Option Marketsand the Value of CSR: Evidence from Option-Implied Volatility

We introduce an innovative method to quantify the risk-management benefit ofCorporate Social Responsibility(CSR). Option-implied volatility captures the expectations of financial marketsof future risk and uncertainty ofa firm. Therefore, if CSR produces risk management benefits, CSR should reduce implied volatility. We find that CSR and implied volatility show a negative concurrent correlation after controlling for other variables. In addition, the greater the CSR, the lower the future implied volatility. These findings are consistent with the view that CSR creates risk management benefits to a firm, and financial markets stronglyappreciate the benefit. Hence, financial engineers in charge of derivative pricing should take into account strategic management variables.