Corporate Social Responsibility and the market reaction to negative events: evidence from inadvertent and fraudulent restatement announcements

We advance a theory asserting that CSR performance may exacerbate, not necessarily moderate, a company’s negative stock-price response to negative events. In testing this theory, we hypothesize and find that CSR performance alleviates (magnifies) the immediate negative stock-price response to inadvertent (fraudulent) restatement announcements, and that these findings are robust to specifications that consider alternative CSR measures and a multitude of control variables shown by prior research to have explanatory power for the cross sectional variation in stock returns. Overall, using restatement announcements as a channel through which CSR performance may affect company value, we show, in contrast to prior research, that depending on management conduct leading to the restatement, a company’s CSR performance may destroy, not necessarily enhance, firm value. Our findings may, thus, inform researchers, market participants, and regulators.