Corporate Social Responsibility and Stock Resilience. An Examination of European Companies during the COVID-19 Crisis

Table of Contents

1 Introduction

2 Literature Review

2.1 Corporate Social Responsibility

2.2 CSR and Corporate Financial Performance

2.3 CSR in Times of Crisis pre-COVID-19 Crisis

2.4 CSR in Times of Crisis post-COVID-19 Crisis

3 Data, Variables, and Sample Construction

3.1 CSR Ratings

3.2 Stock Market Data

3.3 Market-based Measures of Risk

3.4 Accounting-based Measures of Performance and Financial Position

3.5 Corporate Governance Measures

3.6 Additional Relevant Variables

3.7 Sample Construction and Summary Statistics

4 Methodology

4.1 Model Specification

4.2 Validity

4.2.1 Omitted Variable Bias

4.2.2 Selection Bias

4.2.3 Multicollinearity

4.2.4 Heteroskedasticity

5 Empirical Results

5.1 Performance during the Crisis Period

5.1.1 Abnormal Stock Returns

5.1.2 Raw Stock Returns

5.1.3 Volatility Measures

5.2 Performance during the Recovery Period

5.2.1 Return Measures

5.2.2 Volatility Measures

5.3 Specification Checks

5.3.1 Different CSR Measures

5.3.2 Further Specification Checks

6 Discussion

7 Conclusion

Research Objectives and Topics

This thesis investigates whether corporate social responsibility (CSR) engagement serves as an effective mechanism to protect shareholder wealth and mitigate tail risk for European companies during the COVID-19 economic crisis and the subsequent recovery period.

• Analysis of the relationship between CSR performance and stock market returns (abnormal and raw) during market crises.
• Evaluation of CSR as a mechanism for reducing idiosyncratic and total stock volatility.
• Comparison of European company performance against broader evidence from U.S. and global studies.
• Application of comprehensive control variables, including market-based risk, accounting metrics, and corporate governance factors.
• Investigation of the sensitivity of results to different fiscal year ESG scores and methodological specifications.

Excerpt from the Book

Summary of Chapters

1 Introduction: Provides the context of the COVID-19 pandemic's impact on financial markets and introduces the research question regarding CSR's role as a resilience factor.

2 Literature Review: Outlines major definitions of CSR and discusses historical and recent empirical findings regarding the link between CSR performance and corporate financial performance.

3 Data, Variables, and Sample Construction: Details the selection of 428 European companies, the definition of CSR using Refinitiv ESG scores, and the construction of performance and control variables.

4 Methodology: Describes the cross-sectional regression models used to analyze the data and addresses potential validity issues such as selection bias and multicollinearity.

5 Empirical Results: Presents the findings of the regression analysis for the crisis and recovery periods, indicating a lack of significant relationship between aggregate ESG scores and stock performance, with nuances regarding the social pillar.

6 Discussion: Interprets the findings in the context of existing literature and explores why the protective effects of CSR observed in other studies may not apply to this specific European sample.

7 Conclusion: Summarizes the thesis findings, stating that engagement in social activities specifically, rather than aggregate CSR, may help mitigate idiosyncratic risk, and offers implications for investors.

Keywords

Corporate Social Responsibility, CSR, ESG, COVID-19, Stock Performance, Idiosyncratic Risk, Shareholder Wealth, European Companies, Stock Volatility, Regression Analysis, Financial Performance, Moral Capital, Crisis Resilience, Risk Management, Corporate Governance

Frequently Asked Questions

What is the fundamental objective of this research?

The research aims to determine whether engagement in corporate social responsibility (CSR) shields shareholder wealth and reduces tail risk for European firms during the COVID-19 economic crisis and recovery.

What are the primary themes covered in this study?

The study covers the impact of CSR on stock performance, the role of ESG scores as proxies for CSR, the influence of firm-specific risk factors, and the role of corporate governance in crisis resilience.

What specific research question does the thesis address?

It addresses whether engagement in CSR can shield shareholder wealth from the adverse effects of an economic crisis, effectively mitigating tail risk for European companies.

Which scientific methodology is employed?

The author employs cross-sectional OLS regressions, controlling for country and sectro-specific effects, to test the relationship between CSR performance and various measures of stock returns and volatility.

What topics are discussed in the main body of the work?

The main body includes a literature review, a detailed explanation of the data and regression model construction, empirical results for both the crisis and recovery periods, and a discussion of the limitations and implications of the results.

Which keywords best characterize this work?

Key terms include Corporate Social Responsibility (CSR), ESG, COVID-19, idiosyncratic risk, stock performance, and European companies.

What is the relevance of the "social pillar" within the ESC scores?

The research finds that while aggregate ESG scores often fail to show significant results, the social pillar score is specifically linked to lower idiosyncratic volatility during the crisis.

How does the author explain the difference between these findings and those of Lins et al. (2017)?

The author argues that while Lins et al. (2017) focused on the Global Financial Crisis (a "crisis of trust"), the COVID-19 pandemic was a public health crisis where market trust played a diminished role.

What is the primary conclusion regarding CSR engagement?

The author concludes that CSR per se does not automatically shield wealth, but that specific engagement in social activities can help mitigate idiosyncratic risk.

What are the practical implications for investors?

Investors can use a company's social pillar score to assess tail risk and improve portfolio risk management, particularly for reducing exposure to idiosyncratic volatility in times of crisis.