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Patience pays off – corporate social responsibility and long-term stock returns
Abstract
This paper presents new evidence on the implications of corporate social responsibility (CSR) on stock returns. By implementing a long-term focus as well as using subdivided measures for CSR, we cater to the intangible nature and the heterogeneity of CSR activities. We use a novel classification of these activities into nine areas, each belonging to one of the standard environment, social, and governance (ESG) dimensions. Using cross-sectional return regressions and buy-and-hold abnormal returns, we find that firms with strong CSR significantly outperform firms with weak CSR in the mid and long run in certain areas. Firm returns increase up to 3.8% with respect to a one-standard-deviation increase of the CSR rating. In a two-stage least squares (2SLS) approach we verify that the main economic channel for the appreciation of strong CSR stocks is unexpected additional cash flows. The results are relevant for assessing the efficiency of CSR, and have broader implications for asset managers who can expect abnormal returns by investing in firms that exhibit a high CSR in the respective scores and holding the stocks for a longer period.
... In the literature, two opposite views have emerged from examining whether firms benefit from investments in CSP, namely the risk mitigation view and the over-investment view (Goss and Roberts, 2011). In particular, there is evidence that firms profit from sustainable future cash flows (Kang et al., 2016;Dorfleitner et al., 2018;Von Arx and Ziegler, 2014) and abnormal returns (Flammer, 2015), especially in consumer-oriented industries (Dimson et al., 2015). Stock returns of high CSP firms may be comparably higher even during a financial crisis, as documented for the financial crisis of 2008/2009 by Lins et al. (2017), which implies that CSP can contribute to mitigating risk. ...
... The category level of social scores is matched to categories of product responsibility, community, human rights, diversity and employees as in Attig et al. (2013). The environmental performance is marked by three categories, namely emission reduction, environmental innovation, and resource reduction as in Dorfleitner et al. (2018). Details of the CSP variables are also provided in Table 4. Table 5 provides descriptive statistics for the employed CSP variables, their instruments, and control variables for the four regional panels. ...
... In the following, we extend the analysis from overall CSP to single components of CSP. Following Attig et al. (2013), we choose the categories of product responsibility, community, human rights, diversity, and employees and add emission reduction, environmental innovation, and resource reduction instead of only the aggregated environmental pillar based on Dorfleitner et al. (2018). In reference to the model specification, the overall CSP from the estimations in section 5.1 is now replaced by one of these categories, resulting in eight further 2SLS regression sets for each region. ...
Purpose
This paper aims to close gaps in the current literature according to whether there are differences regarding the relationship between corporate social performance (CSP) and systematic risk when diverse regions of the world are considered, and what the respective drivers for this relationship are. Furthermore, it tests the robustness to alternative measures for CSP and systematic risk.
Design/methodology/approach
This study focuses on the impact of corporate social responsibility on systematic firm risk in an international sample. The authors measure CSP emerging from a company's social responsibility efforts by utilizing a CSP rating framework that covers a variety of dimensions. The instrumental variable approach is applied to mitigate endogeneity and identify causal relationships.
Findings
The impact of overall CSP on systematic risk is most distinct for North American firms and, in descending order, weaker in Europe, Asia–Pacific and Japan. Risk mitigation applies across all four regions. However, the magnitude of impact differs. While the most critical drivers in North America and Japan include product responsibility, Europe is affected most by the employees category and Asia–Pacific by environmental innovation.
Practical implications
The findings help firms to control their cost of equity and investors may identify low-risk stocks by considering certain aspects of CSP.
Originality/value
This study distinguishes itself from previous literature addressing the connection between systematic risk and CSP by focusing on regional differences in an international sample, using the very transparent CSP measures of Asset4, identifying underlying impact drivers, and testing for robustness to alternative measures of systematic risk.
... Among others, Derwall et al. (2005) and Edmans (2011), who link the doing good while doing well-hypothesis with the managerial myopia theory, conclude that short-term investors are unable (or unwilling) to price the long-term benefits of those activities correctly and therefore undervalue stocks of companies with high levels of engagement in environmental or social aspects, leading to higher returns in the long-run for the respective stocks when compared with other stocks. This idea of benefit manifestation in the long run is consistent with the findings of Dorfleitner et al. (2018), who conclude that the benefits of socially responsible activities (measured by the abnormal stock returns) are produced by unexpected additional cash flows which occur mid-to-long term. Pintekova and Kukacka (2019) divide the term of ESG-based activities into a primary and a secondary sector, whereas the first category refers to socially responsible activities which are closely related to the core business of the respective company. ...
... In this regard, the controversy score represents a good opportunity to decrease this inefficiency and can add significant value to ESG investing as this score is comparable to credit default ratings as these ratings also evaluate the absence of an infrequent event. Dorfleitner et al. (2018) also address the aspect of information inefficiency in the context of SRI as they argue that the future financial benefits of socially responsible activities are not immediately perceivable and therefore the economic nature of CSR remains fairly opaque. Within their results, they conclude that ESGbased activities lead to significant earnings surprises and unexpected additional cashflows in the long run. ...
... Although the occurrences of controversies may be immediately priced by the market, which is indicated by the non-existing underperformance of the worst controversies score portfolio, the absence of controversies appears to be incorrectly evaluated for small companies. The significant outperformance of the best-rated companies therefore indicates a less efficient market regarding ESG-based information as discussed by Edmans (2011), Mynhardt et al. (2017 and Dorfleitner et al. (2018). Smaller companies without an unwanted boost in public perception due to a controversy remain "silent saints" so-to-speak and "fly under the radar". ...
Based on an extensive international dataset containing Thomson Reuters environmental, social and corporate governance (ESG) rating, as well as Thomson Reuters newest controversies and combined score of an average of 2500 companies in the years 2002–2018, this article contributes to the existing discourse of the relationship between corporate social performance and corporate financial performance (CFP) by examining the Fama and French (J Financ Econ 116(1):1–22, 2015) five-factor risk-adjusted performance of positive screened best and worst portfolios, based on a 10 cutoff, respectively, for equally, value- and rank-weighted strategies in the European, US and global market. Furthermore, the controversies score allows us to examine the mid-to-long-term effects of scandals on the CFP without having to rely on the event study methodology. Even though a value-weighted strategy does not show any significant abnormal returns, we examined a significant outperformance for equally weighted worst ESG portfolios and best controversies strategies. These results strongly indicate that this is, on the one hand, driven by low-rated smaller companies (“small sinners”) and clean-coated firms with regard to controversies (“silent saints”) on the other hand. The findings hold for several robustness checks such as adjusting the cutoff rates or splitting the dataset across time.
... Furthermore, Wang et al. (2023), while examining the market reactions to the United States ESG Disclosure Simplification Act 2021, reveal that the negative impact is less pronounced among firms with higher ESG scores, underscoring the notion that companies with strong ESG standings are better equipped to navigate regulatory changes related to climate disclosures. Dorfleitner et al. (2018) provide additional reinforcement, demonstrating that firms with robust CSR significantly outperform their counterparts with weaker CSR practices. Together, these studies suggest a positive relation between proactive ESG measures, reduced risk and enhanced performance, supporting our hypothesis that: ...
... Concomitantly, high ESG performance signals firm legitimacy and generates reputational advantages (Cuypers et al., 2016;Fuente et al., 2022;Şeker and Şengür, 2021). The results align with Dorfleitner et al. (2018), Sassen et al. (2016) and Wang et al. (2023). These findings are economically significant, indicating that one standard deviation change in ESG leads to 0.75%, 3.05%, 2.26% and 1.76% change in the [0, 0], [+1, +5], [−3, +3] and [−5, +5] CARs, respectively. ...
Purpose
This study aims to comprehensively understand market reactions to Bursa Malaysia's announcement on mandatory climate-change-related disclosures, exploring sector-specific dynamics and cross-sectional influences.
Design/methodology/approach
The study uses event study methodology on 412 listed firms to analyze market reactions around the announcement date. The sector-wise analysis further delves into variations across industries. Cross-sectional analysis explores the significance of environmental, social and governance (ESG) scores and firm controls in explaining the differences across sample firms.
Findings
The event study reveals initial negative market reactions on the event day, with a subsequent shift from positive to negative cumulative impact, indicating the evolving nature of investor sentiment. The sector-wise analysis highlights heterogeneous effects, emphasizing the need for tailored strategies based on industry-specific characteristics. The cross-sectional findings underscore the growing importance of ESG factors, with firm size and performance influencing market reactions. Financial leverage and liquidity prove insufficient to explain cumulative abnormal return (CAR) differences, while past returns and volatility are influential technical factors.
Practical implications
The economic significance of the results indicates a growing trend where investors prioritize companies with more substantial ESG scores, potentially driving shifts in corporate strategies toward sustainability. Better ESG performance signifies improved risk management and long-term resilience in the face of market dynamics. Regulatory bodies may respond by enhancing ESG reporting requirements, while financial institutions integrate ESG factors into their models, emphasizing the benefits of sustainability and financial performance.
Originality/value
This research contributes to the existing literature by providing a nuanced analysis of market responses to climate-related disclosures, incorporating sector-specific dynamics and cross-sectional influences. The findings offer valuable insights for businesses and policymakers, emphasizing the need for tailored approaches to climate-related disclosure management.
... Opposing views have claimed that stock market participants cannot value CSR engagement correctly since its return is uncertain and risky (Oh et al., 2011) and it does not pay off in the short term, only in the long term (Dorfleitner et al., 2018;Gao et al., 2022). Furthermore, managers may engage in excess CSR solely for reputational and private benefits (Tirole, 2001;Harper et al., 2020;Dang and Chang, 2022), which could create tension in a firm's financial situation because of J o u r n a l P r e -p r o o f excessive expenditures. ...
... Thus, we provide novel evidence that over-engagement in ESG might cause instability in the financial position of firms as it raises some concerns about the benefits of CSR, such as its return, which is uncertain and risky (Oh et al., 2011) and does not pay off in the short term, only the long term (Dorfleitner et al., 2018;Gao et al., 2022). Hence, aggressive ESG engagement might require intensive investment without receiving immediate returns and thus its marginal cost might exceed its marginal benefit in the short term. ...
... profitability, firm size, leverage, liquidity, sales growth, asset growth and turnover) to examine the contribution of CSR to firm performance. (Clark, Feiner, and Viehs 2015;Lins, Servaes, and Tamayo 2017;Benlemlih, Jaballah, and Peillex 2018;Dorfleitner, Utz, and Wimmer 2018;Berkman, Li, and Lu 2021). However, the increase in financial market integration and the maturing of economies proffer the need for richer risk management mechanisms and the forming of reliable portfolios. ...
... Accordingly, a plethora of studies has demonstrated responsiveness toward using equities and measures of CSR (Galema, Plantinga, and Scholtens 2008;Hayward 2018;Dorfleitner, Utz, and Wimmer 2018;Durand, Paugam, and Stolowy 2019;Berkman, Li, and Lu 2021, etc.). Findings from these studies revealed that SRI screening leads to out-performance over the numéraire significantly (Derwall et al. 2005). ...
The degree to which corporations benefit from social welfare has induced increasing attention, enjoining corporations to act in a socially responsible manner. The sustainability investing landscape has witnessed rapid ramifications over the years, but with fewer empirical studies relative to the conventional way of investing. Regarding the extent of financial markets inefficiency, we probe into the degree of similarities among sustainability equities returns at multi-frequencies. Twenty samples of sustainability equity indices from various regional blocs, advanced markets and global indices are utilised. To achieve the study's purpose, we employ the I-CEEMDAN based cluster analysis with Pearson product-moment correlation coefficient, Kendall tau-b, variances and correlation matrix as the estimation techniques. It was found that sustainability equities returns demonstrate similar behaviour at both the individual equities and pairwise levels for most frequencies. However, the similarities do not persist across investment horizons revealing markets inefficiency in sustainable responsible investing (SRI). The study concludes that the dynamics of sustainability equities returns are frequency-dependent. Therefore, it is recommended that investors should make better investment decisions in the short-, medium-, and long-term if they seek to exploit the markets. Additionally, the similar dynamics of connectedness among related pairs enhances similar policy dissemination for SRI globally.
... This literature postulates fragmented findings invoking different theoretical frameworks, such as the stakeholder theory, 6 the resource-based view (Bhandari et al., 2022), 7 and the legitimacy theory (Friede et al., 2015;Whelan et al., 2021). 8 For instance, Vishwanathan et al. (2020) suggest that sustainabilityoriented initiatives aimed at supporting either the stakeholder reciprocation or the firm innovation capacity lead to higher financial performance, while Dorfleitner et al. (2018) suggest that the effect of sustainability-oriented initiatives is more pronounced in the long-term run rather than in the short-term run. ...
... Furthermore, it also presents an economic estimate about the firm's ability to create shareholder value and contribution to sustainable growth (Berg et al., 2020;Dorfleitner et al., 2015). Finally, Refinitiv considers a most extensive range of indicators and dimensions to construct each constituent component of the aggregate indicator related to firm sustainability performance (Berg et al., 2020;Dorfleitner et al., 2018). 10 Finally, we also collect information on COVID-19 cases and deaths from the Oxford University COVID-19 Government Response Tracker. ...
Following the COVID‐19 outbreak, orientation toward sustainability is a critical factor in ensuring firm survival and growth. Using a large sample of 1,204 firms in Europe during the year 2020, this study investigates how more sustainable firms fare during the pandemic compared with other firms in terms of risk–return trade‐off and stock market liquidity. We also highlight the drivers of the resilience of more sustainable firms to the pandemic. Particularly, we document that higher levels of cash holdings and liquid assets in the pre‐COVID period help these firms to perform and absorb the COVID‐19 externalities better than other firms. Our results are robust to a host of econometric models, including GMM estimations and several measures of stock market performance. These findings contribute to the theoretical and empirical debate on the role of the sustainability as a source of corporate resilience to unexpected shocks.
... Secondly, a similar path of argumentation considers CFP as opposed to financing costs. CSP is positively related to CFP (Kang et al., 2016;Dorfleitner et al., 2018;Von Arx and Ziegler, 2014) in the sense of sustainable future cash flows. Furthermore, CFP is positively related to creditworthiness (Standard&Poor's, 2013). ...
... The different geographical and political circumstances between North America and Europe are reflected in the different levels of the average ENV scores. Dorfleitner et al. (2018) show that for the U.S., high ENV scores can predict positive earnings surprises in later periods, which can partially explain the positive effect on creditworthiness that we find for North America. Finally, firms in North America have a higher degree of freedom to differentiate themselves from their peers regarding environmen-tal issues compared to Europe, which results in explanatory and prediction power improvements only for North America. ...
... Companies which performed better in terms of ESG achieved higher firm value than companies of worse ESGP. These are supported by Dorfleitner et al. (2018) who in addition documented that the longer the period of analysis is, the relation between ESGP and firm value is stronger. Others also reported that ESGP contributes to higher stock price (Khan, 2019) and abnormal returns (Hong & Kacperczyk, 2009), while some highlight that crucial for firm value improvement is rather ESG disclosure (i.e. ...
Theoretical background: The paper draws on two relevant theories – stakeholder theory and institutional theory. Non-financial information on how the operations of a company impact its surroundings in environmental, social, and governance (ESG) areas is more and more important in terms of firm value and according to stakeholders theory, a positive relationship between these two is expected. However, although the research on the relationship between company ESG performance (ESGP) and firm value origins since the beginning of the 1970s, the authors document no conclusive results. The above is theorised to be conditioned by the role of institutions as they reflect a rational purpose that guides behaviours of entities toward certain ends.
Purpose of the article: Two aims were set in the study. First, to examine the impact of the sustainability level of the European Union (EU) Member States in the years 2012–2021 on ESGP of non-financial sectors stock companies. The second aim of the paper was to assess the country sustainability level as the factor differentiating the nature and the strength of ESGP impact on firm value of non-financial sectors stock companies listed on the regulated financial markets of EU Member States in the years 2012–2021.
Research methods: For the purpose of achieving set goals, the study utilised two econometric models. Models were estimated using Panel Least Squares (PLS) regression with Fixed Effects (FE). Tobin’s Q proxied firm value, ESG scoring from Refinitiv proxied company ESGP. Global Sustainability Competitiveness Index (GSCI) from Solability was used as the measure of country sustainability. Company financial and ESG data was sourced from Refinitiv EIKON, while country data was accessed from Solability, Eurostat, Human Development Index and Transparency International.
Main findings: Countries of both low and high sustainability level impact company ESGP positively. However, almost twice as big influence of highly sustainable countries was noted for low ones. Research results documented ESG to impact firm value positively. An increase in ESG score of a company from the country with low sustainability level decreased its firm value and the opposite was noted in case of companies of countries with high sustainability level. Investors tend to value positively companies with good ESGP and strong nation-level institutions in the field of sustainability and to punish (i.e. with a lower valuation) firms from countries of poor sustainability, even if these entities reached unexceptionally good ESGP.
... Capitalists overly focused on self-interest may be tempted to lower the quality of their products, exploit the rights of their employees, and ignore the impact on the environment. With the growing awareness of social responsibility and the role of the market selection mechanism, the external stakeholders are paying more and more attention to the possible impact of business activities on environmental, social, and governance factors, and investors and consumers are willing to sacrifice some of the benefits or costs to support the adoption of environmentally friendly technologies and improve workers' rights [27,28]. The concept of ESG was first introduced by the United Nations Global Compact in a report in 2004. ...
ESG (Environmental, Social, and Governance) performance is an essential indicator for measuring the sustainability of corporations. It has received increased attention from capital market participants after the proposal of the ‘dual carbon’ goal. Innovation is a necessary skill for corporations to compete in the market. Therefore, this study investigates the impact of innovation on the ESG performance of corporations based on the dual incentive perspective of government subsidies and equity incentives. Using data of China’s A-share main board listed corporations from 2017 to 2022, OLS (Ordinary Least Squares) models are constructed to conduct empirical research. The results show that enhanced innovation can significantly improve corporate ESG performance. This paper also conducts other tests to ensure the robustness of the findings and address potential endogeneity issues. Further analysis shows that both using government subsidies as external incentives and using equity incentives as internal incentives can positively moderate the above findings. Heterogeneity analyses discover that government subsidies granted to asset-advantaged corporations have a more substantial moderating effect than those granted to asset-weakened corporations; equity incentives granted to core technical staff have a more substantial moderating effect than those granted to executives. The concept that innovation with dual incentives can enhance corporate ESG performance can aid in developing programs to improve their ESG performance and generate novel ideas for high-quality, sustainable development.
... Climate risk presents investment opportunities on the asset side of the insurance industry. Insurance companies with higher climate risk perceptions are likely to take more climate adaptation measures, contributing to an increase in their asset returns (Kim et al. 2014;Dorfleitner et al. 2018;Braun et al. 2019). Stechemesser et al. (2015) analyzed three types of insurance companies in terms of climate change adaptation measure dimensions (climate knowledge uptake, climate-related operational flexibility, and strategic climate integration). ...
The impact of climate risk on the insurance industry has attracted the attention of the industry and regulators. Based on data of the insurance industry in 31 provinces in China from 2005 to 2021, we use the fixed effects model to investigate the impact of climate risk on the asset side and liability side of China’s insurance industry. We find the following: First, the rise of climate risk is accompanied by the increase in the auto insurance premium share and the general life insurance premium share on the liability side, and the increase in the current assets ratio, the long-term investments ratio, and the fixed assets ratio on the asset side. Second, premium income and investment returns are two channels for the above impacts. Third, the impacts are greater in regions with catastrophe insurance pilot, lower public climate change concerns, and lower insurance payout ratios. Therefore, China’s insurance industry should optimize climate risk management on the asset and liability sides.
... More specifically, their model suggests that, ceteris paribus, a study with an implied long-term focus is 76% more likely to find a positive or neutral result. Whelan et al.'s (2021) findings support previous studies that report corporate investments in environmental sustainability had effect on corporate financial performance over the long term rather than in the short term (e.g., Dorfleitner et al., 2018;Hang et al., 2019). ...
Purpose: This study aims to investigate whether CEO future focus leads to improvements in the CSP. Although there has been extensive research on the antecedents of CSP, little has addressed the role of CEOs' subjective biases in determining how future time frames affect CSP. This study fills this gap by adopting the concept of CEO future focus and examines the relationship between CEO future focus and CSP. Design/methodology/approach: The sample of this study includes 933 (firm-year) observations from 178 publicly traded U.S. manufacturing firms between 2005 and 2011. This study conducts generalized estimating equations (GEE) model to test our hypotheses. Findings: The finding shows that a CEO's future focus is positively related to CSP. Given the long-term orientation of CSP, this result shows that a CEO with a strong future focus is more likely t o be l ooking ahead a t possible future gains by enhancing CSP. The results also show that various boundary conditions shape the positive relationship between CEO future focus and CSP. Specifically, this study finds that the positive relationship between CEO future focus and CSP is weakened when a CEO has longer tenure, when a CEO has a higher proportion of fixed pay in his/her pay packages, and when an organization confronts a shifting and challenging external environment. Research limitations/implications: This study extends both the strategic leadership and CSR literature in that a CEO's temporal foci, especially future focus, influence corporate social activities. However, this study has limitation related to the measurement of future focus. In addition, this study only considers CEO future focus rather than the past and present focus. Originality/value: This study extends the study of CEO characteristics by investigating how micro-foundations, in the form of CEO future focus, affect CSP. The study provides more in-depth understanding of CEO characteristics by adopting the concept of future focus and examine its impact on the CSP. In addition, the study provides a more precise understanding of the relationship between CEO future focus and CSP by investigating various boundary conditions such as CEO and industry characteristics.
... Vishwanathan et al. (2020) provided meta-analytic evidence of how CSR improves firm performance. In addition, Dorfleitner et al. (2018) showed how long-term engagement in CSR results in long-term stock returns (e.g., a "3.8% increase in stock returns per one-standarddeviation increase in CSR rating"). Since such benefits of the long-term approach are evident, it is important to understand how firms fall into "myopic management" (the inclination to make decisions that prioritize short-term outcomes at the cost of long-term investments), which discourages engaging in long-term oriented CSR and erodes firm value. ...
We apply the approach/inhibition theory of power and tournament theory to explain how power disparities between a CEO and a top management team (TMT) lead to myopic management in a firm that, in turn, influences its corporate social responsibility (CSR) performance. Specifically, we analyze panel data from multiple sources (i.e., KLD, ExecuComp, and Compustat) over a 12-year period and find that CEO-TMT power disparity, measured by pay slice, is positively associated with myopic management that, in turn, leads to a reduction in CSR performance. Furthermore, we decompose total power disparities into short-(e.g., salary and bonus) and long-term (e.g., stock option) power disparities. Our results suggest that CEOs receiving relatively greater short-term compensation than that of TMTs are more likely to engage in myopic management, leading to their firm's reduced CSR practices. We discuss the theoretical and practical implications of this study.
... Corporate investments in environmental sustainability had no immediate impact on financial performance, but they had positive long-term impacts (Hang, Klingeberg and Rathbeger, 2020). Research conducted by Dorfleitner, et al. (2018) on the cross-sectional data of the companies with high ESG ratings found that returns were 3.8% higher per standard deviation of ESG score in the mid and long term. The ESG integration strategic benefits actually outperforms negative screening in a firm's risk analysis (Khan, Serafeim and Yoon (2016). ...
The report gives a panoramic view of the Indian banking and finance sector covering deep and diverse topics ranging from INR settlements to CBDC, 'loan melas' to green finance, business strategy to bank profitability, and people risk management to systemic risk assessment. Recent challenges to banks and NBFCs, which emanate from domestic and global developments, have also been examined. Written in a lucid language, IBFR 2022 is a definitive source of information and discussion on the BFSI sector for banks, regulators, policymakers and academicians.
... Corporate investments in environmental sustainability had no immediate impact on financial performance, but they had positive long-term impacts (Hang, Klingeberg and Rathbeger, 2020). Research conducted by Dorfleitner, et al. (2018) on the cross-sectional data of the companies with high ESG ratings found that returns were 3.8% higher per standard deviation of ESG score in the mid and long term. The ESG integration strategic benefits actually outperforms negative screening in a firm's risk analysis (Khan, Serafeim and Yoon (2016). ...
This chapter discusses the preparedness of Indian banks for climate change. The study reviews climate finance initiatives, and evaluates sectoral positions in terms of environmental risk and schemes for financing green and renewable energy. It critically examines the scope for green finance in India, the linkage with economic
growth and the sustainability of banking business. The chapter highlights important relationships between Environmental, Social and Governance (ESG) scores and credit risk rating and recommends key policies for enhancing green finance by banks.
... Financial sustainability involves striking a balance between environmental and social sustainability while considering the company's financial standing (Dorfleitner et al., 2018). It is an indicator encompassed within companies' sustainability metrics. ...
This study examines the relationship between high-performance work practices (HPWPs) and employee retention
in the hospitality industry. A survey was conducted among 1319 hotel employees in Jordan, resulting in a high
response rate. The data were analyzed using various statistical methods, including descriptive, linear regression,
hierarchical regression, and Macro-process-plugin analysis. The analysis showed that HPWPs have a direct impact
on employee retention and an indirect effect on employee well-being and psychological capital. Furthermore, it is
the first study to identify employee well-being and psychological capital as a moderated mediation mechanism
between HPWPs and employee outcomes in tourism and hospitality. The paper presents significant theoretical
contributions, practical implications, and recommendations for the industry, particularly during the post-COVID19 era.
... A plethora of studies have shown that using equity and CSR measurements can be relevant (Galema et al., 2008;Hayward, 2018;Dorfleitner et al., 2018;Durand et al., 2019;Berkman et al., 2021, etc.). The results of these research showed that SRI screening greatly outperforms the benchmark (Derwall et al., 2005). ...
The study scrutinises the dynamic interconnectedness among 20 sustainability equities returns from regional and global perspective with a sample period from 12th November 2012 to 2nd December 2021. The sustainability equities returns include samples from Africa, America, Asia, Europe, BRICT, Emerging markets, Developed markets and World indices. Using the TVP-VAR and wavelet multiple techniques, we find heterogeneous levels of markets integrations. A mixture of net transmitting and net receiving assets at the averaged total connectedness and net connectedness levels are noticeable. Also, dynamic connectedness rises in times of uncertainties revealing contagion effects. Moreover, the integration levels among sustainability equities are high across investment horizons, but with a potential lead or lag. Particularly, we find more flights to quality for net receivers of shocks relative to net transmitters. It must be noted that distinctions between net transmitters and net receivers of sustainability equities should manifest across time for effective investment decisions.
... Similar results were reported by Velte (2017), who proved no relationship between ESG performance and Tobin's Q of German stock companies. Nonetheless, Fama (1998) andHang et al. (2019) pointed out that no relationship between ESG and market performance appears in the short term only, while in the long-run the relationship usually takes specified direction (Dorfleitner et al. 2018). While Brammer et al. (2006) Barnea and Rubin (2010), and Wong et al. (2021) proved negative effect of ESG ratings on firm value, Lo and Sheu (2007), Galema et al. (2008), and Guenster et al. (2011) reported that ESG disclosure of the firm results in higher valuation. ...
The main aim of the study was to assess the impact of the ESG rating of the company on its market valuation. The research sample included stock companies of real economy sectors of financial markets of European Union Member States in years 2018-2020. The research hypothesis stated that across financial markets of European Union there are sectors in which there is a strong and positive correlation between high ESG rating of the company and its market value. The paper analysed selected measures of descriptive statistics of used variables, Pearson correlation coefficient, and constructed an Ordinary Least Squared model assessing the impact of ESG rating on the surveyed companies’ market value. Both the composites of ESG rating (ESG and ESGC) and the individual components (E, S, G and C) were analysed. Financial data and ESG ratings were extracted from Refinitiv Eikon database. Undertaken research proved ESG disclosure and rating to be the determinant of the companies market value in specific sectors, while companies controversies appeared to be the destructors of market value of companies across all sectors. Undertaken study adds new insights to the debate on the relation between companies ESG and financial performance by applying sector approach to the analysis.
... We collect information from several sources. First, we obtain information on ESG rating from Refinitiv 3 because it includes a more extensive set of European firms (Dorfleitner et al., 2018), and is one of the most widely used by scholars, investors and practitioners (Birindelli & Chiappini, 2021;Ding et al., 2021). In estimating the ESG rating, Refinitiv allows for a broader set of sub-indicators of firm sustainability (Berg et al., 2020). ...
This study investigates how the credit risk of more sustainability-oriented firms changes when national governments intervene in their economies to counterbalance the COVID-19 pandemic. For this reason, we examine how the credit default swap spread changes on a database of all listed firms—for which a credit default swaps (CDS) contract is available—in Europe and the United Kingdom during the whole year of 2020. We find that when national governments intervene in the local economies, the CDS spreads for these firms decrease more than for other firms. Furthermore, the CDS spread changes are more sensitive to those policies aimed at supporting household and business income during the pandemic rather than those policies related to stay-at-home measures and investments in healthcare. Our results corroborate previous theories linking firm sustainability, equity and credit risk.
... CSR berpengaruh positif terhadap financial performance. Perusahaan yang mempertimbangkan CSR sebagai perspektif strategi perusahaan dan memerhatikan kepentingan stakeholder, dapat menurunkan cost of opportunism behaviour, insentif dan biaya pengawasan, risiko dan transaction cost, serta meningkatkan nilai fundamental, meningkatkan brand image dan reputasi, yang dapat meningkatkan financial performance (Dorfleitner et al., 2018;Chen, Hung, & Lee, 2017;Jo & Na, 2012;Chen & Wang, 2011). ...
Tujuan penelitian ini untuk mengetahui pengaruh langsung dari corporate social responsibility (CSR) terhadap financial performance, serta pengaruh tidak langsung corporate social responsibility terhadap financial performance melalui intellectual capital sebagai variabel mediasi. Pengolahan data menggunakan software Smart PLS. Data penelitian ini berasal dari laporan tahunan masing-masing perusahaan yang tergolong subsektor bank dan terdaftar pada Bursa Efek Indonesia periode 2011-2018. Data kuantitatif sekunder tersebut dihitung menggunakan rumus Corporate Social Disclosure Index sebagai indikator CSR, Value Added Intellectual Coefficient (VAICTM) sebagai indikator intellectual capital, Tobin’s Q sebagai indikator financial performance. Hasil penelitian ini membuktikan adanya pengaruh positif dari corporate social responsibility terhadap financial performance, corporate social responsibility terhadap intellectual capital, dan intellectual capital terhadap financial performance.
... Many studies have explored the influence of nonfinancial characteristics, such as ethical and ESG factors (Dorfleitner et al., 2018;Nair & Ladha, 2014), but few of them are conducted in the context of sharia-compliant firms in emerging countries that are members of the Association of Southeast Asian Nations (ASEAN). In this study, we look at Indonesia and Malaysia for the following reasons: (1) in general, shariacompliant stocks encounter less risk because the screening process excludes firms that offer high interest and are highly leveraged, which is expected to encourage non-Muslim to invest in sharia-compliant firms, (2) the governments of both countries give significant support in the promotion of Islamic finance and Islamic capital markets, (3) sharia-compliant firms are regulated with an effective regulatory framework, which is expected to increase confidence among retail and institutional investors, (4) Islamic finance as an industry is making rapid progress in these two countries, and (5) few studies focus on ESG factors in Asian countries, such as Indonesia and Malaysia, so our findings in this paper will fill a gap in the literature. ...
This study empirically investigates the effect of an Islamic label on environmental, social, and governance (ESG) performance. Islamic firms in Indonesia and Malaysia that are characterized by lower debt and lower non-sharia compliant income and have a higher ethical standard are expected to make a better contribution to the environment and society. Testing firms in Indonesia and Malaysia, two emerging countries in ASEAN (Association of Southeast Asian Nations), reveals a significant difference in overall environmental and social performance, but not in governance quality. Also, the study documents the significant effect on performance of using Islamic criteria for leverage, accounts receivable, and cash. Overall, after controlling for some variables and splitting the sample into different time horizons and firm sizes, the study consistently reveals that firms labeled as Islamic have better environmental and social performance, but not governance performance. The relevant policies should be adjusted.
JEL classifications
G21, G29.
... Thus, one may expect that additions to the SI may create a temporary price pressure and can cause short-run deviations in return, which puts higher CS performance into question [36]. This is relevant especially for evaluating the efficiency of CSR and has wider implications for asset managers who can expect abnormal returns by investing in companies that exhibit high CSR in their respective scores and holding the stocks for a more extended period [37]. ...
This study examines the relationships between corporate sustainability (CS) performance of the companies (proxied by inclusion in sustainability index) listed in Borsa Istanbul (BIST, Istanbul, Turkey) and market-specific company performance measures over the period of 2014–2017. The results show that there is no strong evidence of the effect of inclusion in or exclusion from the BIST Sustainability Index (BIST SI) on stock returns and systematic risk (betas) of companies. However, the results reveal that inclusion in the BIST SI reduces the total risk of the companies and protects them from stock declines in case of a severe crisis by improving their resilience compared to other companies not included in the BIST SI. Although no significant link is found concerning the impact of the companies’ inclusion on the level of foreign ownership, a positive association is noted between BIST SI inclusion and the level of institutional ownership.
... Though there is evidence for CSR affecting corporate performance [for example, Hong and Kacperczyk (2009);El Ghoul et al. (2011);Chava (2014) and Eccles et al. (2014)], literature investigating the performance of ESG portfolios shows mixed results. Papers covering the US market [for example, Derwall et al. (2005); Galema et al. (2008);Dorfleitner et al. (2018); Gloßner (2018) and Amiraslani et al. (2019)] and the European market (Brammer et al. 2006;Mollet and Ziegler 2014;Auer 2016;Auer andSchuhmacher 2016 andBarth et al. 2019b) indicate a partly positive relation between CSR and performance for the US, whereas the evidence for Europe does not show a significant performance impact. 3 Similarly, Jin (2018) applies one aggregated ESG-related factor to evaluate U.S. equity funds and finds that fund managers tend to hedge ESG-related systematic risks. ...
The rising sustainability awareness among regulators, consumers and investors results in major sustainability risks of firms. We construct three ESG risk factors (Environmental, Social and Governance) to quantify the ESG risk exposures of firms. Taking these factors into account significantly enhances the explanatory power of standard asset pricing models. We find that portfolios with pronounced ESG risk exposures exhibit substantially higher risks, but investors can compose portfolios with lower ESG risks while keeping risk-adjusted performance virtually unchanged. Moreover, investors can measure the ESG risk exposures of all firms in their portfolios using only stock returns, so that even stocks without qualitative ESG information can be easily considered in the management of ESG risks. Indeed, strategically managing ESG risks may result in potential benefits for investors.
... There are theoretical arguments for both a positive and a negative relationship between these goals. Recent empirical studies support the former stance (see, e.g., Dorfleitner et al. 2018;Lins et al. 2017). Moreover, most evidence indicates that sustainable business practices do not result in a significantly reduced profitability but do mitigate risk. ...
Due to its enormous size and capital base, the insurance industry has the potential to play a key role in countering climate change. To this end, the major capital flows associated with its investment and underwriting businesses would need to be redirected towards carbon-neutral activities. Since insurance companies can be viewed as large portfolios consisting of financial risks (asset side) and underwriting risks (liability side), we suggest an asset pricing approach to detect carbon-intensive positions on their balance sheets. The framework should be accompanied by two simple policy changes to reinforce its effectiveness.
... Sherwood and Pollard. Dorfleitner, Utz, and Wimmer (2018) performed cross-sectional studies of equity abnormal returns, and concluded that companies with stronger Corporate Social Responsibility (CSR) rating outperformed the others. ...
This paper discusses the management of climate change risks for equity investments and presents a scenario-based framework for building sustainable portfolios under the climate change scheme. An empirical analysis is first performed using historical price data to show the inferior risk-adjusted performance of the carbon-intensive industries in the North American stock market, which supplements evidence from existing literature in the market's gradual pricing of the climate change risk. Risk management modules are devised with subjective top-level constraints to achieve comprehensive coverage of the key aspects of climate change: risk exposures are measured by carbon intensities, while the risk impacts are quantified through equity return impact scenarios derived from climate change paths under Integrated Assessment Models. A model for quantifying stranded asset risk is also presented. Results from these modules formulate the joint posterior return distribution of the stocks that are used to construct the mean-variance optimal portfolio.
... While companies are required to make significant investments in the short run when pursuing CSR, they could gain financial return in the long run through improved corporate governance and competitiveness. Using cross-sectional return regressions and buy-and-hold abnormal returns, Dorfleitner, Utz, and Wimmer (2018) found that, in certain areas, firms with strong CSR significantly outperformed firms with weak CSR in the mid and long run. Thus one of the potential benefits of investing in a company with a higher CSR orientation can be such a return over a longer period of time if the investors have enough patience to wait until the gain is realised. ...
This paper aims to identify psychological characteristics of potential investors of socially responsible investment (SRI) in Japan to explain its possible motivation by economic experiments. We asked subjects to make decisions regarding stock investments on the basis of three attributes of return, variance, and corporate social responsibility (CSR). We also conducted a dictator game and two lottery-choice experiments to measure subjects’ psychological characteristics: altruism, risk aversion, and time discount rate. Applying a conditional logit model as well as mixed logit model, we found that people who have a higher time discount rate tend to be SRI investors.
This qualitative study investigates the adoption of Environmental, Social, and Governance (ESG) among German Mittelstand mechanical and plant engineering firms. Through semi‐structured interviews, the research identifies key barriers to ESG implementation, including human resource challenges, conceptual ambiguity, legal complexities, standardization gaps and rapid implementation pressures. Simultaneously, it uncovers driving forces such as customer demands, talent attraction, rating agency influence, intrinsic motivation, executive commitment, and regulatory compliance. Notably, profit and loss (P&L) impact emerge as a dual force, influencing both barriers and drivers. The study proposes a best practice model featuring clear responsibilities, centralization, and ESG integration in processes. Additional recommendations include developing a business case for ESG, engaging in industry‐specific networks, and aligning with prominent rating agencies. This research offers strategic insights for sustainable business practices within the Mittelstand context. It presents implications for governments and businesses, suggesting targeted policies to mitigate barriers and reinforce drivers of ESG adoption.
Purpose
This paper aims to examine the diverse levels of corporate social responsibility (CSR) expenditure among Indian companies and its influence on their performance. The study aims to determine whether exceeding the mandatory CSR spending limit provides an edge to companies that outperform in enhancing corporate firm value.
Design/methodology/approach
A dynamic model using system generalized method of moments (GMM) was used to analyze a balanced panel data set of 191 firms over seven years, spanning from 2016 to 2022. Return on assets was used as a proxy to gauge financial performance. At the same time, the study also examined the robustness of the results by considering return on equity and Tobin’s Q as additional measures.
Findings
The study results indicate that, in a mandatory CSR setting, all companies are generally perceived as performing and reporting on CSR equally. Hence, it will not make any payoff, although few companies outperform. Therefore, companies should differentiate themselves regarding CSR spending and reporting to claim a competitive advantage in the market. The study also suggests that the payoff of mandatory CSR expenditure for both performing and outperforming companies is reflected more in non-quantifiable firm characteristics than in measurable performance metrics.
Research limitations/implications
The period of study covers 7 years, i.e. 2015–2016 to 2022–2023. This may limit capturing long-term CSR practices and firm performance trends. Additionally, data from only 191 Indian companies restrict generalizability; future research should include diverse geographic regions with mandated CSR spending to provide a more comprehensive view. In subsequent studies, contextual factors like regulatory changes and macroeconomic conditions could be considered moderating variables.
Practical implications
The study provides valuable insights to top management, indicating that spending beyond the threshold limit of mandatory CSR spending does not enhance corporate firm value. Instead, this additional investment may yield benefits in the form of goodwill and reputation over the long term.
Social implications
This study assists corporations in optimizing their CSR strategies to enhance their social and financial performance impact. Moreover, the study suggests ways to improve the CSR payoff and the need for increasing stakeholder satisfaction.
Originality/value
The study provides original insights into the relationship between mandatory CSR spending and firm performance in the Indian context, revealing that CSR spending does not significantly impact financial metrics, and it highlights the importance of considering a non-quantitative matrix to enhance the firm value in a mandatory CSR setting.
The aim of this research is to investigate the quality and reliability of ESG data provided by companies, as well as the accuracy and objectivity of ESG ratings produced by sustainability rating agencies (SRAs). Since SRAs use companies' non-financial information as input data when formulating their ESG ratings, these two topics appear to be strictly interconnected. Drawing on the Shanon and Weaver (1949) model of communication, we have addressed these issues by means of a systematic literature review combined with a bibliometric analysis. In our investigation we run: i) the co-citation analysis to detect the seminal papers; ii) a keyword co-occurrence analysis to explore how the main features of the academic debate have unfolded in the last five years; iii) a keyword co-occurrence analysis to obtain a network visualisation map to explore how the research broad scope was articulated in different clusters (i.e., themes of research). Among the clusters that emerged from the mapping, we have decided to delve into the streams of research we consider most relevant and deal with: the relationships between ESG and Artificial Intelligence (AI). Namely, we deem that AI may allow us to process massive amounts of data that contain crucial information for ESG investing. However, even if computer algorithms are able to analyse all information available efficiently, and in a timely manner, managers and investors should be aware of their opportunities and criticisms, while scholars should list propositions for advancing the research on these topics.
In recent years, financial markets have been hit hard by the Great Financial Crisis of 2008, the acceleration of climate change, and now the COVID-19 pandemic. The result of these events is the acceleration of the implementation of a new model of socioeconomic development of societies referred to as the environmental, social, and governance (ESG) model. It has been particularly evident in the financial investment sector. Analyses of the relative performance of ESG funds is inconclusive due to the lack of a clear definition of responsible investments, and insufficient quality of the available data and ESG ratings. However, most of the studies find a positive correlation between ESG factors and company's financial performance. The analyses showed that these positive results are more pronounced over the longer term and impact the stock prices of those companies. ESG funds offer better downside protection during crises in relation to traditional funds. Despite the lack of legal barriers, the Polish economy has experienced very long delays in implementing the ESG model and the gap is even more pronounced in the financial industry. This is surprising as Poland is a very interesting market for sustainable investment given its current underdevelopment and overall potential related to green transformation. In Poland, only 17 investment funds deeply integrate ESG criteria. Educational and communication barriers have been identified as the main obstacles to the development of the sustainable finance market in Poland. Education of all participants in investment processes is a prerequisite for success.
This paper investigates the link between firms’ ESG disclosure quality and the growth of ESG investment based on a cross-country/region firm-level panel dataset. We find evidence supporting moderating effects of ESG disclosure quality on increasing firms’ Tobin’s Q, ROA, and reducing downside risks. ESG disclosure quality has a larger effect on enlarging the ESG investment scale, accelerating its growth and promoting the ESG investment more dispersed among all firms in mandatory CSR reporting countries/regions compared with other countries/regions. Our findings also suggest the importance of good and continuing good ESG disclosure quality for firms to benefit from implementing ESG practices.
Thomson Reuters Asset4 (Asset4) is a leading corporate social responsibility (CSR) database often used by practitioners and researchers. This review offers a precise understanding of prior studies using Asset4 and their justification for selecting Asset4, and identifies research opportunities. We review 285 studies using Asset4 data published in quality academic journals, analysing: (1) the usage of Asset4 pillars, categories, data points, and indicators; (2) the justification of using Asset4; and (3) research themes. Our findings provide valuable information for practitioners and researchers who (plan to) use CSR databases, including our guidance on promising avenues for future studies.
Manufacturers have long considered the best approach to take after a supply chain disruption occurs. Because serious disruptions likely will escalate into organizational crises announced in the national news, managing the effects of the disruptions and communications with relevant stakeholders becomes critical to mitigating possible damages. One of the major stakeholders of a firm are the shareholders, and the current literature provides no direction regarding the strategies firms should deploy in communicating with shareholders. This study provides direction by examining effectiveness of organizational communication based upon the level of responsibility that a firm claims after a supply chain crisis is announced. An event study methodology (n = 204) was used to investigate the firm's communication and the associated shareholder reaction using abnormal stock returns as a proxy. The results of the study revealed that the less responsibility a firm accepted for the supply chain crisis, the less negative the abnormal stock return. From a short-term corporate financial perspective, it is attractive to assume less responsibility and even blame other firms. However, from a long-term supply chain perspective, more collaboration with buyers and suppliers is critical. The short-term abnormal stock returns could be weathered to assure more long-term collaboration. This research relies upon impression management communications as a theoretical foundation; whereby the results align with attribution theory. This study provides new links between impression management communications and supply chain management literatures.
Whether mobility, auditory, sensory, visual, cognitive, or other types, living with a disability is a challenging experience. The individual dimension of this phenomenon is complemented by the social experience. In fact, as compared to individual experiences, social and political structures are considered as the leading cause of disability perception in society. Meanwhile, people with disability constitute a meaningful consumer segment with considerable purchasing power. However, extant literature indicates that the marketplace strategies are not friendly with people with disability in many areas. Hence, this chapter presents a conceptual and robust synthesis of these challenges and strategic directions for addressing the imbalance in relation to the equity and inclusion of people with disability in the marketing system. By and large, the chapter presents a paradigm shift on this phenomenon.
What are the relationships between corporate environmental, social, and governance (ESG), corporate social responsibility (CSR), and stock returns? Existing research has affirmed the impact of ESG or CSR on stock returns, but the discussion on the cointegration relationship among these three variables is still insufficient. Therefore, we use panel data of ESG ratings, CSR scores, and annual stock returns of 684 Chinese‐listed companies from 2011 to 2020 to verify the relationship between the variables through panel CADF and Westerlund tests. Meanwhile, we use PMG estimation to find that, in the long run, CSR significantly promotes the improvement of corporate stock returns, but ESG hurts the stock returns of most corporates. Further research proves that the impact of ESG on stock returns closely relates to corporate profitability. Our findings provide valuable policy implications for both developing and semi‐efficient market countries to help them improve their ESG and CSR performance.
We compare the effects of corporate social responsibility (CSR) on firms' equity risk under two different (non-)financial reporting regimes: the risk-based U.S. and the content-based EU system. We observe a strongly negative CSR-risk relation in the EU, but a much weaker general impact in the U.S. In correspondence with goal-framing theory, we find several moderating effects on this association, depending on the reporting regime: (i) A highly volatile market environment unfolds the risk-reducing effect of CSR in the U.S. system, but has no moderating effect in the EU; (ii) Rising CSR awareness buttresses the risk-reducing effect of CSR in the EU, but has an opposing effect in the U.S.; (iii) Risk reductions are most strongly associated with social and governance rather than environmental activity in the EU regime, while there are no such individual effects in the U.S.
Purpose
This study aims to analyze whether various textual characteristics in corporate sustainability disclosure associate with corporate sustainability performance in Australia, pertaining to tones of language and readability. The voluntary disclosure theory and legitimacy theory are used to formulate the study hypothesis.
Design/methodology/approach
Using data from Australian listed firms (2002–2016), four textual characteristics are examined: tone of optimism, tone of certainty, tone of clarity and readability. Corporate sustainability performance is measured by Thomson Reuters Asset4 ratings. Different strategies are adopted to mitigate endogeneity concerns.
Findings
The authors found that there is a positive relationship between the textual characteristics of sustainability disclosure and sustainability performance. Specifically, firms with better performance communicate in an optimistic, certain, clear and more readable manner.
Practical implications
The results suggest that Australia’s voluntary reporting status does not induce a combination of poor performance and positive disclosure. This paper should be of interest to investors and other stakeholders and also informs regulatory policy on sustainability disclosure in Australia.
Originality/value
The authors contribute to the sustainability disclosure literature using computer-based textual analysis to explore whether firms reveal their sustainability performance by “how things are said” (i.e. textual characteristics) in sustainability disclosure. As far as the authors could ascertain, they are the first to investigate textual characteristics of sustainability disclosure in Australia.
We provide a synthesis of four decades of empirical research regarding the reaction of shareholders to environmental events. This literature is at the crossroads of finance, environmental economics, management and corporate social responsibility (CSR). To set the stage, we first provide an account of the Brumadinho ecological disaster that occurred in Brazil on January 25th, 2019. Second, we provide a critical review of more than 100 event studies. These papers cover a diverse set of events, such as industrial accidents, public disclosure programs, legal actions following environmental violations, changes in environmental regulation, environmental news, and corporate initiatives. This review makes four contributions. First is the synthesis of a large strand of literature in a structured setting, so as to be readily handled by both experts and non-experts. Second is the observation that stock market penalties in the event of environmental concerns are likely to be quite low: on average there is a (temporary) drop in the excess stock market return to events that are harmful to the environment of about 2% and the median is −0.6%. Third is to highlight the limits of CSR as a business strategy towards a sustainable society. Fourth is to provide an open access bibliographic database.
This study analyses how equity funds react to institutional pressure related to green finance. Based on the analysis of 378 open-end equity funds in China from 2010 to 2019, we examined the environmental performance of fund holdings to measure their level of green investment. In our analyses, we distinguished between funds with positive and negative screening strategies. Our results indicate that the funds’ green investments are gradually increasing. Furthermore, we found that green investment strategies help to increase the funds’ excess return. The positive connection to financial returns, however, is only valid for funds with negative screening strategies. Finally, we found that fund investors react negatively to funds using positive screening to identify green investments. The study contributes to theoretical and practical knowledge about factors influencing equity funds’ green and financial performance.
Firm‐level studies of sustainable investment performance are typically limited by an errors‐in‐variables bias (i.e., a distortion of estimated regression coefficients caused by measurement error in explanatory variables). Using recent advances in statistical methodology, we present the first cross‐sectional analysis of sustainable stock selection which adequately corrects for this bias and additionally answers the question of whether betas with respect to sustainable risk factors or sustainable characteristics (i.e., environmental, social, and governance ratings) are more relevant in portfolio selection. Within the universe of S&P 500 stocks, which is highly relevant from the investor attention and liquidity perspectives, we find that, after accounting for errors‐in‐variables bias, both types of variables become insignificant. Consequently, they do not add value to investment portfolios and are not vital in models explaining stock returns. Among classic predictors with a long history of use in the investment fund industry, only the market‐to‐book ratio provides independent investment and pricing information.
Purpose
This study aims to provide evidence of market reactions to organizations' inclusion of people with disabilities. Cases from financial journals in 1989–2014 were used to analyze the impact of actions taken by organizations to include or discriminate people with disabilities in terms of the companies' stock prices.
Design/methodology/approach
This research is conducted as an event study where the disclosure of information on an organization's actions toward people with disabilities is expected to impact the organization's stock price. The window of the event was set as (−1, +1) days. Stock prices were analyzed to detect abnormal returns during this period.
Findings
Results support the hypotheses that investors value inclusion and reject discrimination. Furthermore, the impact of negative actions is immediate, whereas the impact of positive actions requires at least an additional day to influence the firm's stock price. Some differences among the categories were found; for instance, employment and customer events were significantly more important to a firm's stock price than philanthropic actions. It was observed that philanthropic events produce negative abnormal returns on average.
Originality/value
The event study methodology provides a different perspective to practices in organizations regarding people with disabilities. Moreover, the findings in this research advance the literature by highlighting that organizations should consider policies and practices that include people with disabilities.
The food and beverage industry is one of the most water intensive industries. Therefore, an effective and efficient water management, based on eco-system related indicators, is crucial. This study analyzes the connection between indicators that address sustainable water management as a subgroup of ecosystem management and the general corporate social performance of firms. The study explores which water eco-system indicators are used in the food and beverage industry to assess corporate water risk management. Secondly, we analyzed the relationship between corporate water risk management and overall corporate social performance. Based on an analysis of 61 firms in the food and beverage sector, our results suggest that the most used indicators were Operations’ Dependency on Freshwater, Change in Water Supply, Use of Water in the Facilities, Collaboration with Communities, and Water Risks for Agricultural Inputs. Indicators addressing an inside-out perspective, such as Impacts on Communities were less often used. Furthermore, we found that the firms’ general corporate social performance, measured by MSCI KLD-ESG indicators, is a good predictor for their use of water indicators. We conclude that the firms in the sample follow an outside-in approach for their water management activities and that water management is a significant part of corporate social responsibility activities in the sector because the business performance of food and beverage firms is interwoven with their water management activities.
This paper provides an overview of the status quo in socially responsible investing (SRI) literature. We outline motives, history, and current best practice of SRI. We also provide a thorough analysis of a wide set of studies that cover two key topics in this field: the first research objective is to determine the relative performance of SRI vehicles in comparison to their conventional benchmarks. Our meta-analysis shows that most research studies find that socially responsible (SR) investments perform equal to conventional investments, but these findings are challenged by contradictory results from other studies. The second objective is to analyze SR behavior’s effects on a company’s financial results. We cover the period between 1986 and 2012. This paper provides future researchers with a well-documented and structured overview of the existing literature on SRI, thereby identifying gaps that might be closed by future research.
The search for a relation between environmental, social, and governance (ESG) criteria and corporate financial performance (CFP) can be traced back to the beginning of the 1970s. Scholars and investors have published more than 2000 empirical studies and several review studies on this relation since then. The largest previous review study analyzes just a fraction of existing primary studies, making findings difficult to generalize. Thus, knowledge on the financial effects of ESG criteria remains fragmented. To overcome this shortcoming, this study extracts all provided primary and secondary data of previous academic review studies. Through doing this, the study combines the findings of about 2200 individual studies. Hence, this study is by far the most exhaustive overview of academic research on this topic and allows for generalizable statements. The results show that the business case for ESG investing is empirically very well founded. Roughly 90% of studies find a nonnegative ESG–CFP relation. More importantly, the large majority of studies reports positive findings. We highlight that the positive ESG impact on CFP appears stable over time. Promising results are obtained when differentiating for portfolio and nonportfolio studies, regions, and young asset classes for ESG investing such as emerging markets, corporate bonds, and green real estate.
The community of Business and Society scholars has been investigating the relationship between corporate social performance and corporate financial performance over thirty years. The typical conclusion, based on narrative reviews of this literature, is that the empirical evidence is too mixed to allow for any firm. In these reviews, poor measures and weak theory construction are often mentioned as causes of this apparent variability in findings. The assumption that this research stream is inconclusive has persisted until after the turn of the millennium. So, what may be required at this point is a critical examination of the evidence that seems to have motivated these conclusions. This article argues that certain types of literature reviews should be treated with caution. It proposes an alternative and uses this more rigorous methodology of literature reviews in order to assess the cumulative evidence on the core constructs.
The effects of intangible assets on organizational outcomes remain poorly understood. We compare the effects of two intangible assets-firm reputation and celebrity-on (1) the likelihood that a firm announces a positive or negative earnings surprise, and (2) investors' reactions to these surprises. We find that firms that have accumulated high levels of reputation ("high- reputation" firms) are less likely, and firms that have achieved celebrity (celebrity firms) more likely to announce positive surprises than firms without these assets. Both high-reputation and celebrity firms experience greater market rewards for positive surprises and smaller market penalties for negative surprises than other firms.
Most theorizing on the relationship between corporate social/environmental performance (CSP) and corporate financial performance (CFP) assumes that the current evidence is too fractured or too variable to draw any generalizable conclusions. With this integrative, quantitative study, we intend to show that the mainstream claim that we have little generalizable knowledge about CSP and CFP is built on shaky grounds. Providing a methodologically more rigorous review than previous efforts, we conduct a meta-analysis of 52 studies (which represent the population of prior quantitative inquiry) yielding a total sample size of 33,878 observations. The meta- analytic findings suggest that corporate virtue in the form of social responsibility and, to a lesser extent, environmental responsibility is likely to pay off, although the operationalizations of CSP and CFP also moderate the positive association. For example, CSP appears to be more highly correlated with accounting-based measures of CFP than with market-based indicators, and CSP reputation indices are more highly correlated with CFP than are other indicators of CSP. This meta-analysis establishes a greater degree of certainty with respect to the CSP-CFP relationship than is currently assumed to exist by many business scholars.
Mutual fund returns strongly persist over multi-year periods—that is the central finding of this paper. Further, consumer and fund manager behavior both play a large role in explaining these long-term continuation patterns—consumers invest heavily in last-year's winning funds, and managers of these winners invest these inflows in momentum stocks to continue to outperform other funds for at least two years following the ranking year. By contrast, managers of losing funds appear reluctant to sell their losing stocks to finance the purchase of new momentum stocks, perhaps due to a disposition effect. Thus, momentum continues to separate winning from losing managers for a much longer period than indicated by prior studies.
In an era of rising concern about financial performance and social ills, companies’ economic achievements and negative externalities prompt a common question: Does it pay to be good? For thirty-five years, researchers have been investigating the empirical link between corporate social performance (CSP) and corporate financial performance (CFP). In the most comprehensive review of this research to date, we conduct a meta-analysis of 251 studies presented in 214 manuscripts. The overall effect is positive but small (mean r = .13, median r = .09, weighted r = .11), and results for the 106 studies from the past decade are even smaller. We also conduct sensitivity analyses to determine whether or not the relationship is stronger under certain conditions. Except for the effect of revealed misdeeds on financial performance, none of the many contingencies examined in the literature markedly affects the results. Therefore, we conclude by considering whether, aside from striving to do no harm, companies have grounds for doing good - and whether researchers have grounds for continuing to look for an empirical link between CSP and CFP.
We examine the relation between the cost of debt financing and a governance index that contains various antitakeover and shareholder protection provisions. Using firm-level data from the Investors Research Responsibility Center for the period 1990 through 2000, we find that antitakeover governance provisions lower the cost of debt financing. Segmenting the data into firms with strongest management rights (strongest antitakeover provisions) and firms with strongest shareholder rights (weakest antitakeover provisions), we find that strong antitakeover provisions are associated with a lower cost of debt financing while weak antitakeover provisions are associated with a higher cost of debt financing, with a difference of about thirty-four basis points between the two groups. Overall, the results suggest that antitakeover governance provisions, although not beneficial to stockholders, are viewed favorably in the bond market.
In recent years, firms have greatly increased the amount of resources allocated to activities classified as Corporate Social
Responsibility (CSR). While an increase in CSR expenditure may be consistent with firm value maximization if it is a response
to changes in stakeholders’ preferences, we argue that a firm’s insiders (managers and large blockholders) may seek to over- invest
in CSR for their private benefit to the extent that doing so improves their reputations as good global citizens and has a
“warm-glow” effect. We test this hypothesis by investigating the relation between firms’ CSR ratings and their ownership and
capital structures. Employing a unique data set that categorizes the largest 3000 U.S. corporations as either socially responsible
(SR) or socially irresponsible (SI), we find that on average, insiders’ ownership and leverage are negatively related to the
firm’s social rating, while institutional ownership is uncorrelated with it. Assuming that higher CSR ratings is associated
with higher CSR expenditure level, these results support our hypothesis that insiders induce firms to over-invest in CSR when
they bear little of the cost of doing so.
Keywordscorporate social responsibility-ownership structure-corporate governance
Although prior research has addressed the influence of corporate social responsibility (CSR) on perceived customer responses, it is not clear whether CSR affects market value of the firm. This study develops and tests a conceptual framework, which predicts that (1) customer satisfaction partially mediates the relationship between CSR and firm market value (i.e., Tobin's q and stock return), (2) corporate abilities (innovativeness capability and product quality) moderate the financial returns to CSR, and (3) these moderated relationships are mediated by customer satisfaction. Based on a large-scale secondary data set, the results show support for this framework. Notably, the authors find that in firms with low innovativeness capability, CSR actually reduces customer satisfaction levels and, through the lowered satisfaction, harms market value. The uncovered mediated and asymmetrically moderated results offer important implications for marketing theory and practice.
Statistically optimal forecasts need not be unbiased. If analysts' objective is to provide the most accurate forecast through minimizing the mean absolute forecast error, the optimal forecast is the median instead of the mean earnings. When earnings distribution is skewed, the median is different from the mean and forecast bias is observed. Thus, analyst forecast bias could be a natural result of analysts' effort to improve forecast accuracy combined with skewed distribution of earnings. We find that earnings skewness explains a significant amount of variation in analyst forecast bias across firms, across fiscal quarters and across time. Moreover, the market appears to understand at least part of the skewness-induced bias and adjusts accordingly. One salient feature of our explanation is that we predict not only forecast optimism for firms with negatively skewed earnings, but also pessimism for firms with positively skewed earnings, thus providing a more coherent explanation of analyst forecast bias.
This study employs the Corporate Social Responsibility (CSR) Index developed by Chen and Hung [2013. “A Study on Corporate Social Responsibility Index and Investment Performance.” GreTai Securities Market 165: 88–97 (in Chinese)] to measure the CSR performance of Taiwanese companies and proposed a CSR efficiency hypothesis that the influence of CSR on stock returns depends on corporate value. According to our findings, CSR activities not only increase the costs of low value firms but also decrease corporate value, exerting a negative effect on stock returns. In contrast, high value firms have a greater capability to implement CSR, and CSR investments can effectively increase their stock prices and market value.
We investigate the relationship between corporate and country sustainability on the cost of bank loans. We look into 470 loan agreements signed between 2005 and 2012 with borrowers based in 28 different countries across the world and operating in all major industries. Our principal findings reveal that country sustainability, relating to both social and environmental frameworks, has a statistically and economically impactful effect on direct financing of economic activity. An increase of one unit in a country's sustainability score is associated with an average decrease in the cost of debt by 64 basis points. Our international analysis shows that the environmental dimension of a country's institutional framework is approximately twice as impactful as the social dimension, when it comes to determining the cost of corporate loans. On the other hand, we find no conclusive evidence that firm-level sustainability influences the interest rates charged to borrowing firms by banks. Our main findings survive a battery of robustness tests and additional analyses concerning subsamples, alternative sustainability metrics, and the effects of financial crisis. This article is protected by copyright. All rights reserved
Using newly available materiality classifications of sustainability topics, we develop a novel dataset by hand-mapping sustainability investments classified as material for each industry into firm-specific sustainability ratings. This allows us to present new evidence on the value implications of sustainability investments. Using both calendar-time portfolio stock return regressions and firm-level panel regressions, we find that firms with good ratings on material sustainability issues significantly outperform firms with poor ratings on these issues. In contrast, firms with good ratings on immaterial sustainability issues do not significantly outperform firms with poor ratings on the same issues. These results are confirmed when we analyze future changes in accounting performance. The results have implications for asset managers who have committed to the integration of sustainability factors in their capital allocation decisions.
Research summary : Raters of firms play an important role in assessing domains ranging from sustainability to corporate governance to best places to work. Managers, investors, and scholars increasingly rely on these ratings to make strategic decisions, invest trillions of dollars in capital, and study corporate social responsibility ( CSR ), guided by the implicit assumption that the ratings are valid. We document the surprising lack of agreement across social ratings from six well‐established raters. These differences remain even when we adjust for explicit differences in the definition of CSR held by different raters, implying the ratings have low validity. Our results suggest that users of social ratings should exercise caution in interpreting their connection to actual CSR and that raters should conduct regular evaluations of their ratings .
Managerial summary : Ratings of corporate social responsibility ( CSR ) guide trillions of dollars of investment, but managers, investors, and researchers know little about whether these ratings accurately measure CSR . In practice, there are examples of highly rated firms becoming embroiled in scandals and the same firm receiving sharply different ratings from different rating agencies. We evaluate six of the leading raters and find little overlap in their assessments of CSR . This lack of consensus suggests that social responsibility is challenging to measure reliably and that users of these ratings should be cautious in drawing conclusions about firms based on this data. We encourage the rating agencies to regularly validate their data in an effort to improve the measurement of CSR . Copyright © 2015 John Wiley & Sons, Ltd.
We investigate b27Gompers, Ishii, and Metrick's (2003) finding that firms with weak shareholder rights exhibit significant stock market underperformance. If the relation between poor governance and poor returns is causal, we expect that the market is negatively surprised by the poor operating performance of weak governance firms. We find that firms with weak shareholder rights exhibit significant operating underperformance. However, analysts' forecast errors and earnings announcement returns show no evidence that this underperformance surprises the market. Our results are robust to controls for takeover activity. Overall, our results do not support the hypothesis that weak governance causes poor stock returns.
In this paper, I empirically examine whether superior performance in corporate social responsibility (CSR) results in lower credit risk, measured by credit ratings and zero-volatility spreads (z-spreads). I am especially interested in how the environmental, social, and governance (ESG) related performance of the corresponding countries moderates this relationship. I find only weak evidence that superior corporate social performance (CSP) results in systematically reduced credit risk. However, I do find strong support for my hypothesis that a country’s ESG performance moderates the CSP–credit risk relationship. Superior CSP is regarded as risk-reducing and rewarded with better ratings and lower z-spreads only if it is recognized by the environment. In addition, I find a reduction of corporate bonds’ z-spreads by approx. 9.64 basis points if the CSP of a company mirrors the ESG performance of the country it is located in.
This paper contributes both to investigating the link between the corporate social and financial performance based on environmental, social and corporate governance (ESG) ratings and to reviewing the existing empirical evidence pertaining to this relationship. The sample used includes ESG data of ASSET4, Bloomberg and KLD for the U.S. market from 1991 to 2012. The econometrical framework applies an ESG portfolio approach using the Carhart (1997) four-factor model as well as cross-sectional Fama an MacBeth (1973) regressions. Previous empirical research indicates a relationship between ESG ratings and returns. As against this, the ESG portfolios do not state a significant return difference between companies with high and low ESG ratings. Although the Fama an MacBeth (1973) regressions reveal a significant influence of several ESG variables, investors are hardly able to exploit this relationship. The magnitude and direction of the impact are substantially dependent on the rating provider, the company sample and the particular subperiod. The results suggest that investors should no longer expect abnormal returns by trading a difference portfolio of high and low rated firms with regard to ESG aspects.
This study examines the differential predictive power of past earnings volatility for analyst forecast errors and future returns. Past earnings volatility jointly captures two correlated, but distinct, earnings properties: time-series earnings variation and uncertainty in future earnings. To distinguish between these two earnings properties, we develop a forward-looking measure of earnings uncertainty that has a minimal mechanical link to variation in prior-period earnings realizations and does not rely on analyst forecasts. Our results suggest that future earnings uncertainty, and not time variation in earnings, is associated with overly optimistic future earnings expectations of equity analysts and investors. We provide the first empirical evidence on the relevance of future earnings uncertainty to analysts and investors over 1-year horizons. In addition, we provide empirical evidence showing that forecast dispersion is a poor measure of earnings uncertainty.
We study the relationship between employee satisfaction and abnormal stock returns around the world, using lists of the “Best Companies to Work For” in 14 countries. We show that employee satisfaction is associated with positive abnormal returns in countries with high labor market flexibility, such as the U.S. and U.K., but not in countries with low labor market flexibility, such as Germany. These results are consistent with high employee satisfaction being a valuable tool for recruitment, retention, and motivation in flexible labor markets, where firms face fewer constraints on hiring and firing. In contrast, in rigid labor markets, legislation already provides minimum standards for worker welfare and so additional expenditure may exhibit diminishing returns. The results have implications for the differential profitability of socially responsible investing (“SRI”) strategies around the world. In particular, they emphasize the importance of taking institutional features into account when forming such strategies.
In some third-world factories there is a literal "wall of codes." Posted are dozens of codes of conduct as defined by dozens of customer, firm, and industry groups and a host of certifying organizations. The cost of this wall of codes is clear for managers: They must fill out endless forms and host endless visits from compliance auditors. Less obviously, the wall of codes is costly for consumers and other stakeholders who care about the social performance of businesses. Not only must they pay the (passed on) costs of compliance, but with so many standards they cannot always identify which standards and codes are valid measures of true social responsibility. This article documents the proliferation of metrics and outlines some of the problems regarding reliability, validity, and comparability of existing codes. It examines two large sets of metrics: those used in the apparel industry and those created by the socially responsible investment funds. It concludes with some practical suggestions that will help reduce the burdens on managers and yield more reliable, valid, and comparable metrics.
"The direction and vitality of corporate America and its managers cannot be fully understood without knowing more about the values and visions of the men and women who manage it" is as true today as it was ten years ago when we originally reported on a nationwide survey of managers and their values. This study, involving over 1,500 managers, replicates our earlier research and reveals that certain values are enduring (such as what we look for in leaders), while other values are changing (such as how we balance personal and work demands).
A five-factor model directed at capturing the size, value, profitability, and investment patterns in average stock returns performs better than the three-factor model of Fama and French (FF, 1993). The five-factor model's main problem is its failure to capture the low average returns on small stocks whose returns behave like those of firms that invest a lot despite low profitability. The model's performance is not sensitive to the way its factors are defined. With the addition of profitability and investment factors, the value factor of the FF three-factor model becomes redundant for describing average returns in the sample we examine.
This article develops and applies new measures of portfolio performance which use benchmarks based on the characteristics of stocks held by the portfolios that are evaluated. Specifically, the benchmarks are constructed from the returns of 125 passive portfolios that are matched with stocks held in the evaluated portfolio on the basis of the market capitalization, book‐to‐market, and prior‐year return characteristics of those stocks. Based on these benchmarks, “Characteristic Timing” and “Characteristic Selectivity” measures are developed that detect, respectively, whether portfolio managers successfully time their portfolio weightings on these characteristics and whether managers can select stocks that outperform the average stock having the same characteristics. We apply these measures to a new database of mutual fund holdings covering over 2500 equity funds from 1975 to 1994. Our results show that mutual funds, particularly aggressive‐growth funds, exhibit some selectivity ability, but that funds exhibit no characteristic timing ability.
This study posits that security analysts heed corporate social performance information and factor it into their recommendations to general investors. In particular, as corporate social Performance is often uncertain and ambiguous to general investors, analysts may serve as the informational pathway connecting corporate social performance to firm stock returns. Thus, we argue that analyst recommendations mediate the relationship between corporate social performance and firm stock returns. On the basis of not only a qualitative study with literature searches and interviews of stock analysts but also a quantitative study with two longitudinal samples of large firms, we find support for these arguments. Our findings uncover an information-based underlying mechanism for the link between corporate social performance and financial performance.
We investigate whether firms’ corporate social performance (CSP) ratings impact their performance (cost of capital) and risk. Using a proprietary CSP ratings database, we find no difference in the risk-adjusted performance of UK firms with high and low CSP ratings. Additionally, the firms do not differ in their amount of idiosyncratic risk. We find some evidence of high-ranked firms being larger. The empirical evidence therefore indicates that investors and managers are able to implement a CSP investment or business strategy without incurring any significant financial cost (or benefit) in terms of risk or return.
The power of dividend yields to forecast stock returns, measured by regression R2, increases with the return horizon. We offer a two-part explanation. (1) High autocorrelation causes the variance of expected returns to grow faster than the return horizon. (2) The growth of the variance of unexpected returns with the return horizon is attenuated by a discount-rate effect - shocks to expected returns generate opposite shocks to current prices. We estimate that, on average, the future price increases implied by higher expected returns are just offset by the decline in the current price. Thus, time-varying expected returns generate ‘temporary’ components of prices.
This study examines the effect of shareholder proposals related to corporate social responsibility (CSR) on financial performance. Specifically, I focus on CSR proposals that pass or fail by a small margin of votes. The passage of such “close call” proposals is akin to a random assignment of CSR to companies and hence provides a quasi-experiment to study the effect of CSR on performance. I find that the adoption of close call CSR proposals leads to positive announcement returns and superior accounting performance, implying that these proposals are value enhancing. When I examine the channels through which companies benefit from CSR, I find that labor productivity and sales growth increase after the vote. Finally, I document that close call CSR proposals differ from non-close proposals along several dimensions. Accordingly, although my results imply that adopting close call CSR proposals is beneficial to companies, they do not necessarily imply that CSR proposals are beneficial in general.
Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.2038 .
This paper was accepted by Wei Jiang, finance.
Based on Whitley’s “National Business Systems” (NBS) institutional framework (Whitley 1997; 1999), we theorize about and empirically investigate the impact of nation-level institutions on firms’ corporate social performance (CSP). Using a sample of firms from 42 countries spanning seven years, we construct an annual composite CSP index for each firm based on social and environmental metrics. We find that the political system, followed by the labor and education system, and the cultural system are the most important NBS categories of institutions that impact CSP. Interestingly, the financial system appears to have a relatively less significant impact. We discuss implications for research, practice and policy-making.
Using a large sample of mergers in the U.S., we examine whether corporate social responsibility (CSR) creates value for acquiring firms’ shareholders. We find that compared to low CSR acquirers, high CSR acquirers realize higher merger announcement returns, higher announcement returns on the value-weighted portfolio of the acquirer and the target, and larger increases in post-merger long-term operating performance. They also realize positive long-term stock returns, suggesting that the market does not fully value the benefits of CSR immediately. In addition, we find that mergers by high CSR acquirers take less time to complete and are less likely to fail than mergers by low CSR acquirers. These results suggest that acquirers’ social performance is an important determinant of merger performance and the probability of its completion, and support the stakeholder value maximization view of stakeholder theory.
Analyst forecasting errors are approximately as large as Dreman and Berry (1995) documented, and an optimistic bias is evident for all years from 1985 through 7996. In contrast to their findings, I show that analyst forecasting errors and bias have decreased over lime. Moreover, the optimistic bias in quarterly forecasts was absent for S&P 500 firms from 1993 through 1996. Analyst forecasting errors are smaller for (1) S&P 500 finns than for other firms; (2) firms with comparatively large amounts of market capitalization, absolute value of earnings forecast, and analyst following; and (3) firms in certain industries.
Although prior research has addressed the influence of corporate social responsibility (CSR) on perceived customer responses, it is not clear whether CSR affects market value of the firm. This study develops and tests a conceptual framework, which predicts that (1) customer satisfaction partially mediates the relationship between CSR and firm market value (i.e., Tobin’s q and stock return), (2) corporate abilities (innovativeness capability and product quality) moderate the financial returns to CSR, and (3) these moderated relationships are mediated by customer satisfaction. Based on a large-scale secondary data set, the results show support for this framework. Notably, the authors find that in firms with low innovativeness capability, CSR actually reduces customer satisfaction levels and, through the lowered satisfaction, harms market value. The uncovered mediated and asymmetrically moderated results offer important implications for marketing theory and practice.
Numerous studies observe abnormal returns after the announcement of quarterly earnings. Ball (1978) suggests those returns are not evidence of market inefficiency, but instead are due to deficiencies in the capital asset-pricing model. This paper tests whether abnormal returns are observed when steps are taken to reduce the effect of deficiencies in the capital asset-pricing model. Significant abnormal returns are observed, but do not cover the transactions costs unless one can avoid direct transactions costs (e.g., a broker). The paper also investigates whether those abnormal returns can be attributed to a deficiency in the capital asset-pricing model. The conclusion is they cannot.
The book-to-market ratio of the Dow Jones Industrial Average predicts market returns and small firm excess returns over the period 1926—1994. The DJIA book-to-market ratio contains information about future returns that is not captured by other variables such as interest yield spreads and dividend yields. The DJIA book-to-market ratio's predictive ability is specific to the pre-1960 sample. In contrast, the S&P book-to-market ratio provides some predictive ability in the post-1960 period, although this relation is dramatically weaker than the Dow Jones pre-1960 findings. The predictive ability of book-to-market ratios appears to stem from the relation between book value and future earnings.
We test the hypothesis that corporate social responsibility is due to managerial agency problems using two identification strategies. First, we use the 2003 Dividend Tax Cut, which increased the after-tax effective firm ownership for managers. Consistent with the agency view, we find that the tax cut led to a decline in corporate goodness. We then use a difference-in-differences approach to test a prediction of the agency model that firms with intermediate managerial ownership stakes should react more strongly to the tax cut than firms with very low or high managerial ownership stakes. Second, we provide corroborating evidence using a regression discontinuity design of close votes around the 50% cut-off for passage of shareholder-initiated governance proposals. Firms in which these proposals narrowly passed experienced significantly slower growth in corporate goodness relative to firms in which the proposals narrowly failed.
Typical socially responsible investors tilt their portfolios toward stocks of companies with high scores on social responsibility characteristics such as community, employee relations and the environment. We analyze returns during 1992-2007 of stocks rated on social responsibility by KLD and find that this tilt gave socially responsible investors a return advantage relative to conventional investors. However, typical socially responsible investors also shun stocks of companies associated with tobacco, alcohol, gambling, firearms, military, and nuclear operations. We find that such shunning brought to socially responsible investors a return disadvantage relative to conventional investors. The return advantage of tilts toward stocks of companies with high social responsibility scores is largely offset by the return disadvantage that comes from the exclusion of stocks of 'shunned' companies. The return of the DS 400 Index of socially responsible companies was approximately equal to the return of the S&P 500 Index of conventional companies. Socially responsible investors can do both well and good by adopting the best-in-class method in the construction of their portfolios. That method calls for tilts toward stocks of companies with high scores on social responsibility characteristics, but refrains from calls to shun the stock of any company, even one that produces tobacco.
We examine a potential benefit associated with the initiation of voluntary disclosure of corporate social responsibility (CSR) activities: a reduction in firms’ cost of equity capital. We find that firms with a high cost of equity capital in the previous year tend to initiate disclosure of CSR activities in the current year and that initiating firms with superior social responsibility performance enjoy a subsequent reduction in the cost of equity capital. Further, initiating firms with superior social responsibility performance attract dedicated institutional investors and analyst coverage. Moreover, these analysts achieve lower absolute forecast errors and dispersion. Finally, we find that firms exploit the benefit of a lower cost of equity capital associated with the initiation of CSR disclosure. Initiating firms are more likely than non-initiating firms to raise equity capital following the initiations and among firms raising equity capital, initiating firms raise a significantly larger amount than do non-initiating firms.
An influential thesis, dubbed "Doing Well by Doing Good", argues that corporate social responsibility is profitable. We establish that, if anything, the reverse is true: firms do good only when they do well in the sense of having financial slack. We model a firm's optimal choices of capital and goodness subject to financial constraints. Less-constrained firms spend more on goodness. We verify that in the data less constrained firms indeed have higher goodness scores and establish causality by using a quasi-experiment. During the Internet bubble, previously constrained firms experienced a temporary relaxation of their constraints and their goodness also temporarily increased relative to their previously unconstrained peers. Goodness is also more sensitive to financial constraints than capital or R\&D spending.
In this paper, we investigate whether superior performance on corporate social responsibility (CSR) strategies leads to better access to finance. We hypothesize that better access to finance can be attributed to a) reduced agency costs due to enhanced stakeholder engagement and b) reduced informational asymmetry due to increased transparency. Using a large cross-section of firms, we find that firms with better CSR performance face significantly lower capital constraints. Moreover, we provide evidence that both of the hypothesized mechanisms, better stakeholder engagement and transparency around CSR performance, are important in reducing capital constraints. The results are further confirmed using several alternative measures of capital constraints, a paired analysis based on a ratings shock to CSR performance, an instrumental variables and also a simultaneous equations approach. Finally, we show that the relation is driven by both the social and the environmental dimension of CSR.
This study examines the link between corporate social responsibility (CSR) and bank debt. Our focus on banks exploits their specialized role as delegated monitors of the firm. Using a sample of 3996 loans to US firms, we find that firms with social responsibility concerns pay between 7 and 18 basis points more than firms that are more responsible. Lenders are more sensitive to CSR concerns in the absence of security. We document a mixed reaction to discretionary CSR investments. Low-quality borrowers that engage in discretionary CSR spending face higher loan spreads and shorter maturities, but lenders are indifferent to CSR investments by high-quality borrowers.
The purpose of this paper is to reexamine Reinganum's study which indicates that abnormal returns could not be earned unexpected quarterly earnings information, and to document precisely the response of stock prices to earnings announcements. This study, using a very large sample of stocks and daily returns, represents the most complete and detailed analysis of quarterly earnings reports that has been performed to date. Our results are contrary to those of Reinganum and show that abnormal returns could have been earned almost any time during the 1970's. Our analysis also indicates that risk adjustments matter little in this type of work. Finally, we find that roughly 50% of the adjustment of stock returns to unexpected quarterly earnings occurs over a 90-day period after the earnings are announced.
We examine the effect of corporate social responsibility (CSR) on the cost of equity capital for a large sample of US firms. Using several approaches to estimate firms’ ex ante cost of equity, we find that firms with better CSR scores exhibit cheaper equity financing. In particular, our findings suggest that investment in improving responsible employee relations, environmental policies, and product strategies contributes substantially to reducing firms’ cost of equity. Our results also show that participation in two “sin” industries, namely, tobacco and nuclear power, increases firms’ cost of equity. These findings support arguments in the literature that firms with socially responsible practices have higher valuation and lower risk.