The Effects of Being "Socially Responsible" on Investors' Risk Perceptions

Abstract

The general purpose of this study is to determine whether the social responsibility issue is of great enough concern to the investment community to affect a corporation's common stock value. More specifically, the objective is to provide evidence to support or reject the hypothesis that companies deemed being more "socially responsible" are perceived of as less risky and are therefore, according to the Capital Assets Pricing Model, required to yield a lower rate of return. But before this objective can be achieved, a working definition of being "socially responsible" must be established. The social responsibility issue has been at the center of controversy for decades. Some claim the argument for corporate social responsibility is insightful and valid, while others call it pure rhetoric. Part of the reason for these divergent opinions is the lack of consensus as to what " social responsibility" means and entails. But while a universally acceptable definition has yet to be found, "social responsibility" does incorporate certain characteristics that most people agree upon. These attributes are well expressed by A. A. Sommer, Jr., an attorney actively involved in the area of corporate law and social involvement. He states, "[s]ocial responsibility means that a corporation voluntarily expends its resources to do something not required by law and without immediate economic benefits.” A set of guidelines known as the Sullivan Principles seems to be consistent with Mr. Sommer's definition of social responsibility. A sample of 39 companies subscribing to the Sullivan Principles was therefore selected to deter­ mine if any discernible changes in risk could be found after the firms agreed to abide by the principles.