The Impact of Indirect Corporate Social Performance Signals on Firm Value: Evidence from an Event Study

Abstract

Prior research shows that signals sent by institutionalized third parties (i.e. indirect signals) about firms' corporate social performance (CSP) can impact firm value. However, the effects that different types of indirect CSP signals have on firm value have remained largely unexplored. Furthermore, managers often do not fully understand how to communicate CSP effectively. In this article, we operationalize CSP as a multidimensional construct and draw on signalling theory to examine how different types of indirect CSP signals impact firm value. The results of an event study show that institutionalized third parties can play an important role in delivering credible CSP‐related information to the market. Results also demonstrate that the valence (positivity vs. negativity) and content (the specific social domain) of indirect CSP signals are important predictors of the magnitude of market reactions, and that shareholders' responses to the valence and content of indirect CSP signals have substantially changed over time.