Effect of CSR on Firm-specific Risks and Bank Value, Comparison between Eurozone and US Banks

This thesis investigates the relationship between corporate social responsibility and the idiosyncratic risk, bank value of Eurozone and US banks. Tobin’s Q used as a value indicator in order to assess the value of Eurozone and US banks. Thomson Reuters ESG scores are used to determine the CSR scores of these banks during the same period, and the effects of the environmental, social, and governance dimensions on idiosyncratic risk are investigated separately. The quantile regression method reveals a relationship between CSR and idiosyncratic risk over different risk levels. Aligning with stakeholder and legitimacy theory a significant negative relationship has been found between the overall CSR scores and the idiosyncratic risk of Eurozone and US banks for medium- to high-risk levels. Eurozone bank’s stakeholders have an increased emphasis over CSR manners. The negative effect of CSR is nearly two times greater on idiosyncratic risk for Eurozone banks compared to the US banks which justifies the higher CSR score of Eurozone banks. The effect becomes stronger as the riskiness of the banks increases. Similar to the overall CSR score, the governance and environmental dimensions have a negative impact on Eurozone banks with medium- to high-risk levels. However Environmental dimension have a higher risk reducing effect for US banks over all quantiles compared to social and governance dimension. Even though CSR have a risk reducing impact, a negative relationship revealed between CSR scores and value of Eurozone and US banks. Findings over value reducing effect of CSR shows support the view of neo-classical and agency theory. Banks should consider amounts invested on CSR project and make strategic decisions as there is trade-off between risk mitigation and value decreasing effect of CSR.