Corporate Social Responsibility as a Catalyst for Sentimental Stock Price Corrections

Abstract: Extant research finds that firms can buffer the effects of sentimental stock price corrections when bubbles burst by increasing their customer satisfaction. Research also shows that corporate social responsibility (CSR) is an antecedent of customer satisfaction and is related to market value. This study bridges the gap between these two findings by examining the cross-section of stock returns by CSR activity, and conditional on investor sentiment. Surprisingly, results show that CSR activities have the opposite effect of customer satisfaction: they catalyze firms’ reactions to investor sentiment, increasing volatility and returns. Implications for managing market-based assets are that CSR policies should be undertaken during periods of low investor sentiment, and alternatives to CSR should be undertaken to increase customer satisfaction during periods of high investor sentiment.