Corporate social responsibility in a general equilibrium stock market model: Solving the financial performance puzzle

Abstract

We analyze corporate social responsibility (CSR) in a general equilibrium stock market model with uncertainty in production. Production generates non-market costs and consumers take this into account when they construct their portfolio. We deduce empirically testable hypotheses and analyze how CSR affects various financial performance indicators. We show that our model offers an excellent explanation of the seemingly contradictory findings in the existing empirical literature. We stress that our findings are not a result of assumptions on the operational level of the firm. We conclude that there is a clear and direct association between CSR and different measures of corporate financial performance.