Differing impacts of Legal and normative CSR

What is it about?

Legal and normative CSR have differing impact on analysts’ earnings forecast dispersion, stock return volatility, cost of equity capital, and firm value. Net CSR intensities reduce analyst dispersion of earnings forecast, volatility of stock return and cost of capital (COC), and increase firm value. However, its impact is reduced for firms with better accounting and disclosure quality. When we dis-aggregate CSR into legal and normative CSR, we find that legal (normative) CSR decreases (increases) analysts’ dispersion, stock return volatility, and COC, while legal (normative) CSR increases (decreases) firm value. The sell-side analysts tend to have less (greater) information asymmetry regarding the net benefits of pursuing CSR that is (not) required by laws. We find, however, that the benefit of having normative CSR realized in 1 year lag such that analyst dispersion, stock return volatility, COC decrease, respectively, and firm value increases. Furthermore, we find that the benefit of normative CSR is offset for firms with higher accounting and disclosure quality.

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Why is it important?

There are two types of CSR: Legal CSR that are required by laws and Normative CSR that are based on norms, ethics, and discretionary social responsibility and that there are differing impacts of Legal and Normative CSR on analysts’ earnings forecast dispersion, stock return volatility, cost of equity capital, and firm value.