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

• Author: Scott Julian,Yonghong Jia,Xinghua Gao
• Date: 01 February 2020
• Published date: 01 February 2020
• DOI: http://doi.org/10.1002/smj.3107

RESEARCH ARTICLE

Do firms use corporate social responsibility to insure

against stock price risk? Evidence from a natural

experiment

Yonghong Jia

1

| Xinghua Gao

2

| Scott Julian

3

1

Ivy College of Business, Iowa State University, Ames, Iowa

2

Carson College of Business, Washington State University, Pullman, Washington

3

Mike IIitch School of Business, Wayne State University, Detroit, Michigan

Correspondence

Yonghong Jia, Ivy College of Business,

Iowa State University, 2167 Union Drive,

Ames, IA 50010.

Email: yonghong@iastate.edu

Abstract

Research Summary: To examine whether firms use corpo-

rate social responsibility (CSR) to insure against stock price

risk, we exploit an exogenous shock in stock price risk asso-

ciated 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.

Managerial Summary: 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 ran-

domly selected set of pilot firms were exposed to elevated

short-sale risk unleashed by the SEC regulation, we find evi-

dence that they do. Once the SEC initiated the regulatory

Received: 5 February 2019 Revised: 4 September 2019 Accepted: 6 September 2019 Published on: 21 November 2019

DOI: 10.1002/smj.3107

290 © 2019 John Wiley & Sons, Ltd. Strat Mgmt J. 2020;41:290–307.wileyonlinelibrary.com/journal/smj

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.

KEYWORDS

CSR, insurance-like effect, resource allocation, short selling, stock

price risk

1|INTRODUCTION

Do firms purposefully use corporate social responsibility (CSR) for risk mitigation, such as to insure

against stock price risk? We investigate this question by taking advantage of an exogenous shock in

stock price risk associated with the 2005 Regulation SHO (hereinafter Reg SHO) whereby the SEC

removed the uptick restriction for a set of randomly selected pilot firms.

1

U.S. firms have intensively

engaged in CSR activities in recent decades, so it is of great interest to understand the rationale for

such allocation of resources (Mattingly, 2017). Some prior studies address passive firm adoption of

CSR in the face of various pressures (Aguinis & Glavas, 2012; Groza, Pronschinske, & Walker,

2011) while others have found that firms actively pursue CSR to gain benefits “from a variety of

stakeholders, such as consumers, employees, investors, regulators, and other socio-political actors”

(Kaul & Luo, 2018, p. 1653). Within this latter stream, assessing firms' insurance motives to invest

in CSR is particularly important given the increasing business need for risk management and mitiga-

tion (e.g., Disparte, 2016). To this point, Peloza's (2006, p. 60) observation as to the managerial use

of CSR rings true: “… although researchers and firms are moving toward an appreciation of insur-

ance potential from CSR, the certainty of firms' abilities to take advantage of this potential is

limited.”

Prior literature shows that firms that have invested in CSR enjoy insurance-like benefits

(Godfrey, Merrill, & Hansen, 2009; Koh, Qian, & Wang, 2014; Shiu & Yang, 2017) but has not

shown that these benefits are the reason firms advance CSR. A firm's enjoyment of such benefits

need not imply that firms intentionally leverage CSR for risk mitigation purposes since firms might

just happen to realize insurance benefits while engaging in CSR for other reasons. For example, firms

face pressure by governments, NGOs, activists, media, and/or various CSR rankings to pursue CSR,

which may bring about unintended, ad hoc insurance benefits (Wang, Tong, Takeuchi, & George,

2016); or they may actively pursue CSR to seek benefits other than insurance-related ones (Kaul &

Luo, 2018). As well, it is unclear whether CSR undertaken for the instrumental purpose of protecting

against future negative events actually does so (Godfrey, 2005). Luo, Kaul, and Seo (2018) highlight

the importance of this issue by finding that the insurance-like benefits of philanthropy appear to be

opportunistically used by petroleum firms as a shield for more oil spills. In this study, we address

these gaps in the literature by exploiting the natural experiment of Reg SHO to examine whether

1

To ascertain the effect of loosening short selling restrictions (i.e., lifting the uptick rule), the SEC ran a pilot study as part of

Reg SHO. It announced the list of pilot stocks on July 28, 2004. The pilot program took effect on May 2, 2005 (i.e., the uptick

rule was removed only for pilot securities) and ended on July 6, 2007, when the uptick rule was eliminated for all exchange-

listed stocks.

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