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Corporate social responsibility as a common risk factor

Author

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  • Lajili Jarjir, Souad
  • Nasreddine, Aya
  • Desban, Marc

Abstract

This article challenges factor models widely used to explain stock returns. For European firms involved in corporate social responsibility (CSR) actions, we find a risk premium associated with extra-financial ratings priced by the market (that is, environmental, social, and governance [ESG] ratings). This premium is calculated as the excess return of low-rated firms compared to high-rated firms. To describe rated firms' returns, we propose a parsimonious two-factor model that includes both the market factor and this premium. Unlike the CAPM, three-, or five-factor models, our model is validated by the Gibbons, Ross and Shanken (1989) test. Our results lead to many managerial implications related to portfolio management, asset pricing, and corporate financial and investing decisions.

Suggested Citation

  • Lajili Jarjir, Souad & Nasreddine, Aya & Desban, Marc, 2022. "Corporate social responsibility as a common risk factor," Global Finance Journal, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:glofin:v:52:y:2022:i:c:s1044028320302775
    DOI: 10.1016/j.gfj.2020.100577
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    More about this item

    Keywords

    Asset pricing; Risk factors; Three-; four- and five-factor models; ESG criteria; Corporate social responsibility and anomalies;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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