Corporate Social Responsibility, Stocks Prices and Tax Policy

We model a capital market in which some proportion of investors get utility from owning firms that undertake spending on corporate social responsibility (CSR). We also assume different categories of firms: those with good CSR fundamentals and those with poor CSR fundamentals. We develop an equilibrium in which investors’ CSR considerations influence their financial portfolio decisions, influencing stock prices and corporate CSR spending decisions. An important determinant of the equilibrium is the proportion of altruistic investors in the market. Besides providing a model with reasonable empirical predictions, we also examine optimal tax policy questions, looking to maximize total individual donations plus corporate CSR spending less the tax rebates given for such spending.