The impact of CSR on corporate risk: On the moderating role of a country’s legal origin and CSR disclosure

⁺Student at the Faculty of Economics and Business, University of Groningen, Student number 2373173, a.m.fopma@student.rug.nl

The impact of CSR on corporate risk: On the moderating role of a

country’s legal origin and CSR disclosure

A.M. Fopma⁺

Supervised by: Dr. A. Dalò

Submitted for the degree of MSc. International Financial Management

Faculty of Economics and Business Economics, University of Groningen, Netherlands June 2020

Abstract

This paper examines the relation between corporate social responsibility (CSR) performance and corporate risk. Furthermore, it examines how CSR disclosure and a country’s legal origin affect the relation between CSR performance and corporate risk. This study distinguishes a country’s legal origin based on common law and civil law, using a global sample covering 36,222 firm-year observations for 58 countries for the period 2008 to 2018. Findings show that CSR engagement significantly reduces corporate risk. Furthermore, this study finds that CSR disclosure works as a stronger risk-mitigating tool for firms with low levels of CSR engagement compared to firms with stronger CSR performance. Consequently, evidence is found for the moderating role of CSR disclosure on the link between CSR engagement and corporate risk. Moreover, findings suggest that CSR engagement significantly reduces corporate risk in common law countries and strongly supports the view of the moderating role of a country’s legal origin. These findings have important implications for financial managers and investors.

1 1. Introduction

The outbreak of the COVID-19 virus led to a worldwide pandemic and the most impactful drop in stock prices since the 2008 crisis (Kishan and Chasan, 2020). In addition to the growing global attention for corporate social responsibility (CSR) by academics and business practitioners, this crisis accelerates the trend for corporate social behaviour. It highlights core sustainability issues, such as firms’ supportiveness towards employees, society and customers. Many investment analysts argue that the COVID-19 crisis could strengthen CSR behaviour of firms and providing statistics that stocks entitled to CSR, outperform the market (Kishan and Chasan, 2020). This sheds possibly new light on corporate social responsibility. This study aims to provide evidence for a possible relation between CSR performance and corporate risk.

Previous literature documented several theoretical motives for firms’ engagement in CSR, such as pressure from stakeholders, legitimacy reasons and managerial benefits. Several studies examine the link between CSR and corporate outcomes and most studies find a beneficial relation to exist, for example, for firm value (Waddock and Graves, 1997). However, less evidence is provided for the relation between CSR and corporate risk, while it is important as it reflects a company’s ability to respond to market shocks. Numerous studies find an inverse relation between CSR performance and total risk (Jo and Na, 2012) or idiosyncratic risk (Luo and Bhattacharyo, 2009). These studies suggest that CSR increases reputation and employee loyalty, resulting in a reduction of corporate risk. The unique factor of this study is that it contributes to existing literature by examining a global sample, where prior studies only examined a single country or continent.

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by examining the possible moderating role of a country’s legal origin on the relation between CSR performance and corporate risk, where it distinguishes the legal context in common and civil law countries based on the study of La Porta et al., (1998).

To investigate the relation between CSR performance and corporate risk, the following research question is addressed: Does CSR performance reduces corporate risk?

To analyse the relation between CSR and corporate risk, this study uses corporate risk, which is defined as the combination of systematic and idiosyncratic risk for its measurement of corporate risk (Sharpe, 1963). Modern Portfolio Theory argues only systematic risk to be present as idiosyncratic risk can be eliminated with a well-diversified portfolio. On the contrary, many studies have provided empirical evidence that idiosyncratic risk matters as portfolios are rarely perfectly diversified (Goyal and Santa-Clara, 2003). Therefore, this study incorporates total risk measurement as this represents the combination of systematic and idiosyncratic risk and uses idiosyncratic risk as a proxy to test for robustness. Furthermore, for completeness this study analysis the relation between CSR and firm performance.

The final data sample consists of 36,222 firm-year observations for 58 countries covering the period 2008 to 2018. This study finds evidence that CSR engagement significantly reduces corporate risk. Furthermore, findings suggest that disclosing CSR reduces risk more for weak CSR performing firms compared to firms with stronger CSR performance. Lastly, it is evidenced that CSR engagement reduces corporate risk more in common law countries than in civil law countries. For completeness, regressions are also conducted for firm performance and the results confirm prior findings. These findings are valuable for risk managers that want to adopt CSR in their management strategy and for investors who are composing their portfolios.

3 2. Literature review

In this section, the definition and motives for CSR engagement are discussed. It is followed by theoretical arguments of firms’ involvement in CSR and a review of existing literature related to corporate risk and its relation with CSR performance and CSR disclosure. Moreover, theoretical arguments and existing literature regarding a country’s legal origin are provided. Lastly, hypotheses are developed.

2.1 Corporate social responsibility

Since 1950, the attention for CSR by academics as well as business practitioners has increased considerably (Caroll, 1999). CSR evolved from being treated as a burden on firms and only beneficial for society, towards being beneficial for corporations and applied as an important part of business strategy. The increase in importance coincided with the development of stakeholder theory (McCarthy, Oliver and Song, 2017). Over the years, various definitions for CSR have been applied and a universal consensus has not been reached. One of the first more precise definitions of CSR was mentioned by McGuire (1963). He stated that a corporation has, besides economic and legal obligations, also responsibilities towards society. The most commonly used and accepted definition, according to Dahlsrud (2008), and the one used in this study, is stated by the Commission of European Communities. The Commission of European Communities (2001, pp 6) defines CSR as “a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis”. Although there does not exist a uniform definition of CSR, existing definitions are largely congruent as they encompass similar dimensions (social, environmental, economic, stakeholder and voluntariness) (Dalhsrud, 2008).

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(Barnea and Rubin, 2010; Cespa and Cestone, 2007). Consequently, additional operating costs arise and a reallocation of scarce business resources at the expense of profitability for shareholders (McGuire, Sundgren, and Schneewis, 1988). Firms can mitigate these conflicts by adding CSR disclosure to their financial reports to reduce information asymmetry (Cormier et al., 2009). The stakeholder theory, which is introduced by Freeman (1984), highlights that value creation to all stakeholders, not only shareholders, is a responsibility of the corporation. He mentioned that companies have relationships with various stakeholders who can influence or be influenced by the company. It is the responsibility of a firm to add value to all stakeholders and balance their interest, to achieve long-term success and survival of the company (Salama, Anderson and Toms, 2011). With the growing attention for social, ethical and environmentally responsible behaviour, stakeholders adept at holding firms responsible for the consequences of their activities in this area (Freeman and Mcvea, 2001). Consequently, firms reconcile their business strategies by increasing CSR engagement to satisfy stakeholders' expectations and needs (McWilliams and Siegel, 2001).

Another theoretical argument, similar to the stakeholder theory and mainly discussed in literature, is described as the legitimacy theory (Suchman, 1995). According to this theory, a firm participates in social behaviour as they have a “social contract” with society (Guthrie et al., 2004). Although it is not a legally binding contract, it obligates firms to behave within the norms and boundaries constructed by their respective society to be accepted. According to Deegan (2002) is this a useful theory for explaining firms’ engagement in CSR disclosure because firms try to legitimize their behaviour.

2.2 Corporate risk

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risk that an individual firm faces. It is essential for firms to manage these risks properly to maximize the value of the organization (Fatemi and Luft, 2002).

One of the first academics who examined the empirical association between CSR and risk was done by Spicer (1987). He examined the environmental effect for a small sample of companies located in the United States and found it to be negatively related to total and systematic risk. Another prior study of Aupperle and Pham (1989) did not find a significant relation between CSR and total risk. Whereas, a more recent study conducted by Orlizky and Benjamin (2001) found evidence for CSR to reduce risk. They examined the relation using a meta-analysis for companies in the US.

Various studies documented only systematic risk to be present, as idiosyncratic risk can be eliminated with a well-diversified portfolio (Jo and Na, 2012; Jo and Harjoto, 2011; Cheng, Ioannou and Serafeim, 2014). These studies find a negative relation between CSR and systematic risk as expected by Modern Portfolio Theory. The study of Jo and Na (2012) investigated sinful industries and discussed the risk reduction and window-dressing theory as a possible explanation for the effect on risk. The authors used MSCI ESG variables as a measure for CSR and found evidence in favour of the risk-reduction theory for both systematic risk and idiosyncratic risk. Oikonomo, Brooks and Pavelin (2012) studied a sample of S&P 500 companies and used KLD ratings as a measure for CSR. They found a weak but negative relation with systematic risk. Another study conducted by Salama, Anderson and Toms (2011) observed community and environmental responsibility factors for a sample of the United Kingdom and found a relatively weak negative relation as well.

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Na, 2012). Moreover, Boutin-Dufrense and Savaria (2004) found that CSR engagement alleviates idiosyncratic risk for a sample of Canadian companies. However, Lee and Faff (2009) examined the top ten per cent of companies registered at the Dow Jones Sustainability Index. They found that companies with lower performance showed lower levels of idiosyncratic risk than companies with superior social performance. However, Humphrey, Lee and Shen (2012) and Kim (2010) did not find a significant effect on both variables. Whereas Boulash, Kryanowski and M’Zali (2013) focused on individual components of social performance and they found that idiosyncratic risk is negatively related to employee relations and human rights, while other CSR components do not affect financial risk.

Prior research mostly evidenced a negative relation between CSR and corporate risk (total, systematic and idiosyncratic). However, the results are ambiguous as some academics also find no significant or weak relation to exist. The next section provides explanations for CSR and its relation to corporate risk.

2.3 Corporate social responsibility and corporate risk

The increased social awareness of stakeholders encourages companies to invest in CSR activities. Compliance of companies to the needs and interests of stakeholders helps to preserve and improve their reputation. Additionally, companies mitigate possible conflicts with stakeholders by showing that they act in a legitimate manner which creates goodwill and loyal customers (Godfrey, 2005). It further reduces the probability of getting legal sanctions and lawsuits (Bassen and Kovacs, 2008; Sharfman and Fernando, 2008). Reputation is perceived as the most important intangible asset of the company (Waddock and Graves, 1997; Little and Little, 2000) with which they can generate tangibles (Fombrun, 1996). According to Godfrey (2005), does this provides insurance-based protection because stakeholders stay loyal in times of crises. Furthermore, CSR engagement also benefits employees as this reduces labour problems and improves employee satisfaction, which increases the productivity of the company and lowers the attrition ratio of employees (Lee, Park and Lee, 2013) and as a consequence reduces costs and risks.

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for providing loans to environmentally irresponsible firms (Cogan, 2008) and charge them higher interest rates (Chava, 2014). Moreover, Heinkel, Kraus and Zechner (2001) argue that investors can be subdivided into socially conscious investors who prefer sustainable investments and traditional investors who are indifferent. Associated with the growing demand of investors in sustainable stocks (Sharfman and Fernando, 2008), does this results in higher liquidity of capital for sustainable companies, which makes access to financial markets easier. Besides this, the growing amount of firms disclosing CSR helps to reduce potential agency costs (Graham, Harvey and Rajgopal, 2005). The increased transparency makes it easier for investors to estimate intangible assets and to make forecasts on the future profitability of a company (Cormier and Magnan, 2013), which makes them more willing to trade (Verrecchia, 2001). This all results in lower costs of capital (El Ghoul et al., 2011; Dhaliwal et al., 2011) and a reduced possibility of financial distress (Goss, 2009).

On the contrary, others argue a positive relation to exist between CSR and risk because some managers use CSR as a tool to derive personal benefits (Barnea and Rubin, 2010). Especially in times when firm performance is low, are managers more likely to over-invest in CSR activities to counterbalance these bad results and underinvest in CSR when performance is higher (Makni, Francoeur and Bellayance., 2009). This over-investment sacrifices short-term profits and increases costs which could increase risk (McGuire, Sundgren and Schneeweis, 1988). Another argument in favour of a positive relation between CSR and risk is the window-dressing theory. However, several studies that examined this relation in controversial industries did not find evidence that supports this theory (Jo and Na, 2012). Furthermore, the author of this study assumes this to be more of a concern for CSR disclosure. Therefore this theory is discussed in the next section. The aforementioned theories and motives related to CSR engagement, which include employee satisfaction, lower costs of capital, loosened capital constraints, better reputation and most prior studies’ findings, suggest a significant reduction in risk with higher levels of CSR performance. Therefore, this study examines the following hypothesis:

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2.4 Corporate social responsibility disclosure

Corporations disclose financial and non-financial information in their annual reports to communicate with their stakeholders. This helps firms to legitimize their corporate conduct (Pérez, 2015; Deegan, 2002) and gives stakeholders an overview of the activities of the company. The disclosure of CSR has increased concomitant with CSR performance. Both are responses of compliance to stakeholders' interests, but also because firms that have good CSR performance are more likely to disclose this, as they are willing to show their legitimate behaviour (Dhaliwal et al., 2011). CSR disclosure increases transparency which helps to reduce agency costs (Cormier et al., 2009; El Ghoul et al., 2011) and which lowers costs of equity (Cheng, Ioannou and Serafeim, 2014). Several studies find that higher CSR disclosure reduces corporate risk because stakeholders are better able to monitor managers (Hasseldine, Salama and Toms, 2005). Furthermore, as mentioned before, CSR disclosure helps firms to reduce the cost of capital and to loosen capital constraints.

On the contrary, firms’ motivation to engage in CSR disclosure could also be driven by managers who “greenwash” their activities to whitewash irresponsible behaviour. This is defined as the window-dressing theory and assumes managers to increase CSR disclosure to reduce threats related to their irresponsible behaviour (Hummel and Schlick, 2016). A study by Lanis and Richardson (2013) found that tax aggressive firms are more likely to increase their level of CSR disclosure to distract public concerns related to their irresponsible behaviour. Furthermore, Xing, Kim and Yu (2019) find that firms committing financial fraud are more likely to disclose CSR activities. This could bring additional risks, especially when stakeholders doubt about the true intentions of the corporation. They will penalise these firms which bring additional costs and risks. Based on these arguments and theories, the following hypothesis is stated:

H2: Corporate social responsibility disclosure affects the relation between corporate social

responsibility performance and total corporate risk.

2.5 Legal origin

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evidenced institutional environments to be an important explanation for these differences (Matten and Moon, 2008; El Ghoul, Guedhami and Kim, 2017) and have proved to be a more important determinant in explaining CSR than political institutions or financial performance (Liang and Renneboog, 2017). Institutions are defined by North (1990, pp 3) stated as “a set of rules, formal or informal, that actors generally follow, whether for normative, cognitive or material reasons” .

According to La Porta, Lopez-de-Silanes and Vishny (1998), legal systems can be dichotomized in civil law and common law. The most commonly used system worldwide is civil law and it originates from Roman law. The source of law is defined by statue-law and shaped by laws and regulations. Countries that base their institutions on civil law are mainly centred in non-English speaking countries and a distinction can be made between French, German and Scandinavian civil law (La Porta, Lopez-de-Silanes and Vishny 1998). On the contrary, common law devises its origin from Anglo-American law and is mainly centred in English speaking countries or former colonies. Their system is based on case-law or better known as a judicial mechanism and less on rules and regulations as is the case for civil law. Both systems differ systematically from each other (Cappiello, 2010). Common law countries are market-oriented and have better protection rights for investors. Companies in common law countries are mainly financed by a large amount of dispersed investors (La Porta and Lopez-de-Silanes, 1998). On the contrary, civil law countries are bank-oriented and are characterized by a few concentrated investors (La Porta, Lopez-de-Silanes and Vishny, 1998).

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objectives of all stakeholders (La Porta, Lopez-de-Silanes and Vishny, 1998). With the increasing interest towards CSR among various stakeholders, it is expected that companies in civil law countries will act accordingly and engage more in socially responsible behaviour. Several studies have evidenced that civil law countries are indeed more likely to engage in CSR activities compared to common law countries (Kim, Park and Ryu, 2017; Liang and Renneboog, 2017; Jackson and Apostolakou, 2010). However, little studies have examined the moderating role of a country’s legal origin on the relation between CSR and its business practices. El Ghoul, Guedhami and Kim (2017) found that the institutional framework moderates the relation between CSR and firm value. Breuer et al. (2018) found that countries with higher levels of investor protections can substantially lower the cost of equity. Another study of Benlemlih and Girerd-Potin (2017) examined a global sample of 25 companies and found evidence that CSR significantly reduced firm risk in civil law countries.

Based on the aforementioned theories and motives, this study draws upon the expectation that a country’s legal origin affects the relation between CSR engagement and corporate risk. This leads to the following hypothesis:

H3: A country’s legal origin moderates the relation between CSR performance and total

corporate risk.

3. Data and Methodology

This section presents the sources of the collected data and the final sample used in this study, with a description of the main variables of interest and other regression variables used in the analyses of this study. Secondly, the methodology is elaborated and lastly, the descriptive statistics are presented.

3.1 Data sample

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variable GDP per capita. To distinguish a country’s legal origin, this study uses the classification used by the study of La Porta, Lopez-de-Silanes and Shleifer (2008). The classification of civil law portrays the family of civil law and combines French, Scandinavian and German civil law countries. Furthermore, idiosyncratic risk is used for robustness analysis and its factors market return and the risk-free rate of return are obtained from Kenneth French’s website.

Firms in the financial sector (SIC-code 6000-6999) and the utility sector (SIC-code 4900-4999) are excluded from the sample as these are highly regulated, which influences risk outcomes. Moreover, firms with missing values are excluded from the model and continuous variables are winsorized at the top and bottom 1% level to mitigate the influence of outliers. This results in a final sample of 36,222 firm-year observations of 5,978 unique firms covering 58 different, where 23,283 firm-year observations are considered as common law and 12,939 firm-year observations as civil law countries for the period 2008 to 2018.

3.2 Regression variables

The dependent variable is represented by a firm’s total corporate risk. The independent variables of interest are represented by the CSR performance score of a company, CSR disclosure and a country’s legal origin. Furthermore, several control variables are added as these firm and country characteristics are considered to influence risk. Lastly, a multivariate regression between the relation of firm performance and CSR is conducted.

3.2.1 Measures of corporate risk

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𝑅𝑖𝑡 − 𝑅𝑓𝑡 = 𝛼 + 𝛽𝑖(𝑅𝑚𝑡− 𝑅𝑓𝑡) + ɛ𝑖𝑡 (1)

Where the subscripts i,t represent companies and months. 𝑅𝑖𝑡 represents the return on companies’

stocks, 𝑅_𝑖𝑓 the risk-free rate of return, (𝑅_𝑚𝑡− 𝑅_𝑓𝑡) is the monthly excess return of a company and ɛ_𝑖𝑡 the stochastic error term. Idiosyncratic risk is measured as the residuals of the annualised monthly excess return over the past 12 months (Sassen, Hinze and Hardeck, 2016; Salama, Anderson and Toms, 2011).

3.2.2 Measures of firm performance

For completeness, a multivariate regression between the relation of firm performance and CSR is conducted. Firm value is measured with the ratio Tobin’s q. It is a widely used measure for firm value in literature (Tobin, 1969). Tobin’s q is measured as the sum of the market value of total equity, book value of preferred stock, and book value of debt divided by the book value of total assets.

3.2.3 Corporate social responsibility

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3.2.4 Interaction terms

This study uses two interaction variables to examine whether CSR disclosure and a country’s legal origin affect the relation between CSR and corporate risk. These interaction variables include two variables representing CSR disclosure and a country’s legal origin. The first one is CSR disclosure which is measured as a dummy variable representing whether a firm discloses CSR. It takes the value of 1 when a corporation discloses CSR and 0 otherwise. The other variable is the measurement of countries legal origin, which is distinguished by common and civil law countries. This study follows the distinction of La Porta, Lopez-de-Silanes and Shleifer (2008) who divided 150 countries based on their legal origin distinguished by English common law and Scandinavian, German and French civil law. This study merges the families of civil law into one dummy indicating 1 if the legal origin of the country is civil law and 0 if the legal origin of the country is common law.

3.2.5 Control variables

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positive relation between total risk and AGR and therefore a positive relationship is expected (Benlemlih et al., 2018; Jo and Na, 2012). Furthermore, liquidity is added and measured as the ratio of current total assets to current total liabilities. A positive relation is expected. Leverage is measured as the ratio of long term debt divided by total assets and a positive relation is expected. The last firm-level control variable is operating cash flow (OCF) measured as the ratio of operating cash flows divided by total sales. It indicates the amount of cash flows available and therefore it is expected to be negatively related to corporate risk. To account for country-level differences, a country’s GDP per capita (GDPcapita) is used to measure a country’s economic development relative to the size of a country. It is denoted in US dollars and a natural logarithm is applied. A negative relation is expected as economically developed countries may face less risks. These variables are summarized in table 1.

3.3 Methodology

This study examines the relation between CSR and corporate risk, with CSR disclosure and legal origin as a moderating variable using a multivariate approach. The following regression analysis is used:

𝑇𝑜𝑡𝑎𝑙 𝑟𝑖𝑠𝑘_𝑖𝑡 = 𝛼 + 𝛽₁𝐶𝑆𝑅_𝑖𝑡+ 𝛽₂𝐶𝑆𝑅𝑑𝑖𝑠𝑐𝑙𝑜𝑠𝑢𝑟𝑒 + 𝛽₃𝑆𝑖𝑧𝑒_𝑖𝑡+ 𝛽₄𝑅𝑂𝐴_𝑖𝑡

+𝛽5𝑀𝑇𝐵𝑅𝑖𝑡+ 𝛽6𝐶𝐴𝑃𝑋𝑅𝑖𝑡+ 𝛽7𝑂𝐶𝐹𝑖𝑡 + 𝛽8𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑡+ 𝛽9𝐿𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦𝑖𝑡 (2)

+𝛽10𝐴𝐺𝑅𝑖𝑡+ 𝛽11𝐺𝐷𝑃𝑐𝑎𝑝𝑖𝑡𝑎 + 𝛽12𝐶𝑖𝑣𝑖𝑙 + 𝛽13𝐶𝑆𝑅 ∗ 𝐶𝑆𝑅𝑑𝑖𝑠𝑐𝑙𝑜𝑠𝑢𝑟𝑒𝑖𝑡

+𝛽₁₄𝐶𝑆𝑅 ∗ 𝐶𝑖𝑣𝑖𝑙_𝑖𝑡+ ɛ_𝑖𝑡

15 This table summarizes and describes the regression variables used in the sample.

3.4 Descriptive statistics

Table 2 presents the descriptive statistics of the regression variables used in this study. The mean (median) of total risk is 0.358 (0.310). There exist a large variation between the minimum (0.111) and maximum (1.131), which is tenfold. The explanatory variable CSR also shows a large variation between the minimum (0.047) and maximum (0.836) value. A higher value of CSR

Table 1 Description of regression variables Variables Explanation

Total Risk Total risk is measured by the annualised monthly stock returns over the current fiscal year.

Idio Risk Idiosyncratic risk is measured by the annualised monthly excess return of the residuals from the CAPM model using the previous year’s daily excess return. Firm Perf Firm Perf is represented by Tobin’s q and is measured as the sum of the market

value of total equity, book value of preferred stock, and book value of debt divided by the book value of total assets.

CSR Corporate social responsibility performance measured with the normalized weighted ESG score of the three pillars (environmental, social and governance) and adjusted with a controversies overlay. The score is provided from Thomson Reuters Asset4.

CSRdisclosure CSRdisclosure represents a dummy variable indicating 1 if a firm discloses CSR and 0 otherwise.

Size Firm size is measured by the natural logarithm of total assets in US$. ROA Return on assets measured as net income divided by total assets.

MTBR Market to book ratio measured as the market value divided by the book value of common equity.

CAPXR Capital expenditure ratio is measured as capital expenditures over sales.

OCF Operating cash flow ratio measured as operating cash flows divided by total assets.

Leverage Leverage measured as long term debt divided by total assets

Liquidity Liquidity measured as current total assets divided by current total liabilities. AGR Asset Growth measured by total assets in year t minus total assets in year t-1

divided by total assets in year t-1.

GDPcapita Gross domestic product per capita converted in US$.

Civil Civil represents the legal origin of a country measured as a dummy representing English common law and civil law (combined French, German and

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indicates better performance for this variable. It can thus be noticed that some firms rarely perform in an environmental, social and governance manner, whereas others are doing twice as good as average. Furthermore, slightly more than half of the corporations are disclosing CSR. With regard to the firm characteristics, one can notice that ROA, AGR, MTBR and CAPXR are highly skewed.

Table 2 Descriptive statistics

Mean Median St. Dev. Min. Max. N

Dependent variables Total Risk 0,358 0,310 0,189 0,111 1,131 36,222 Idio Risk 0,356 0,306 0,197 0,104 11,182 35,686 Firm Perf 1,617 1,200 1,302 0,344 7,881 35,832 Firm characteristics CSR 0,396 0,380 0,195 0,047 0,836 36,222 CSRdisclosure 0,538 1,000 0,499 0,000 1,000 36,222 Size ($US) 15,100 15,109 1,532 11,212 18,790 36,222 ROA 0,038 0,045 0,108 -0,514 0,310 36,222 MTBR 2,964 1,869 4,164 -7,731 27,687 36,222 CAPXR 0,127 0,044 0,303 0,002 2,397 36,222 OCF 0,093 0,089 0,088 -0,260 0,359 36,222 Liquidity 2,053 1,541 1,768 0,323 11,744 36,222 Leverage 0,197 0,175 0,169 0,000 0,774 36,222 AGR 0,304 0,057 1,549 -2,473 12,715 36,222 Country characteristics GDPcapita ($US) 10,500 10,764 0,771 7,381 11,324 36,222 Civil 0,357 0,000 0,479 0,000 1,000 36,222

This table presents descriptive statistics for the regression variables containing 36,222 firm-year observations between 2008 and 2018. All variables are defined in table 1.

Table 3 Correlation matrix

Total Risk CSR

CSR

disclosure Size ROA MTBR CAPXR OCF Liquidity Leverage AGR

GDP capita Civil Total Risk 1,000 CSR -0,233 1,000 CSRdisclosure -0,204 0,660 1,000 Size -0,289 0,456 0,405 1,000 ROA -0,355 0,119 0,107 0,130 1,000 MTBR -0,068 -0,011 -0,058 -0,168 0,150 1,000 CAPXR 0,233 -0,174 -0,115 -0,145 -0,221 -0,042 1,000 OCF -0,227 0,087 0,052 0,028 0,643 0,208 -0,151 1,000 Liquidity 0,137 -0,192 -0,200 -0,314 -0,081 0,032 -0,175 -0,115 1,000 Leverage 0,019 0,054 -0,011 0,204 -0,118 -0,001 -0,017 -0,063 -0,219 1,000 AGR 0,129 -0,134 -0,112 -0,104 -0,044 0,038 0,384 -0,157 0,222 -0,044 1,000 GDPcapita -0,011 -0,032 -0,160 -0,098 -0,115 0,003 0,038 -0,033 0,109 0,091 0,039 1,000 Civil -0,093 0,158 0,261 0,262 0,042 -0,124 0,112 -0,042 -0,112 -0,124 -0,070 -0,240 1,000

Table 4 represents the regression variables according to legal origin. The sample contains 12,939 (23,283) firm-year observations based on civil (common) law countries. One can notice that firms in civil law countries have on average better CSR performance and more CSR disclosure

compared to common law countries. This is expected and in line with the studies of La Porta, Lopez-de-Silanes and Vishny (1998) and Liang and Renneboog (2017). They suggest civil law countries to be more responsive to stakeholders and are, therefore, more likely to invest in a corporate social responsible manner. Moreover, the average total risk is slightly higher in common law countries (0.371) than in civil law countries (0.334). Considering the control variables, one can notice that the capital expenditure ratio (CAPXR) in common law countries is almost double the size of civil law countries.

Table 4 Descriptive statistics by legal origin

Civil law Common law

Mean Median

St.

Dev. N Mean Median

St. Dev. N Dependent variables Total Risk 0,334 0,297 0,162 12,939 0,371 0,319 0,201 23,283 Idio Risk 0,336 0297 0,166 12,821 0,367 0,311 0,211 22,865 Firm Perf 1,359 0,994 1,144 12,864 1,762 1,329 1,362 22,968 Firm characteristics CSR 0,438 0,447 0,208 12,939 0,373 0,348 0,183 23,283 CSRdisclosure 0,712 1,000 0,453 12,939 0,441 0,000 0,496 23,283 Size ($US) 15,639 15,584 1,335 12,939 14,801 14,795 1,552 23,283 ROA 0,045 0,040 0,075 12,939 0,035 0,049 0,122 23,283 MTBR 2,271 1,499 2,870 12,939 3,349 2,160 4,689 23,283 CAPXR 0,080 0,046 0,148 12,939 0,153 0,043 0,359 23,283 OCF 0,088 0,081 0,073 12,939 0,096 0,096 0,095 23,283 Liquidity 1,774 1,435 1,347 12,939 2,208 1,625 1,946 23,283 Leverage 0,169 0,150 0,142 12,939 0,213 0,193 0,181 23,283 AGR 0,159 0,063 0,889 12,939 0,385 0,053 1,809 23,283 Country characteristics GDPcapita ($US) 1,000 1,000 0,000 12,939 0,000 0,000 0,000 23,283 Civil 10,252 10,566 0,788 12,939 10,638 10,851 0,726 23,283

19

Appendix A reports the mean of the regression variables used in the sample per country. One can notice that a significant share of the total observations is originated from firms located in the United States, followed by Japan and the United Kingdom. Furthermore, the highest (lowest) value for total risk is found in Cyprus (Slovenia). Furthermore, Spain represents the highest CSR performance, whereas Bahrain the lowest. It can be observed that most firms with above-average CSR performance are more likely to disclose this information as they mostly correspond to above-average CSR disclosure scores. This corresponds to previous findings of Dhaliwal et al., (2011) who find that corporations with better CSR performance are more likely to disclose this information.

4. Empirical Results

This section provides the results of the OLS regression, which are used to test the relation between corporate risk, CSR performance and the moderating role of CSR disclosure and a country’s legal origin. Furthermore, a multivariate regression is conducted to test the relation between CSR and firm performance. In section 4.3, the endogeneity problem is discussed. Lastly, in section 4.4, additional regressions are elaborated to test the validity of the model.

4.1 Multivariate regression for corporate risk and CSR

20

In hypothesis 1, it is stated that CSR reduces total corporate risk and the results provide evidence of a negative relation between CSR and corporate risk. One can notice that in models (1) to (6), the relation between CSR and corporate risk is significant at a 1% level. This is in line with aforementioned theories and previous studies and provides strong evidence that CSR engagement lowers corporate risk. It presents evidence in favour of the stakeholder theory, where companies try to fulfil the needs of various stakeholders and by doing so increase reputation and reduce the change of getting legal sanctions (Godfrey, 2005). Concerning the control variables in model (3)-(6), firm size (Size), market-to-book ratio (MTBR), return on assets (ROA), operating cash flow ratio (OCF) and a country’s GDP per capita level (GDPcapita), all show a significantly negative relation to total risk as expected. Moreover, the variables capital expenditure over sales (CAPXR), Liquidity, Leverage and asset growth (AGR) provide a positive and significant relation with total risk which is also in line with expectations. However, legal origin (Civil) does not seem to affect total risk as the coefficient is insignificant in model (3).

21

disclosure works as a risk-mitigating tool as transparency increases. This is also found in a study conducted by Cho, Lee and Pfeiffer Jr. (2013) who highlight information asymmetry to be more severe in firms with weak CSR practices.

22

issues more optimistic and found evidence that perceptions of CSR shift from an agency-oriented theory towards a stakeholder-oriented theory. Lastly, column 6 includes all variables, including both interaction terms. One can notice that the results hold when all models are combined.

To conclude, results provide evidence that CSR practices reduce corporate risk and consequently are supportive of hypothesis 1. Furthermore,

23 Table 5 The relation between total risk, CSR performance, CSR disclosure and legal origin

(1) (2) (3) (4) (5) (6)

Total Risk Total Risk Total Risk Total Risk Total Risk Total Risk CSR -0.194*** -0.154*** -0.040*** -0.069*** -0.062*** -0.084*** (0.008) (0.009) (0.008) (0.014) (0.010) (0.015) CSRdisclosure -0.026*** -0.008*** -0.022*** -0.007** -0.020*** (0.004) (0.003) (0.006) (0.003) (0.006) CSR*CSRdisclosure 0.043*** 0.036** (0.015) (0.015) CSR*Civil 0.049*** 0.045*** (0.012) (0.012) Size -0.032*** -0.032*** -0.031*** -0.032*** (0.001) (0.001) (0.001) (0.001) ROA -0.403*** -0.403*** -0.401*** -0.401*** (0.017) (0.017) (0.017) (0.017) MTBR -0.001*** -0.001*** -0.001*** -0.001*** (0.000) (0.000) (0.000) (0.000) CAPXRS 0.011* 0.010* 0.010* 0.010* (0.006) (0.006) (0.006) (0.006) OCF -0.100*** -0.100*** -0.100*** -0.100*** (0.021) (0.021) (0.021) (0.021) Liquidity -0.001 -0.001 -0.001 -0.001 (0.001) (0.001) (0.001) (0.001) Leverage 0.103*** 0.103*** 0.103*** 0.103*** (0.009) (0.009) (0.009) (0.009) AGR 0.005*** 0.005*** 0.005*** 0.005*** (0.001) (0.001) (0.001) (0.001) GDPcapita -0.044*** -0.043*** -0.042*** -0.042*** (0.010) (0.010) (0.010) (0.010) Civil 0.086* -0.015 -0.015 -0.033 -0.031 (0.051) (0.037) (0.037) (0.038) (0.038) Constant 0.332*** 0.332*** 1.288*** 1.293*** 1.278*** 1.283*** (0.049) (0.050) (0.111) (0.111) (0.111) (0.111) Industry x x x X x x Country x x x X x x Year x x x X x x Observations 36,222 36,222 36,222 36,222 36,222 36,222 R-squared 0.318 0.320 0.420 0.420 0.421 0.421

24

4.2 Multivariate regression firm performance and CSR performance

For completeness, a multivariate regression between the relation of firm performance and CSR is conducted. This relation is widely examined among scholars and most found a positive relation to exist between CSR and firm performance (Waddock and Graves, 1997). It is argued that more stable stock prices represent higher firm performance. As a negative relation between CSR and corporate risk is found in section 4.1, it is the expectation that a positive relation exists between CSR and financial performance. For the measurement of firm performance, the variable Tobin’s q is used, which is defined as the market value of equity plus the book value of preferred stock and debt divided by the value of total assets. For the regression the same equation is applied as presented in equation (2). However, the dependent variable total risk is replaced by Tobin’s q to measure financial performance and ROA and MTBR are removed as they are both proxies of firm financial performance. The regression is presented below:

𝐹𝑖𝑟𝑚 𝑃𝑒𝑟𝑓_𝑖𝑡 = 𝛼 + 𝛽₁𝐶𝑆𝑅_𝑖𝑡+ 𝛽₂𝐶𝑆𝑅𝑑𝑖𝑠𝑐𝑙𝑜𝑠𝑢𝑟𝑒 + 𝛽₃𝑆𝑖𝑧𝑒_𝑖𝑡 + 𝛽₄𝐶𝐴𝑃𝑋𝑅_𝑖𝑡

+ 𝛽₅𝑂𝐶𝐹_𝑖𝑡 + 𝛽₆𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒_𝑖𝑡+ 𝛽₇𝐿𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦_𝑖𝑡 + 𝛽₈𝐴𝐺𝑅_𝑖𝑡+ 𝛽₉𝐺𝐷𝑃𝑐𝑎𝑝𝑖𝑡𝑎𝑙 (5) +𝛽₁₀𝐶𝑖𝑣𝑖𝑙 + 𝛽₁₁𝐶𝑆𝑅 ∗ 𝐶𝑆𝑅𝑑𝑖𝑠𝑐𝑙𝑜𝑠𝑢𝑟𝑒_𝑖𝑡 + 𝛽₁₂𝐶𝑆𝑅 ∗ 𝐶𝑖𝑣𝑖𝑙_𝑖𝑡+ ɛ_𝑖𝑡

25 Table 6 The relation between firm performance, CSR performance, CSR disclosure and legal origin

(1) (2) (3) (4)

Firm Perf Firm Perf Firm Perf Firm Perf

CSR 0.508*** -0.016 0.495*** -0.001 (0.071) (0.118) (0.091) (0.127) CSR disclosure -0.003 -0.267*** -0.003 -0.270*** (0.025) (0.048) (0.025) (0.048) CSR*CSR disclosure 0.781*** 0.787*** (0.128) (0.129) CSR*Civil 0.029 -0.042 (0.115) (0.116) Size -0.271*** -0.271*** -0.271*** -0.272*** (0.013) (0.013) (0.013) (0.013) CAPXR 0.271*** 0.258*** 0.270*** 0.259*** (0.047) (0.047) (0.047) (0.047) OCF 4.533*** 4.540*** 4.534*** 4.539*** (0.226) (0.225) (0.226) (0.225) Liquidity 0.095*** 0.094*** 0.095*** 0.094*** (0.009) (0.009) (0.009) (0.009) Leverage 0.072 0.080 0.072 0.080 (0.082) (0.082) (0.082) (0.082) AGR 0.040*** 0.039*** 0.040*** 0.039*** (0.008) (0.008) (0.008) (0.008) GDPcapita 0.104 0.113 0.105 0.112 (0.071) (0.071) (0.071) (0.071) Civil -0.241 -0.233 -0.252 -0.218 (0.185) (0.183) (0.190) (0.188) Constant 3.678*** 3.770*** 3.673*** 3.779*** (0.770) (0.769) (0.771) (0.770) Industry x x X x Country x x x x Year x x x x Observations 35,832 35,832 35,832 35,832 R-squared 0.467 0.468 0.467 0.468

26

performance add CSR disclosure compared to when they do not disclose information. This indicates that these firms might use CSR disclosure to “greenwash” their irresponsible behaviour, whereas the interaction suggests that CSR disclosure increases performance more for firms with strong CSR performance.

In model (3), an interaction term is included to analyse the moderating role of a country’s legal origin. One can notice that CSR shows a strongly significant and positive relation towards firm performance and suggest that firms in common law countries can increase their performance more than firms that do not engage in CSR activities. However, the interaction term turns out to be insignificant and therefore suggest that legal origin does not affect the relation between CSR and firm value. Furthermore, column (4) combines previous models and one can conclude that previous findings hold.

4.3 Robustness tests

In this section, several tests are performed to test the robustness and validation of the regression model used in this study. First, this study tries to address the endogeneity problem. Secondly, several additional regression tests are performed to test the validity of the model.

4.3.1 Endogeneity

27

The use of two lags is distinctive for annual data (Woolridge, 2010). The following regression is used:

𝑇𝑜𝑡𝑎𝑙 𝑟𝑖𝑠𝑘𝑖𝑡 = 𝛼1 + 𝛼11𝑇𝑜𝑡𝑎𝑙 𝑟𝑖𝑠𝑘𝑖𝑡−1+ 𝛼12𝑇𝑜𝑡𝑎𝑙 𝑟𝑖𝑠𝑘𝑖𝑡−2+ 𝛽21𝐶𝑆𝑅𝑖𝑡−1+

𝛽₂₂𝐶𝑆𝑅 _𝑖𝑡−2+ ɛ_𝑖𝑡 (3)

𝐶𝑆𝑅_𝑖𝑡 = 𝛼₂+ 𝛽₂₁𝐶𝑆𝑅_𝑖𝑡−1+ 𝛽₂₂𝐶𝑆𝑅_𝑖𝑡−2+ 𝛼₁₁𝑇𝑜𝑡𝑎𝑙 𝑟𝑖𝑠𝑘_𝑖𝑡−1+ 𝛼₁₂𝑇𝑜𝑡𝑎𝑙 𝑟𝑖𝑠𝑘_𝑖𝑡−2+ 𝜃_𝑖𝑡 (4) Where the subscripts i,t represents firms and years, respectively. Total risk represents total corporate risk and CSR represents the CSR performance of a firm.

In order to perform the Granger causality regression and following Sassen, Hinze and Hardeck, (2016) the lags of total risk and CSR are estimated, using the generalized method of moments (GMM). Furthermore, the Helmert transformation or forward orthogonal deviation is used to remove fixed effects (Love and Zicchino, 2006). Lastly, robust standard errors are clustered at the firm level to mitigate heteroscedasticity and serial correlation. The results are reported in table 7. According to the results, the null hypothesis that CSR does not Granger cause corporate risk has to be rejected. Moreover, the null hypothesis that corporate risk Granger cause CSR cannot be rejected. Therefore, it can be concluded that there exists a unidirectional relation from CSR to total risk. This means that this study does not suffer from a reverse causality issue and that the management theory dominates the one of slack resources.

Table 7 Granger causality test

Equation

Total risk Relationship according to Granger causality test

Chi2(df) p value CSR does not Granger-cause

risk 0,956 (1) 0,003

Unidirectional Total risk does not

Granger-cause CSR 0,503 (1) 0,448

28

Another measure to partially address simultaneous bias is the use of lagged explanatory variables (Luo and Bhattacharya, 2009; Harjoto and Jo, 2014). With the use of lagged variables, past CSR performance and current total risk are not determined in the same period. This diminishes the impact of simultaneity, but it cannot eliminate it. The results are presented in Table 8 and the sign and significance of both total risk and CSR remain unchanged. Furthermore, except for AGR, the control variables also remain sign and significance.

4.3.2 Additional regressions

To test the robustness of the model, several additional regressions are examined. Idiosyncratic risk is used as an additional measure for risk. According to Goyal and Santa-Clara (2003) are fluctuations in stock prices mainly driven by idiosyncratic risk and can idiosyncratic risk distinguish for common factors of CSR. The results are reported in table 9. One can notice that the results are provided with the same sign and significance as for total risk, which indicates that the results found earlier hold. The results suggest that CSR has a strong significantly negative relation with idiosyncratic risk, which is in line with prior studies that idiosyncratic risk matters (Husted, 2005; Boutin-Dufrense, 2004). One can notice that the relation of CSR on idiosyncratic risk is stronger than for total risk. Furthermore, as provided by the results in column (6), the interaction term of CSR*CSR disclosure and the interaction term of CSR*Civil remains positive and significant at 1% level. Therefore, we can confirm prior conclusions that CSR disclosure does affect the relation between CSR engagement and idiosyncratic risk. Moreover, CSR engagement reduces idiosyncratic risk in civil and common law countries. However, CSR works as a stronger risk-mitigating tool in common law countries than in civil law countries.

29

Again, CSR performance provides a strong significant negative relation with total risk. Furthermore, the interaction term CSR*CSR disclosure turns out to be insignificant and the interaction term CSR*Civil remains positive and highly significant. It provides evidence that the main findings are unaffected by different estimation methods1.

Lastly, to validate the robustness of the model and to assess potential characteristics of civil and common law countries, the regressions are computed for common and civil law countries separately. Results validate previous regression results and are reported in table 11. In columns (1) and (3) the regression is represented with the explanatory variable and control variables and in columns (2) and (4) an interaction term for CSR*CSR disclosure is included. One can notice that CSR is insignificant for civil law countries, whereas, it is negative and significant at a 1% level for common law countries which is expected from the main results. Furthermore, consistent with prior research, CSR disclosure is negatively related to total risk, whereas the moderating role is insignificant in both countries. Lastly, all control variables. Except MTBR and CAPXR, remain their sign and significance for both countries.

1 _{Table 10 provides the results for the Newey-West test calculated using two lags. Additional Newey-West tests are}

30 Table 8 The relation between total risk, lagged CSR performance, CSR disclosure and legal origin

(1) (2) (3) (4)

Total Risk Total Risk Total Risk Total Risk

L.CSR -0.031*** -0.038*** -0.049*** -0.052*** (0.008) (0.015) (0.010) (0.015) CSRdisclosure -0.008*** -0.012* -0.008** -0.009 (0.003) (0.006) (0.003) (0.006) L.CSR*CSRdisclosure 0.010 0.004 (0.015) (0.016) L.CSR*Civil 0.041*** 0.041*** (0.013) (0.013) Size -0.031*** -0.031*** -0.031*** -0.031*** (0.001) (0.001) (0.001) (0.001) ROA -0.411*** -0.411*** -0.410*** -0.410*** (0.019) (0.019) (0.019) (0.019) MTBR -0.001*** -0.001*** -0.001*** -0.001*** (0.000) (0.000) (0.000) (0.000) CAPXR 0.011* 0.011* 0.011* 0.011* (0.006) (0.006) (0.006) (0.006) OCF -0.108*** -0.108*** -0.108*** -0.108*** (0.023) (0.023) (0.023) (0.023) Liquidity -0.001 -0.001 -0.001 -0.001 (0.001) (0.001) (0.001) (0.001) Leverage 0.114*** 0.114*** 0.114*** 0.114*** (0.010) (0.010) (0.010) (0.010) AGR 0.002 0.002 0.001 0.001 (0.001) (0.001) (0.001) (0.001) GDPcapita -0.035*** -0.035*** -0.034*** -0.034*** (0.011) (0.011) (0.011) (0.011) Civil 0.007 0.007 -0.008 -0.008 (0.031) (0.032) (0.032) Constant 1.345*** 1.333*** 1.334*** (0.117) (0.117) (0.117) Industry x x x x Country x x x x (Continued) Year x x x x Observations 30,201 30,201 30,201 30,201 R-squared 0.420 0.420 0.421 0.421

31 Table 9 The relation between idiosyncratic risk, CSR performance, CSR disclosure and

legal origin

(1) (2) (3) (4) (5) (6)

Idio Risk Idio Risk Idio Risk Idio Risk Idio Risk Idio Risk CSR -0.219*** -0.176*** -0.046*** -0.074*** -0.069*** -0.091*** (0.008) (0.009) (0.009) (0.015) (0.011) (0.016) CSRdisclosure -0.029*** -0.008** -0.022*** -0.007** -0.019*** (0.004) (0.003) (0.006) (0.003) (0.006) CSR*CSRdisclosure 0.041*** 0.034** (0.016) (0.016) CSR*Civil 0.050*** 0.047*** (0.013) (0.013) Size -0.037*** -0.038*** -0.037*** -0.037*** (0.001) (0.001) (0.001) (0.001) ROA -0.421*** -0.421*** -0.419*** -0.419*** (0.018) (0.018) (0.018) (0.018) MTBR -0.001*** -0.001*** -0.001*** -0.001*** (0.000) (0.000) (0.000) (0.000) CAPXR 0.014** 0.013** 0.013** 0.013** (0.006) (0.006) (0.006) (0.006) OCF -0.116*** -0.115*** -0.116*** -0.116*** (0.022) (0.022) (0.022) (0.022) Liquidity -0.002* -0.002* -0.002* -0.002* (0.001) (0.001) (0.001) (0.001) Leverage 0.101*** 0.101*** 0.100*** 0.101*** (0.010) (0.010) (0.010) (0.010) AGR 0.004*** 0.004*** 0.004*** 0.004*** (0.001) (0.001) (0.001) (0.001) GDPcapita -0.060*** -0.059*** -0.058*** -0.058*** (0.010) (0.010) (0.010) (0.010) Civil 0.091 -0.036 -0.035 -0.054 -0.053 (0.057) (0.043) (0.043) (0.043) (0.043) Constant 0.357*** 0.358*** 1.567*** 1.572*** 1.556*** 1.561*** (0.056) (0.056) (0.117) (0.117) (0.117) (0.118) Industry x x x x x x Country x x x x x x Year x x x x x x Observations 35,686 35,686 35,686 35,686 35,686 35,686 R-squared 0.310 0.313 0.420 0.421 0.421 0.421

32 Table 10 Newey West test

(1) (2) (3) (4)

Total Risk Total Risk Total Risk Total Risk

CSR -0.031*** -0.038*** -0.049*** -0.052*** (0.008) (0.015) (0.010) (0.015) CSRdisclosure -0.008*** -0.012* -0.008** -0.009 (0.003) (0.006) (0.003) (0.006) CSR*CSRdisclosure 0.010 0.004 (0.015) (0.016) CSR*Civil 0.041*** 0.041*** (0.013) (0.013) Size -0.031*** -0.031*** -0.031*** -0.031*** (0.001) (0.001) (0.001) (0.001) ROA -0.411*** -0.411*** -0.410*** -0.410*** (0.019) (0.019) (0.019) (0.019) MTBR -0.001*** -0.001*** -0.001*** -0.001*** (0.000) (0.000) (0.000) (0.000) CAPXR 0.011* 0.011* 0.011* 0.011* (0.006) (0.006) (0.006) (0.006) OCF -0.108*** -0.108*** -0.108*** -0.108*** (0.023) (0.023) (0.023) (0.023) Liquidity -0.001 -0.001 -0.001 -0.001 (0.001) (0.001) (0.001) (0.001) Leverage 0.114*** 0.114*** 0.114*** 0.114*** (0.010) (0.010) (0.010) (0.010) AGR 0.002 0.002 0.001 0.001 (0.001) (0.001) (0.001) (0.001) GDPcapita -0.035*** -0.035*** -0.034*** -0.034*** (0.011) (0.011) (0.011) (0.011) Civil 0.007 0.007 -0.008 -0.008 (0.031) (0.031) (0.032) (0.032) Constant 1.345*** 1.347*** 1.333*** 1.334*** (0.117) (0.117) (0.117) (0.117) Industry x x x x Country x x x x Year x x x x Observations 30,201 30,201 30,201 30,201 R-squared 0.420 0.420 0.421 0.421

33 Table 11 The relation between total risk, CSR performance and disclosure as separate

regressions for common and civil law countries

Civil law Common law

Total Risk Total Risk Total Risk Total Risk

CSR -0.016 -0.012 -0.076*** -0.102*** (0.011) (0.025) (0.012) (0.017) CSRdisclosure -0.023*** -0.021*** 0.002 -0.015* (0.005) (0.008) (0.004) (0.008) CSR*CSRdisclosure -0.005 0.046** (0.025) (0.020) Size -0.025*** -0.025*** -0.034*** -0.034*** (0.002) (0.002) (0.002) (0.002) ROA -0.414*** -0.414*** -0.346*** -0.346*** (0.043) (0.043) (0.019) (0.019) MTBR -0.001 -0.001 -0.000 -0.000 (0.001) (0.001) (0.000) (0.000) CAPXR -0.023 -0.023 0.002 0.002 (0.028) (0.028) (0.003) (0.003) OCF -0.076** -0.076** -0.140*** -0.140*** (0.037) (0.037) (0.025) (0.025) Liquidity -0.004** -0.004** -0.000 -0.000 (0.002) (0.002) (0.001) (0.001) Leverage 0.078*** 0.078*** 0.111*** 0.111*** (0.017) (0.017) (0.011) (0.011) AGR 0.008* 0.008* 0.003*** 0.002*** (0.004) (0.004) (0.001) (0.001) GDPcapita -0.026* -0.026* -0.085*** -0.085*** (0.014) (0.014) (0.017) (0.017) Constant 1.154*** 1.153*** 1.923*** 1.929*** (0.138) (0.138) (0.181) (0.181) Industry x x x X Country x x x X Year x x x X Observations 12,939 12,939 23,283 23,283 R-squared 0.410 0.410 0.441 0.441

34 5. Conclusion

This study examines the link between CSR performance and corporate risk by exploring the moderating role of CSR disclosure and a country’s legal origin. This study examines a global sample consisting of 36,222 firm-year observations, including 58 different countries, 23,283 firm-year observations are from countries considered as common law and 12,939 firm-year observations are considered as civil law. The period that this study covers is from 2008 to 2018. This study finds that CSR performance lowers total corporate risk, which is in support of hypothesis 1. Furthermore, the findings show that disclosing CSR works as a stronger risk-mitigating tool for companies with weak CSR performance and therefore evidence is found in support of hypothesis 2. This suggests that firms with stronger CSR performance already have built a decent reputation among stakeholders and that firms with weaker CSR performance can reduce information asymmetry by disclosing their CSR activities. Moreover, this study examined the link between CSR and corporate risk and a country’s legal origin. Findings show that civil law countries engage on average more in CSR activities and CSR disclosure as would be expected by previous studies (Liang and Renneboog, 2017). However, when examining the moderating role of a country’s legal origin and its CSR activities, this study finds evidence that CSR reduces risk levels more in common law countries than in civil law countries. This is in support of hypothesis 3 and evidenced that a country’s legal origin works as a moderating role in the relation between corporate risk and CSR. However, it contradicts previous theories, which state that civil law countries are more stakeholder-oriented and therefore more likely to behave in stakeholders interests. Consequently, it suggests that common law countries are more likely to focus on short-term profits and in the interests of shareholders, which supports less investment in CSR (La Porta, Lopez-de-Silanes and Vishny, 1998). As the results presented in this study show that there is an increase in CSR performance among common law countries, it might be that there exists a changing point where firms in common law countries are adding more value to CSR as previously done.

35

tool for corporate risk. This could motivate managers to invest in CSR related activities as it is not only beneficial for society, but could also increase shareholder value. Besides that, CSR can increase firm reputation, which is considered as the most valuable intangible asset of the company. Furthermore, it could also be of value for them as it provides evidence that the negative relation between CSR and corporate risk is stronger for corporations located in common law countries than in civil law countries. Furthermore, these findings are also of value for investors and portfolio managers who might use the findings presented in this study when making investment decisions.

36 Acknowledgement

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