The contribution of corporate social responsibility to financial performance: a factor model of Canadian stocks

This paper studies the effect of corporate social responsibility (CSR) on the returns of Canadian stocks. It employs the 3-factor asset-pricing model created by Fama and French (1993) and adds a new CSR factor (2x3 sorts) to examine if the explanatory power of the model is improved by the CSR factor. I, also, introduce an alternative method to create a 4-factor model (2x2x2 sorts). The results of my tests show the CSR factor does not improve the explanatory power of the Fama French models. Furthermore, replacing HML by CSR captures no more excess returns and I conclude that corporate social responsibility is not a priced factor in Canadian capital markets. In addition, the 3-factor model (based on Rm-Rf, SMB, HML) generates the exactly same results as Fama-French (1993 and 2015) models. Finally, I find that large firms, especially big size-low BE/ME companies, tend to be more “ethical”.