between 0 and 100, which is the weighted average of five indexes – accounting information quality, internal control effectiveness, the independence of external auditor, operations management efficiency, and financial management efficiency.7 Agency costs is the composite score of free cash flow, expense ratio, dividend payout ratio and asset utilization (Obeng, Ahmed, and Cahan Citation2021).8 We thank the anonymous reviewer for the constructive suggestion.9 Adjusted CSR = adjusted CSR = (raw score of CSRi,t,j – minimum score provided by rater j in year t)/(maximum score provided by rater j in year t – minimum score provided by rater j in year t).10 Chinese listed firms’ annual CSR reports cover eleven aspects, namely third-party certification, referring to GRI, Big 4 external auditors, shareholders protection, creditors protection, staff protection, supplier protection, customer protection, environment protection, public relation, and system constructions.Additional informationFundingThe work was supported by the Education Department of Jilin Province [JJKH20230186SK]; Jilin Provincial Education Science Project [ZD22124]; Jilin Provincial Scientific and Technological Development Program [20230601019FG].