Proponents of corporate social responsibility (CSR) argue that CSR activities allow firms to improve relationships with key stakeholder groups and gain a sustainable competitive advantage over industry rivals. This study examines wealth effects of additions and deletions to the Domini Social 400 Index, a widely recognized benchmark for measuring the impact of environmental and social screening on investment portfolios, for both announcing firms and rival companies. It further differentiates between those CSR
activities that relate directly to primary stakeholders versus that involving broader social issue participation. Three important findings are documented. First, the study rejects the agency theory hypothesis that CSR activities lead to inefficient allocation of company resources. Second, intra-industry results from additions to the index provide support for the resource based view theory that stakeholder-related CSR activities provide firms with a competitive advantage. Finally, deletions from the index elicit contagion effects by rival firms. The strategic policy implications for corporate managers are discussed.

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