Chapter 5: Discussion and Conclusion
Corporations are increasingly more involved in CSR activities however, with few notable exceptions discussed above, the finance literature lacks of significant empirical researches on this topic, especially from the perspectives of investors and capital market. Thus my thesis contributes to the literature by tracing the stock market reaction to entries and exits from an established social index. The attempt provides interesting insights on the impact of CSR on shareholders’ value.
In the beginning,
we adopt propensity matching theory to fix the characteristics of firms in two groups so as to remove the selection bias due to nonrandom assignment of samples. Two matching methods, nearest-neighbor and Caliper matching are used.
Before matching, the simple t-statistics show that both additions and deletions underperform the S&P500 stocks in cumulative abnormal return. As for our regression analysis results after Caliper matching, index inclusion stocks experience a significant increase in stock returns while index exclusion stocks suffer from insignificant decrease in stock returns. Similar results are presented under nearest-neighbor matching, yet neither additions nor deletions are significant. Likely explanations for this value increase are that investors use membership on the DJSI as a signal of higher expected returns for this firm and the DJSI label helps to attract new investors. On the contrary, exits events regarding with violation of ethical criteria should lead those passive socially responsible investments (SRI) funds to sell the deleted stocks and cause the market performances to drop.We draw on the final conclusion from the hypothesized positive feedback cycle showed in Graph1. To begin with, the companies with higher asset and ROE in previous years are prone to be engaged more in CSR activities. Therefore, they would be of larger possibilities to be selected as DJSI components. Once these firms become
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
39
a member on the DJSI, shareholders would value the firms’ sustainability conveyed by this signal and there is a positive stock market reaction. Later, firms with a good reputation for sustainability will be able to negotiate better terms of trade with all stakeholders (customers, suppliers, employees, etc.) because they are able to signal the quality of their products and services and their ability to honor claims in the future(C. Fombrun & Shanley, 1990). Thus, these better relationships with all stakeholders could lead to an increase on their earning ability or scale, and the positive feedback loop will circuit again. This hypothesized positive feedback cycle fully supports the social impact hypothesis, but also depicted an “Icing on the Cake”
phenomenon that enterprises with better accounting performance are tend to be chosen in the social index.
Graph1: Hypothesized positive feedback cycle for firms engaging in CSR
Further research could proceed in following directions. First, my study finds out that exit from the prominent social index may lead to a drop in these deleted stocks, however, it’s still not very clear that this phenomenon depend more from the reaction of SRI funds or from an expected negative shock on shareholders’ value. Moreover,
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
40
further study using matching theory should take longer period of data or larger samples if possible, because using the matching theory often reduces the samples, making the estimation less efficiency. There are some methods providing more close matching but lose the sample size, such as Mahala Caliper; in contrast, some methods are just the opposite, they provide less satisfactory matching but retain larger sample size, like Nearest and Caliper which we applied in this article. If there is more data existing, more accurate and efficient results could be presented.
Given the pressure on companies to demonstrate that they are behaving as good corporate citizens, it is not surprising that a new industry has developed around reporting on and reviewing the CSR activities of companies. However, the long-term value of a reputation for CSR can only be preserved if a company’s CSR activities are aligned with the values and goals of the organization (Porter and Kramer, 2006). This will continue to be an ongoing challenge. In determining a CSR strategy, stakeholder engagement must be at the core and firms must develop an understanding of their current performance through the use of appropriate metrics. In the end, this may be the real value in participating in indices like the DJSI. By demanding that companies account for their social and environmental performance, the DJSI serves as an excellent benchmarking tool for those organizations that truly wish to remain best in class.
‧
Barnea, A., & Rubin, A. Corporate Social Responsibility as a Conflict Between Shareholders. [10.1007/s10551-010-0496-z]. Journal of Business Ethics.
Becchetti, L., R. & Hasan, I. (2007). Corporate Social Responsibility and Shareholder’s Value: An Event Study Analysis. Working Paper, Federal Reserve Bank of Atlanta.
Bertrand, M., & Mullainathan, S. (2003). Enjoying the Quiet Life? Corporate Governance and Managerial Preferences. The Journal of Political Economy,
111(5), 1043-1075.
Cowen, S. S., Ferreri, L. B., & Parker, L. D. (1987). The impact of corporate characteristics on social responsibility disclosure: A typology and frequency-based analysis. [doi: DOI: 10.1016/0361-3682(87)90001-8].
Accounting, Organizations and Society, 12(2), 111-122.
Dhaliwal, D. S., Lee, K. J., & Fargher N. L. (1991). The association between
unexpected earnings and abnormal security returns in the presence of financial leverage*. Contemporary Accounting Research, 8(1), 20-41.
Dutton, J. E., & Dukerich, J. M. (1991). Keeping an Eye on the Mirror: Image and Identity in Organizational Adaptation. The Academy of Management Journal,
34(3), 517-554.
Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. [doi: DOI: 10.1016/0304-405X(93)90023-5]. Journal of Financial
Economics, 33(1), 3-56.
Fombrun, C., & Shanley, M. (1990). What's in a Name? Reputation Building and Corporate Strategy. The Academy of Management Journal, 33(2), 233-258.
Fombrun, C. J., & Gardberg, N. A. (2000). Opportunity platforms and safety nets:
Corporate citizenship and reputational risk. [Article]. Business & Society
Review (00453609), 105(1), 85.
Frey, B. S., & Oberholzer-Gee, F. (1997). The Cost of Price Incentives: An Empirical
‧
Analysis of Motivation Crowding- Out. The American Economic Review,
87(4), 746-755.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. [doi: DOI:
10.1016/0304-405X(76)90026-X]. Journal of Financial Economics, 3(4), 305-360.
Karlsson, J & Yana C. (2008). Does Corporate Social Responsibility Pay off? – An Event Study of the Impact of Corporate Entry and Exit from the Dow Jones Sustainability World Index on the Market Value of a Company.
Unpublished Advanced level Thesis, School of Business, Economics and
Law, Goteborg University.Lee E Preston, & Douglas P O'Bannon. (1997). The corporate social-financial performance relationship. Business and Society, 36(4), 419-429.
Martin Curran, M., & Moran, D. (2007). Impact of the FTSE4Good Index on firm price: An event study. [doi: DOI: 10.1016/j.jenvman.2006.02.010]. Journal of
Environmental Management, 82(4), 529-537.
McGuire, J. B., Alison, S., & Schneeweis, T. (1988). Corporate Social Responsibility and Firm Financial Performance. The Academy of Management Journal, 31(4), 854-872.
Montiel, I. (2008). Corporate Social Responsibility and Corporate Sustainability:
Separate Pasts, Common Futures. Organization & Environment, 21(3):
245-269.
Newgren, K. A., Rasher, M. LaRoe & M. Szabo. (1985) Environmental Assessment and Corporate Performance: A Longitudinal Analysis Using
Market-Determined Performance Measures. Research in Corporate Social
Performance and Policy, 7(1), 153–164
O'Connor, M., & Spangenberg, J. H. (2008). A methodology for CSR reporting:
assuring a representative diversity of indicators across stakeholders, scales, sites and performance issues. [doi: DOI: 10.1016/j.jclepro.2007.08.005].
Journal of Cleaner Production, 16(13), 1399-1415.
‧
Porter, M. E. & M. R. Kramer. (2006). Strategy & Society: The Link Between Competitive Advantage and Corporate Social Responsibility. Harvard
Business Review,84(12), 78-92.
Posner, R. A. (1975). The Social Costs of Monopoly and Regulation. The Journal of
Political Economy, 83(4), 807-827.
Rosenbaum, P. R., & Rubin, D. B. (1985). Constructing a Control Group Using Multivariate Matched Sampling Methods That Incorporate the Propensity Score. The American Statistician, 39(1), 33-38.
Rubin, D. B., & Thomas, N. (1992). Characterizing the Effect of Matching Using Linear Propensity Score Methods with Normal Distributions. Biometrika,
79(4), 797-809.
Ruf, B., Muralidhar, K., Brown, R., Janney, J., & Paul, K. (2001). An Empirical Investigation of the Relationship Between Change in Corporate Social Performance and Financial Performance: A Stakeholder Theory Perspective.
[10.1023/A:1010786912118]. Journal of Business Ethics, 32(2), 143-156.
Shen, C., & Chang, Y. (2009). Ambition Versus Conscience, Does Corporate Social Responsibility Pay off? The Application of Matching Methods. Journal of
Business Ethics, 88, 133.
Brammer, S., Brooks,C. & Pavelin, S. (2006). Corporate Social Performance and Stock Returns: UK Evidence from Disaggregate Measures. Financial
Management, 35(3), 97-116.
Waddock, S. A., & Graves, S. B. (1997). The Corporate Social Performance-Financial Performance Link. Strategic Management Journal, 18(4), 303-319.
Walley, N.& B. Whitehead. (1994). It’s Not Easy Being Green. Harvard Business