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Inflation, the corporate greed narrative, and the value of corporate social responsibility


Mão-de-Ferro, Ana; Ramelli, Stefano (2023). Inflation, the corporate greed narrative, and the value of corporate social responsibility. Swiss Finance Institute Research Paper 23-06, University of Zurich.

Abstract

Inflation can significantly undermine companies’ relationships with their customers, employees, and other stakeholders, spawning a crisis of trust. This is particularly true in a period when many citizens accuse corporations of excessively raising prices to maximize profits. Studying the cross-sectional reactions of U.S. stocks to inflation over the period 2018-2022, we find that in the month following a higher inflation rate, equity investors reward firms with stronger social capital, as proxied by their corporate social responsibility (CSR) levels. The effect holds using different measures of inflation, including region-specific ones. The inflation-hedging property of CSR is stronger for firms headquartered in Democratic U.S. states (those most exposed to the “corporate greed” narrative of inflation) and appears to operate through the firm’s cash flows. Analyst forecast revisions provide additional evidence of the value of CSR in inflationary periods. Overall, the findings spotlight inflation as a crisis in stakeholder trust and provide new insights into the importance of social capital for firm value.

Abstract

Inflation can significantly undermine companies’ relationships with their customers, employees, and other stakeholders, spawning a crisis of trust. This is particularly true in a period when many citizens accuse corporations of excessively raising prices to maximize profits. Studying the cross-sectional reactions of U.S. stocks to inflation over the period 2018-2022, we find that in the month following a higher inflation rate, equity investors reward firms with stronger social capital, as proxied by their corporate social responsibility (CSR) levels. The effect holds using different measures of inflation, including region-specific ones. The inflation-hedging property of CSR is stronger for firms headquartered in Democratic U.S. states (those most exposed to the “corporate greed” narrative of inflation) and appears to operate through the firm’s cash flows. Analyst forecast revisions provide additional evidence of the value of CSR in inflationary periods. Overall, the findings spotlight inflation as a crisis in stakeholder trust and provide new insights into the importance of social capital for firm value.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scope:Discipline-based scholarship (basic research)
Language:English
Date:22 May 2023
Deposited On:18 Jul 2023 06:29
Last Modified:06 Mar 2024 14:40
Series Name:Swiss Finance Institute Research Paper
ISSN:1556-5068
OA Status:Green
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.2139/ssrn.4308164
Other Identification Number:merlin-id:23887
  • Content: Published Version
  • Language: English