New research led by Dr Julie Ayton, Senior Lecturer in Finance, has rejected any causality between corporate social performance and financial risk, contrary to what previous evidence has found.
The research, which was co-authored by Westminster academics Dr Natalia Krasnikova, Senior Lecturer in Accounting and Governance, and Dr Issam Malki, Senior Lecturer in Economics, used a unique dataset of monthly corporate social responsibility ratings to shed new light on the relationship between corporate social performance (CSP) and firm risk.
Where previous studies used annual measures of CSP, assuming that a change in CSP leads a change in risk, the researchers formally tested the direction of the relationship using Granger causality - a statistical concept of causality that is based on prediction.
Looking at large UK companies over 2002-2018, the authors rejected any causality, in either direction, between CSP and financial risk. This shows that the CSP-risk relationship is not an endogenous one, contrary to what previous evidence has found.
The authors’ original approach has therefore opened a new door to further the study of the link between CSP, financial performance and financial risk.
Speaking about the significance of the research findings, Dr Ayton said: "Our paper's main contribution and originality arises from both the methodology and the data. We were able to access monthly corporate social responsibility data from Covalence SA, showing that it is possible and necessary to use monthly data for more insightful analysis of corporate social responsibility."
Read the full paper in the International Review of Financial Analysis.
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