Will Good Deeds Redeem Your Sins? A quantitative study of the effects of corporate charitable donations in a sin stock setting

Abstract

Corporate social responsibility (CSR) has received increasing attention from the popular press in general, and academics and the investment community in particular, in the past decade. Corporations are increasingly integrating CSR as part of their business strategies. In sin stocks, CSR is particularly complex and although sin firms have been shown to engage more in CSR activities than non-sin firms there are still uncertainties to the actual effects of CSR in sin stocks. Some recent studies have suggested adverse effects of CSR in sin stocks. Nonetheless, these studies (and a majority of all studies on CSR in sin stocks) examines the effects of overall CSR performance, and we identify a lack of research on individual sub-categories of CSR. A major dimension of CSR is corporate philanthropy, with corporate donations being the most common form. In 2018, corporations in the US alone accounted for $20.05 billion in donations – a 5.4 percent increase from the previous year and an increase of over 40 percent compared to 2009. Despite the ample role of corporate donations in CSR, and a large body of literature related to CSR effects in sin stocks, there are to the best of our knowledge no studies on the effect of corporate donations in sin stocks. This study takes a quantitative approach to further the understanding of CSR in sin stocks, and specifically to shed light on the individual effects of the major CSR sub-category that is corporate donations. Using a sample of listed sin stocks from the North American and European markets, from the period 2009 to 2018, this study sets out to tests two main hypotheses: (1) Corporate donations are negatively related to abnormal returns in sin stocks, and (2) corporate donations decrease idiosyncratic risk in sin stocks. In line with our prediction, we find a clear negative relationship between donations and idiosyncratic risk in sin stocks, indicating that sin firm donations do in fact mitigate risk. We find no significant effects on abnormal returns from donations. The results imply that stakeholder perceptions of overall CSR performance differ from that of certain sub-activities in sin stocks, and thus future research could benefit from focusing on the effects of individual sub-activities rather than the effects of CSR performance as a composite. Further, the results imply that in order for donations to be value maximizing, they should be well grounded in- and aligned with stakeholder demands.