Center for Advancing Accounting

Environmental and Social Risk, Adaptation, and Equity Value

• In Event: Impact of CSR and ESG on Valuation

Abstract

This study investigates the impact of corporate social responsibility (CSR) shortcomings on firm valuation. Firm value is expected to be a function of current earnings to the extent current earnings reflect cash flows that are expected to recur in future periods (“recursion value”). However, to the extent a firm may be forced to modify its future operating processes, firm value is expected to be a function of the net assets in place that can be used to generate an alternate stream of cash flows (“adaptation value”). My results show a partial shift from recursion value to adaptation value in the presence of weak CSR. These results are consistent with institutional theory, which suggests that firms with poor CSR performance face pressure from ethical oriented stakeholders to adapt their current operations. By demonstrating the link between weak CSR and adaptation value, this study supports recent practitioner guidance on CSR failures as a threat to business continuity.

Author

• Curtis Farnsel, University of Dayton