【Research Report】Corporate Social Responsibility and Crash Risk for Japanese Firms

This paper investigates the relationship between corporate social responsibility (CSR) and crash risk of Japanese firms following Kim et al. [2014], who find that the effect of CSR mitigates firms’ future stock price crash risk by substituting for a firm’s weak governance mechanism. Only since August of this year has the Council of Advisers, conducted by the Financial Service Agency in Japan, started to consider establishing a Corporate Governance Code. It is important to test whether the effect of CSR and governance reduces crash risk of Japanese firms from a practical viewpoint. We find from our regression analysis that CSR practices in Japanese firms has no effect on reducing crash risk. As opposed to the argument of Kim et al. [2014], this result is consistent in firms with a weak governance mechanism. Next, we examine the effect of firms’ governance mechanisms on crash risk by repeating the same analysis using several governance factors of the mechanism. However, we find no evidence that the governance mechanism reduces crash risk. Overall, these results suggest that corporate governance mechanism in Japanese firms is less effective.