Does CSR engender trust? Evidence from investor reactions to corporate disclosures

We investigate whether a firm’s corporate social responsibility activity (CSR) affects investor trust. Motivated by the observation that trust enhances disclosure credibility which will in turn lead to faster price discovery, we address our question by examining the relation between CSR and stock price discovery at earnings announcements. We find robust evidence that firms with more CSR enjoy faster incorporation of earnings news into stock prices. This faster price discovery exists only for positive earnings news, reinforcing the perspective that CSR leads investors to maintain a positive view of the firm. We strengthen our identification of the effect of CSR on investor trust using regression discontinuity analyses of shareholder CSR proposals and an experiment that provides evidence of the causal effects of a firm’s CSR on investor perceptions of trust. We further show that high CSR firms experience lower investor uncertainty, more trading volume, and stronger earnings response coefficients.