The use of stock market data to define a corporate social responsibility measure based on the Choquet integral

Abstract

With the aim of assessing the socially responsible (SR) level of a firm, this paper utilises the Choquet integral to aggregate the various SR dimensions provided by rating agencies into a unique measure. This measure reflects investors’ preferences not only in terms of the importance of each SR component but also in terms of the complementarity or substitutability of the components. We first show how financial intermediaries can define a given investor’s profile and help them choose the appropriate portfolio. Given that the stock market is able to aggregate all the investors’ opinions and preferences more effectively than a panel of experts, we then propose, for the first time, the use of stock market data to elicit the components of the Choquet-based SR measure. Mutual-fund managers can then use this measure to build a portfolio adapted to the average investor’s preferences. Our empirical application on firms rated by Vigeo Eiris identifies three dimensions that investors deem relevant: environment, community involvement and corporate governance. Our results show that the average investor gives higher importance to environment among the three SR dimensions and highly values good SR performance in two of the three dimensions.

Keywords:

• Finance
• socially responsible investment
• financial stock market
• investors’ preferences
• Choquet integral

JEL CLASSIFICATION:

• A13
• D81
• G12
• M1

Acknowledgements

We are grateful to the Vigeo Eiris social rating agency for its generosity in providing its ratings. We would like to thank the anonymous referees and the editors for their valuable comments and suggestions.

Disclosure statement

No potential conflict of interest is reported by the authors.

Notes

1 Vigeo Eiris, which became an affiliate of Moody’s Corporation in 2019, is now a part of Moody’s ESG Solutions.

2 The rationale behind choosing the three-factor Fama-French model is both theoretical and practical. The basis of a risk-return model is that any factor premium must reflect a higher risk. The three-factor Fama-French model adds to the market risk premium of the capital asset pricing model (CAPM) with two premiums able to better reflect default risk, liquidity risk and information asymmetry risk. The many other factors that could be added as proposed in the literature have much less clear economic rationale. Moreover, increasing the number of factors strongly increases the number of portfolios mimicking the factors. So as not to have portfolios that are too narrow with a low diversification level, we have chosen to keep the three-factor model. In the empirical section, we will propose a robustness test with the CAPM as the risk-return model.

3 There are 61 countries represented in our sample of firms.

4 Approximately 20 firms were eliminated.

5 Kappalab is an R module, developed by Michel Grabisch, Ivan Kojadinovic, and Patrick Meyer (See Grabisch et al., 2008 and Grabisch et al., 2015). It is available at http:/cran.r-project.org.

6 The results of tables 3 and 6 based on the CAPM as risk-return model are available from the authors upon request.

7 The details of the tests are available from the authors upon request.

8 https://sustainableinvest.com/investor-evaluator-sustain-evaluator/