Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence∗

This paper presents an industry equilibrium model where firms can choose to engage in corporate social responsibility (CSR) activities. We model CSR activities as an investment in customer loyalty and show that CSR decreases systematic risk. This e§ect is stronger for firms producing di§erentiated goods and when consumers’ expenditure share on CSR goods is small. We find supporting evidence for our predictions. In our empirical tests, we address a potential endogeneity problem by instrumenting CSR using data on the political a¢liation of the firm’s home state and data on environmental and engineering disasters and product recalls. JEL classification: G12, G32, D43, L13, M14.