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Lowering Portfolio Risk with Corporate Social Responsibility

John Clark, Kevin Krieger and Nathan Mauck
The Journal of Investing ESG Special Issue 2019, 28 (2) 43-52; DOI: https://doi.org/10.3905/joi.2019.28.2.043
John Clark
is an associate professor of finance in the Henry W. Bloch School of Management at the University of Missouri in Kansas City, MO
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Kevin Krieger
is an associate professor of finance at the University of West Florida in Pensacola, FL
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Nathan Mauck
is an associate professor of finance in the Henry W. Bloch School of Management at the University of Missouri in Kansas City, MO
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Abstract

This article examines the link between corporate social responsibility (CSR), as measured by the Kinder, Lydenberg, and Domini Research and Analytics Inc. (KLD) data, and the likelihood that a firm experiences an extreme return in a given year. An extreme-return firm is defined as one that has a return either in the top or bottom 3% of all firms with CSR data. The authors find CSR is negatively related to the likelihood of a firm experiencing an extreme return. Accounting for this negative relationship significantly improves a model used to predict future extreme returns. Finally, they form two portfolios: one with all firms with CSR data and one with all firms with CSR data except those firms with the highest predicted probability of extreme returns in the following year. Our results indicate that the returns for the two portfolios are nearly identical. However, the standard deviation of the portfolio excluding likely extreme movers is 3% lower than the portfolio with all firms. Thus, this simple portfolio strategy incorporating CSR has the potential to lower risk without impacting return.

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The Journal of Investing: 28 (2)
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Vol. 28, Issue 2
ESG Special Issue 2019
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Lowering Portfolio Risk with Corporate Social Responsibility
John Clark, Kevin Krieger, Nathan Mauck
The Journal of Investing Jan 2019, 28 (2) 43-52; DOI: 10.3905/joi.2019.28.2.043

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Lowering Portfolio Risk with Corporate Social Responsibility
John Clark, Kevin Krieger, Nathan Mauck
The Journal of Investing Jan 2019, 28 (2) 43-52; DOI: 10.3905/joi.2019.28.2.043
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