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Chapter 1: Introduction
Background
Since the mid-1990s, the decade has been marked by a new societal demand for measuring the performance of the business sector relative to a spectrum of sustainable development goals(O'Connor & Spangenberg, 2008). This emerging profile of
corporate social responsibility (CSR) places distinct requirements on company management, notably the need to address three bottom lines of economic, social and environmental performance. There is also an emphasis on new forms of social dialogue as a contribution to company reporting, strategy definition and decision-making.
Regarding with the CSR benchmarks set for the enterprises, socially responsible investments are also fast becoming an investment discipline in its own right. Socially responsible investments (SRI) have attracted much money, many investors, and a great deal of research, including studies of socially responsible mutual funds, socially responsible indices, stocks with good and bad environmental records, and stocks with good and bad employee relations. The FTSE and Dow Jones organizations have both launched indices of socially responsible companies to meet the growing market demand for professional, objective and reliable benchmarks.
The Dow Jones Sustainability Index (DJSI) was introduced on September 8 1999 and was the first global index to track the financial performance of leading international sustainability-driven companies. DJSI is internationally recognized for its
informational transparency and objectivity and well received by international investment communities. Each year 10% of the leading sustainability companies in
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different sectors are selected from 2000 global companies1. A well-defined set of criteria and weightings is used for company selection. They evaluate the opportunities and risks faced by those companies based on criteria that are weighted approximately equally for economic, environmental, and social performance. The firms selected for the index announce their inclusion on their corporate websites and include the Dow Jones Sustainability Index symbol on their promotional material. Thus, despite the numerous requirements for information and the costs associated with completing the survey, companies see the DJSI label as an important mechanism in establishing a reputation for sustainability.
Institutional investors are increasingly relying on these socially indexes to create portfolios. According to the DJSI webpage, currently 80 DJSI licenses are held by asset managers in 16 countries to manage a variety of financial products including active and passive funds, equity baskets and warrants. In total, these licensees presently manage close to 8 billion USD based on the DJSI1
Motivation
. By being included on the Dow Jones Sustainability Index, companies also become eligible for inclusion in other socially responsible investment funds. Given that the number of SRI investors is increasing, being identified as a sustainable company in the social index is seen as important for attracting investors.
While customers, employees, suppliers, community groups, governments, and some shareholders have encouraged firms to undertake additional investments in corporate social responsibility, many companies often express their corporate concerns on whether investors are aware of their corporate sustainable decisions, understand their actions and are able to evaluate their progress and competitive positioning (Ivan
1 Sources from DJSI website, http://www.sustainability-index.com/default.html
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Montiel 2008). If financial markets do not value their efforts on corporate sustainability, they would not have proper incentive to become or continue to be corporate sustainable company. Therefore, my thesis is to responds to the increasing interest in the relationship between corporate social responsibility initiatives and the change in market value of American companies added to or dropped from the social index.
Thesis Objective and Investigation
I investigate this topic by using one of the most prominent stock market indexes of social responsibility, the Dow Jones Sustainability Index, while tracking and evaluating the impact of events - of inclusion and deletion from the index – to the financial market. Using inclusion on DJSI as a signal of a company’s reputation for being a sustainable company, we investigate whether being added to or dropped from the DJSI results in a significant change to the market value of an American company.
If stakeholders value sustainability practices, then inclusion on a sustainable index should be associated with a positive increase in value, and vice versa. I assume that investors do track these socially responsible companies and the indices and any substantial deviation or change announcement in the index are reflected in the stock price movements in the capital market. Employing an event study analysis during 2002-20092
My thesis explores whether inclusion on the DJSI is a goal that firms should pursue.
Our evidence portrays a significant share price rising trend in cumulative abnormal I measure the financial investors’ perception and expectation and test about the effect of entry/exit from the social index thus provide evidence on the CSR-corporate performance nexus.
2 The website of DJSWI does not provide any information in relation to the index inclusions and exclusions prior to 2002, and it’s only updated to 2009.
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立 政 治 大 學
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returns (CAR) of the samples under the addition situation. However, there is an insignificant negative stock market reaction while firms are removed from the DJSI.
We can draw from the results that, at the very least, adopting CSR doesn’t deteriorate the value of the firms. Our results suggest that the benefits of being included on the DJSI outweigh or are equal to the costs associated with applying.
Thesis structure
The rest of my thesis is organized as follows. In the second section, I briefly
summarize the key empirical literature, mainly focus on the social impact hypothesis and the shift of focus hypothesis. In the third section, I report data from Dow Jones Sustainability Index, propensity score matching (PSM) methodology (Rosenbaum &
Rubin, 1985) and research findings. The final section concludes the thesis.
‧ 國
立 政 治 大 學
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N a tio na
l C h engchi U ni ve rs it y
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