N°23-06: Inflation, the Corporate Greed Narrative, and the Value of Corporate Social Responsibility

Inflation can significantly undermine companies' relationships with their customers, employees, and other stakeholders, spawning a crisis of trust. This is particularly true in a period when many citizens accuse corporations of excessively raising prices to maximize profits. Studying the cross-sectional reactions of US stocks to inflation over the period 2018-2022, we find that in the month following a higher inflation rate, equity investors reward firms with stronger social capital, as proxied by their corporate social responsibility levels. The effect holds using different measures of inflation, including region-specific ones. The inflation-hedging property of CSR is stronger for firms headquartered in Democratic US states (those most exposed to the "corporate greed'' narrative of inflation) and for firms with higher customer awareness and intangible capital. Overall, the findings spotlight inflation as a crisis in stakeholder trust and provide new insights into the importance of social capital for firm value.