Corporate Social Responsibility as a Risk Factor in Asset Pricing: Evidence from Multi-Factor Models

This study investigates the influence of Corporate Social Responsibility (CSR) on financial returns and its role as a potential risk factor in investment decisions. Using CSR rating data from the MSCI database, the research analyzes a sample of up to 2,365 companies over 26 years (1992 to 2018), yielding 26,918 firm-year observations. Firms are categorized into portfolios based on six risk factors, with industry classification using the Global Industry Classification Standard (GICS) and the Fama-French 49 Industry Classification (FF49). The analysis employs five asset pricing models- the Capital Asset Pricing Model (CAPM), the Fama-French three-factor model (FF3F), the Carhart four-factor model (CAR4F), the Fama-French five-factor model (FF5F), and an augmented six-factor model (A6FM), estimated via the Fama-MacBeth two-step procedure. Two distinct methodological approaches are used to construct CSR risk factor variables. Empirical findings indicate that CSR exerts a statistically significant influence on excess stock returns across multiple models and portfolio configurations, with consistent results observed in both simple and value-weighted portfolios. A total of 150 double-sorted portfolios is constructed to assess abnormal returns across five financial characteristics, namely Size, Value, Profitability, Investment, and Momentum, under three CSR classifications- High/Low, Good/Bad, and Yes/No. Results reveal that portfolio performance varies systematically with CSR rating, with important implications for portfolio managers, investors, and corporate governance stakeholders seeking to integrate sustainability into financial decision-making.