Measuring the costs and benefits of CSR through shareholder value

How much does it pay to be socially responsible? To answer this question, we employed the KLD database as our measure of corporate social performance (CSP), and we applied Carhart’s four-factor model in the field of finance, to quantify the relationship between CSP and financial performance. Our results show that, for large US corporations belonging to the S&P 500 Index, the stocks of companies in the top CSP quantile outperform those of companies in the bottom CSP quantile. The difference was as much as 7.19 percentage points annually from 1991 through 2006, after adjusting for standard risk factors. However, this relationship disappears if we construct our portfolios on the basis of an already published CSP rating or we track the five-year long-run stock performance.