We document that firms increase their investment in ESG activities, a proxy for CSR performance, in anticipation of lawsuits from external stakeholders to mitigate the adverse consequences of such legal externalities. We find that higher CSR performance is also positively related to the litigation count and propensity for class-action lawsuits. We show that this strategy to enhance CSR performance prior to anticipated litigation pays off in multiple ways, including a smaller negative wealth effect, shorter litigation process, and lower likelihood of class-action grants or monetary penalties against the defendant firm. The findings are robust to alternative measures of CSR performance, industry factors, and endogeneity concerns. Moreover, firms seem to boost their CSR performance even further after a rise in lawsuit activity. The evidence suggests that CSR performance is an additional risk mitigation tool – or an on-demand insurance policy – against anticipated lawsuits.
Khokhar, Abdul Rahman and Shahriari, Hesam, Perceived Trust and Corporate Litigation: The Role of Corporate Social Responsibility (May 15, 2021).