Risk Mitigation of Corporate Social Performance in US Class Action Lawsuits

Daniel V. Fauser · Sebastian Utz

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Corporate Social Responsibility Reporting Financial Markets and Investment Strategies Corporate Identity and Reputation

Abstract

We investigated the relationship between corporate environmental, social, and governance (ESG) performance and litigation risk by examining US class action lawsuits. We found that a 1 standard deviation improvement in the ESG controversies of an average company in the sample reduced litigation risk from 3.1% to 2.4%. Moreover, an average company with low ESG performance exhibited a loss in market value twice as large as that of a company with high ESG performance—an abnormal loss of US$1.14 billion. Implementation of our findings with a trading strategy yielded positive monthly alphas, suggesting that investors benefit from lower litigation risk and the insurance-like protection of high ESG performance.

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References

1993Common risk factors in the returns on stocks and bonds 2010Strategic management a stakeholder approach 1997On Persistence in Mutual Fund Performance 2007The Social Responsibility of Business Is to Increase Its Profits 2014A five-factor asset pricing model 1997THE CORPORATE SOCIAL PERFORMANCE-FINANCIAL PERFORMANCE LINK 1987A Simple Model of Capital Market Equilibrium with Incomplete Information 1990WHAT'S IN A NAME? REPUTATION BUILDING AND CORPORATE STRATEGY.

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