Risk Mitigation of Corporate Social Performance in US Class Action Lawsuits

We investigate the relationship between corporate social performance and litigation risk by examining US class action lawsuits. We find that a one standard deviation improvement in environmental, social, and governance (ESG) controversies of an average sample firm reduces litigation risk from 3.1% to 2.4%. Moreover, an average sample firm with low ESG performance exhibits losses twice as high in market value compared to a firm with high ESG performance, i.e., an abnormal loss of US $1.14bn. Implementing our findings with a trading strategy yielded positive monthly alphas, suggesting that investors benefit from lower litigation risk and insurance-like protection.