Corporate social responsibility and stock market performance

Abstract

We analyse the performance of a large sample of Socially Responsible (SR) stocks relative to a Control Sample (CS) of equivalent size for 14 years. We find that individual SR stocks have on average significantly lower returns and unconditional variance than CS stocks when controlling for industry effects. This result is paralleled by descriptive evidence on the lower (daily return) mean and variance of the buy-and-hold strategies on the SR portfolio with respect to those on the control portfolio. Beyond this first evidence we discover that: (i) individual SR stocks are significantly less risky when controlling for conditional heteroskedasticity; (ii) there are no significant differences in risk-adjusted returns between the two buy-and-hold strategies on (SR and CS) portfolios; (iii) the buy-and-hold strategies on the SR portfolio exhibits significantly lower exposition to systematic nondiversifiable risk. These last findings are robust to different–market model, Generalized Autoregressive Conditional Heteroskedasticity (GARCH(1, 1)), Asymmetric Power ARCH (APARCH(1, 1))–model specifications.

Acknowledgements

The authors thank Iftekhar Hasan, William W. Lang, Leonard Nakamura, Lorenzo Sacconi, Lucio Sarno, Mark Taylor for the useful comments and suggestions received. Any remaining errors are the authors’ responsibility. The usual disclaimer applies.

Notes

¹ The ‘2003 CSR monitor’ finds that the amount of consumers looking at social responsibility in their choices jumped from 36% in 1999 to 62% in 2001 in Europe. In addition, more than one in five consumers reported having either rewarded or punished companies, based on their perceived social performance and more than a quarter of share-owing Americans took into account ethical considerations when buying and selling stocks. The Social Investment Forum (2007) reports that in the US in 1999, there was more than two trillion worth of assets invested in portfolios that used screens linked to the environment and social responsibility. Socially Responsible Investment (SRI) assets rose more than 324% from 639 billion in 1995 to 2.71 trillion in 2007. The broader universe of assets under professional management increased less than 260% (from 7 trillion to 25.1 trillion) during the same period. From 2005 to 2007 alone, SRI assets increased more than 18% while the broader universe of professionally managed assets increased less than 3%.

² Vitaliano and Stella (2006) and Siegel and Vitaliano (2007).

³ KPMG (2005) reports that in the year 2005, 52% of the largest corporations published a CSR report.

⁴ On the methodological problems related to the maximization of multiple stakeholders interests, see Jensen (2001) and Tirole (2001).

⁵ See Paul and Siegel (2006).

⁶ The problem of benchmarking for ethical fund portfolios is quite difficult to solve with standard indexes since these portfolios have no defined geographical, size and industry representation. In our case, the problem of geographical representation does not arise since all selected stocks are from the S&P. We therefore accurately check that our CS is homogeneous in terms of industry and size characteristics in portfolio comparisons. However, in individual stock comparisons we introduce industry dummies to control for industry effects in the estimates.

⁷ The productivity enhancing effect of the latter is widely analysed by the efficiency wage literature (Yellen, 1984) in shirking (Shapiro and Stiglitz, 1984) and gift exchange models (Akerlof, 1982). Furthermore, the importance of intrinsic motivations in productivity, and the availability of workers to accept lower wages are strong (and even voluntary work) when intrinsic motivations are strong (Ryan et al., 1991; Frey and Oberholzer-Gee, 1997; Kreps, 1997), suggests that the latter act as a partial substitute of pecuniary transfers and are therefore a channel through which CSR, by fostering alignment between corporate goals and workers’ motivation, may increase workers’ productivity.

⁸ Daily stock prices are collected from Centre for Research in Security Prices (CRSP).

⁹ The assumption necessary for the two step approach is that the residual of the GARCH(1, 1) estimate is uncorrelated with that of the estimate of specifications in (2).

¹⁰ Empirical results from the contrarian strategy literature show that small size portfolios are not significantly riskier than large size ones, while the average risk of individual small size stocks is significantly higher than that of individual large size stocks. These findings document that small size portfolios achieve significant diversification gains reducing the risk run when holding individual small size stocks (Becchetti and Cavallo, 2002).

¹¹ See Choi and Kim (1991), Salin et al. (2002) and Alberg et al. (2008).

¹² Results are omitted for reasons of space and available from the authors upon request.

¹³ The so-called Leverage Effect appears firstly in Black (1976), who notes that ‘a drop in the value of the firm will cause a negative return on its stock, and will usually increase the leverage of the stock. […] That rise in the debt-equity ratio will surely mean a rise in the volatility of the stock’. One of the first models testing for the leverage effect is the EGARCH model developed by Nelson (1991).

¹⁴ See Diltz (1995).

¹⁵ Remember that most of ethical fund investing comes from institutional investors such as pension funds, religious institutions, Community Development Financial Institutions (CDFIs), etc.