臺大管理論叢 NTU Management Review VOL.30 NO.2

The Effect of Corporate Social Responsibility Performance on Financial Risk 300 5. Conclusions This paper investigates the effects of CSR on financial risk. In particular, this study uses market risk and liquidity risk as measures of systematic risk. This paper is motivated by Lang and Maffett (2011), Ng (2011), and Sadka (2011), who suggest that higher information quality can lower liquidity risk and, hence, lower the cost of capital. In the present study, by empirically assessing the effect of CSR performance on financial risk, we infer that a firm with superior CSR performance experiences lower market risk and liquidity risk. Through the robustness test, we also find that superior CSR performance reduces the cost of capital. Furthermore, we find that the performance of corporate governance activities increases the cost of capital, even though we control for industry effects. Although there is a positive association between corporate governance and the cost of capital, the corporate governance dimension is distinct from other social and environmental dimensions of CSR (Kim et al . , 2012; Kim et al . , 2014). Therefore, if we exclude the corporate governance dimension from CSR activities, we find that, in summary, CSR performance is negatively related to the cost of capital. In order to distinguish between good and bad performers on each CSR dimension, Bouslah et al. (2013) consider strengths and concerns separately and find that both corporate governance concerns and strengths positively affect a firm’s risk. They attribute this inconsistent impact to the fact that market participants do not agree on the value of the strengths and their impacts on the moments of cash flows. In addition, appropriate cost of equity capital estimates are difficult to obtain, so prior research adopts indirect estimates of cost of equity capital (Botosan, 1997). Several studies suggest that there are measurement errors in estimating the cost of capital, which can lead to spurious inferences, including studies by Goolsbee (2000) and Wang (2012). These measurement errors are also possible reasons for the observed contradiction of the positive relationship between corporate governance performance and the cost of capital. Although there is a conflict between profit maximizing and social welfare maximizing, our findings are consistent with Jensen (2001) statement that “We cannot maximize the long-term market value of an organization if we ignore or mistreat any important constituency (stakeholder).” Firms will benefit from CSR activities, especially from superior CSR performance. Therefore, our results have implications for firms which are going to participate in corporate responsibility activities, as they indicate that the benefit of superior CSR performance outweighs the increased costs of CSR. Simultaneously, a firm will benefit from lower cost of capital.