by Philipp Krüger written: 2012-09-15 released: 2014-09-17
Abstract
Using a unique data set, I study how stock markets react to positive and negative events concerned with a firm’s corporate social responsibility (CSR). I show that investors respond strongly negatively to negative events and weakly negatively to positive events. I then show that investors do value “offsetting CSR,” that is positive CSR news concerning firms with a history of poor stakeholder relations. In contrast, investors respond negatively to positive CSR news which is more likely to result from agency problems. Finally, I provide evidence that CSR news with stronger legal and economic information content generates a more pronounced investor reaction.
Content
1 Introduction
-
economic theory
- don’t internalize negative externalities
- create profit
-
agency problem: good CSR news = bad for shareholders
- solve by taking a look at low liquidity, high leverage firms
- not enough money around to spend on negative NPV CSR projects
- solve by taking a look at low liquidity, high leverage firms
-
value motivation: “doing well by doing good”
-
companies have incentive to greenwash
-
reverse causality:
- doing well by doing good
- OR doing good by doing well
- solved by short-run event study
-
better-off firms have better CSR performance
-
short term stock price movement reflects Net Present Value of event
-
negative CSR news
- environment/communities more pronounced
- movement DOWN
- social irresponsibility
- cost: 76 Million
- maybe just cost of doing business → what can be gained should the bad news improve
-
positive CSR news
- environment/communities more pronounced
- movement DOWN, but way less
- investors don’t like CSR
- investors hate no CSR even more
- better reaction to improving something bad than just improving
- there is a reason to improve bad CSR
2 Literature
- excess returns
- good CSR companies
- good CSR portfolios
- no risk/return difference to conventional portfolios
- democratically leaning executives care more about shareholders than republican
- agency problems
3 Data
- public information between 2001 and 2007
- e.g. news of poor labor relations
- e.g. report on toxic waste water dumping
- areas
- community
- corporate governance
- diversity
- employee relations
- environment
- human rights
- product
- KLD Socrates → MSCI ESG Ratings
- CSR policies are mostly costly
- CSR is often seen as charitable giving → cash flow shock
- slightly positive reaction to positive product news → market leader, etc
- surprising that positive reaction is not more pronounced
5 Agency Motivated
- positive news better received from high leverage companies
- probably less agency mismatch than high liquidity companies
6 Textual Analysis
- counting words per category (positive, negative, legal, economics, digits, etc)
- more hard facts in negative news
- more digits, legal terms
7 Conclusion
- stronger reaction to more extreme news
- more positive reaction if agency problems are less probable
- higher leverage, lower liquidity
- more positive reaction if past irresponsibility is addressed
- especially in community and environmental factors
- negative reaction if just responsible
- more positive reaction if news are legal/economic and have digits/numbers in them