Godfrey, Merrill, and Hansen (2006)

Godfrey, Paul C., Craig B. Merrill, and Jared M. Hansen. "Philanthropy, Corporate Social Responsibility and the Risk Management Perspective: An Empirical Test and Theoretical Extension." Working Paper, Brigham Young University. 2006.

This event study tests the following hypotheses, which are derived from theoretical work done by Godfrey (2005):

"H1. In the context of a negative event, declines in shareholder value will be smaller for firms with noteworthy engagement in philanthropy than for firms without such noteworthy engagement.

"H2. In the context of a negative event, declines in shareholder value will be smaller for firms with noteworthy engagement in other discretionary CSR activities than firms without such noteworthy engagement.

"H3a. Broader philanthropic participation will be associated with less negative abnormal returns.
"H3b. Broader participation in other CSRs will be associated with less negative abnormal returns."

The study examines the impact of 185 negative legal or regulatory actions on the stock prices of 160 U.S. firms covered in the KLD social research database. Rather than aggregate KLD scores as many researcher have done, the authors use the sub-components of the KLD Community Relations category, which are 1) cash giving in excess of 1.5% of trailing 3-year pretax earnings, 2) innovative giving programs, 3) support for education, and 4) support for affordable housing. These scores were lagged by one year to ensure that their publication pre-dated the events studied.

The event study analysis is conducted with a full awareness of the issues raised in McWilliams and Siegel (1997) - the original sample of 254 was reduced to 185 because of potential confounding events. All events occurred during the 1991-2002 time period. Control variables include economic sector (4 broad classifications developed for this study), firm size, and valuation (price/book ratio), all sourced from Compustat.

Finds that H1 is supported as philanthropic firms (those with high cash giving as a percentage of earnings) experienced significantly smaller price declines than their less-philanthropic counterparts, although the introduction of the size control variable pushed statistical significance above the 5% level. H2 appear "is not supported."

Moreover, "both H3a and H3b are rejected and the rejection of these two hypotheses represents an important finding. While noteworthy engagement in philanthropy provides firms with some measure of protection, noteworthy engagement in a broader range of philanthropic activities yields no additional benefit, at least among investors making judgments about the impact of negative events."

Link (published version):  https://www.jstor.org/stable/40060271?seq=1#page_scan_tab_contents