Corporate Social Performance and Class Action Lawsuits

We examine the relationship between corporate social performance and US class action lawsuits. Previous business ethics research suggests that corporate social performance has risk management characteristics, reduces information asymmetries, and offers insurance-like effects in cases of litigation. We find that a one standard deviation increase in our measure for business ethics controversies of an average firm reduces its risk to face a US class action lawsuit by 15%. Moreover, on average, firms with high corporate social performance exhibit approximately 50% lower negative abnormal returns around a class action lawsuit filing than firms with lower corporate social performance. Our findings are important to understand the potential of corporate social performance to reduce information asymmetry and to shield against negative market impacts during corporate crisis.