Corporate social responsibility: market regulation and the evidence

Purpose - Much has been written about the importance of corporate social responsibility (CSR) and the need to assure its importance through formal regulation and reporting requirements. Little reflection has taken place on the role of the market in achieving effective regulation and behaviour changes in this area through an analysis of stock values. This study seeks to fill that gap by presenting an analysis of CSR influences on stock values facilitated by the regulatory methods of the stock markets. Design/methodology/approach - The 90 shares of the US Dow Jones Sustainability Index were chosen as the sample of firms with “value‐generating CSR”. The performance of these individual shares was analysed by comparing their return with the relevant indexes, with the respective industry and on a risk‐adjusted basis, for the six years and the ten years ended 30 June 2006. Several tests were carried out to see whether or not the sample contained a value/growth/core/large cap bias. Findings - The results were impressive: stocks from companies with “value‐driven CSR” clearly outperformed the market and their peers over extensive periods of time, with reasonably low risk. Research limitations/implications - There are several limitations of this type of analysis ranging from those inherent in the Capital Asset Pricing Model, to the fact that other cultures might define corporate responsibility differently. Originality/value - The CSR2model introduced suggests how CSR can generate value reflected in the stock market. If so, the markets can prove to be an effective tool in regulating externalities related to pollution or global warming.