Is CSR linked to idiosyncratic risk? Evidence from the copula approach

Abstract

In this paper, we extend the research on the effect of corporate social responsibility (CSR) on firm risk by analyzing the CSR–idiosyncratic risk nexus and how CSR can be integrated as insurance in a global risk management strategy. First, the causality between CSR and risk was tested. Second, copulas were estimated to strengthen the existing results on the structure of the dependence between the different dimensions of CSR activities and idiosyncratic risk levels. The empirical analysis was conducted on a sample of 254 European-listed firms over the 2018–2020 period. The main results showed a directional causality effect between CSR and idiosyncratic risk, and the dependences were modeled between CSR and realized idiosyncratic risk. This allows a better understanding of the risk implications of CSR for investors, corporate managers, and policy makers.

Corporate governance and risk management: a systematic review and synthesis for future research

“…However, the most recent ones have shifted their focus towards CSR (e.g. Hassan et al ., 2021; Li et al ., 2021; Wang et al ., 2021; Aevoae et al ., 2022; Bannier et al ., 2022; Chakraborty et al ., 2022; Do, 2022; Mefteh-Wali et al ., 2022) and accordingly theories based on stakeholder, shareholder, signalling and resource-based view have gained more prominence. In the present times, it is pertinent to communicate management's commitment and willingness towards society and stakeholders.…”

“…Furthermore, certain geographies, such as the European Union (e.g. Addo et al ., 2021; Mefteh-Wali et al ., 2022), Australia (e.g. Tan and Liu, 2016; Ali et al ., 2018; Unda and Ranasinghe, 2021), the UK (e.g.…”

“…Both Li et al . (2021) and Mefteh-Wali et al . (2022) concluded that there is a U-shaped relationship, implying that the outlay on CSR activities is only beneficial if the benefits are more than the cost involved.…”

What do we know about ESG and risk? A systematic and bibliometric review

“…Many studies specifically investigate the impact of ESG metrics on CSP (Corporate Social Performance) linked to the firm (total) risk, systemic (idiosyncratic or unsystematic) risk and firm specific (or idiosyncratic) risk (see e.g., Embrechts et al (2011) and McNeil et al (2015)). Idiosyncratic risk is caused by specific firm's characteristics and it can be estimated by the realised idiosyncratic volatility and expected idiosyncratic volatility (Mefteh‐Wali et al, 2022), whereas the systemic risk depends on a firm's sensitivity to changes in average market, which is explained by how a stock's return reflects the general market movements (the universe of securities) and it is measured by a firm's Beta, based on the standard CAPM model and its improvements (Sassen et al, 2016). Through CSR, firms can manage their idiosyncratic risk.…”

“…Firms invest in CRS projects to control their risk using CRS as an insurance mechanism against risk. Mefteh‐Wali et al (2022) and Clemente et al (2022) propose innovative methodologies to manage idiosyncratic risk. Based on various copula functions, Mefteh‐Wali et al (2022) depicts the complex dependence structures between the firm specific risk and idiosyncratic risk levels, showing a directional causality between CSR and the idiosyncratic risk.…”