Zivin, Joshua Graff, and Arthur Small. "A Modigliani-Miller Theory of Altruistic Corporate Social Responsibility." Topics in Economic Analysis and Policy, Volume 5, Issue 1, 2005.

This theoretical paper, written with a strong awareness of the recent literature, argues that "firms that advertise their social and environmental good works in effect solicit charitable contributions from customers, employees, investors, and other stakeholders." The authors construct a valuation framework in which utility is defined not only in financial terms, but also includes the psychic benefits of contributing to charity.

The paper's theoretical arguments are carefully constructed, but I have two empirical objections.

First, the authors ask "why would anyone voluntarily accept a private cost - reduced financial returns - in order to hold shares in an enlightened company...?" In fact, there is little evidence they do. Returns to socially responsible investment have historically been competitive with other financial instruments on both a nominal and risk-adjusted basis.

Second, the authors argue that the demand for social responsibility is increasing and that philanthropic behavior is growing. Although there are no published studies of this, an examination of KLD data suggests charitable giving as a percentage of earnings is lower than in the past.