Depending on the conduct of company management, the sign varies denoting the interaction between the company’s CSR level and the market’s response to a restatement announcement. Since the market expects the leaders of a high CSR company to fully comply with ethical and legal principles, a restatement announcement due to fraud is irrefutable proof that no such compliance exists. Trust in management subsequently collapses, triggering a more negative reaction from that market compared to what would occur for a low CSR company (all other conditions being equal) because the reputational premium component would no longer be calculated in the stock price.
The bottom line is that investing in CSR activities can be a double-edged sword for management. While it is true that CSR can effectively mitigate risks and protect the value of the company when negative events occur, this happens only when corporate social responsibility is genuine. This means that management makes a concrete commitment to comply with fundamental ethical and legal principles. Vice versa, when management builds a fake image of high CSR for its stakeholders and investors, adopting greenwashing policies, negative events pull back the curtain on the underlying opportunistic behavior. In this case, we will see a negative reaction from the market that is amplified (not attenuated), and far more value will be destroyed compared to companies with low levels of CSR.