Thursday, July 17, 2014

Do investors care about corporate social responsibility? One study has the answer

Anne Tucker recently blogged about the relationship between corporate social performance and corporate financial performance.  She discussed the 2009 article “Does it Pay to Be Good?” in which the authors found a small positive effect on financial performance based upon a meta-analysis of 251 effects in 214 manuscripts.

In the course of my summer research, I came across a 2014 working paper entitled "Everybody's Talking But is Anybody Listening? Stock Market Reactions to Corporate Social Responsibility Communications.” Professors Kun Yu, Shuili Du and C.B. Bhattacharya assert that theirs is the first to examine whether and how the stock market reacts to voluntary non-financial disclosure, namely stand-alone CSR reports. They conclude that non-financial CSR reports “play a critical role in supplementing firm financial disclosure and enhancing information transparency to investors and other important stakeholders.”

For those who aren’t familiar with CSR reports, they typically include information about firm performance in human resources, the environment, corporate governance, suppliers, customers, community engagement, and other relevant factors.  Examples of some good CSR reports are here. The study’s sample size consisted of Fortune 500 companies that released CSR reports between 2005-2011-- 139 firms with 328 release dates during the relevant period.

The authors note that although many CEOs believe that investors do not care about CSR, 722 institutional investors representing $87 trillion in assets use data from the Carbon Disclosure Project, which examines environmental performance. Additionally, whether or not CEOs think they have value, over 5500 companies issued CSR reports in 2011, even though the authors acknowledge that stakeholder awareness of these reports is generally low.

The authors cite studies indicating that benefits of releasing stand-alone CSR reports include: enhancing relationships with customers and employees; cultivating research and innovations; reducing employee recruitment, retention and training costs; attracting and keeping customers; and preempting government regulation. Durable manufacturing firms released the most CSR reports followed by the food and retail industry. Mining and construction issued the fewest. Notably, ExxonMobil, Walmart and Tyson Foods had the lowest CSR scores based upon the authors’ stated methodology and Texas Instruments, Xerox, Proctor & Gamble and Gap scored the highest. The authors also concluded that smaller firms would likely reap the most benefits from issuing CSR reports, perhaps because larger firms regularly interact with their institutional investors and may share information with them more often and on more subjects.

Many of us have blogged on this site about “disclosure overload” and the need for reform (see here, here, here, and here for example). This article shows that many investors value non-mandatory disclosures.

The abstract for this article is below:

This research investigates stock market reactions to corporate social responsibility (CSR) communications, specifically, the release of standalone CSR reports. We develop and test a theoretical framework predicting that (1) CSR performance drives abnormal stock returns to the release of a firm’s CSR report, (2) information environment and R&D moderate the positive relationship between abnormal returns and CSR performance, and (3) CSR reporting enhances the value relevance (i.e., helps predict firm value) of CSR performance. Based on a large-scale secondary dataset, the results show support for this framework. Specifically, the positive association between abnormal returns and CSR performance is stronger for firms in a weak information environment, suggesting that investors of these firms rely more on CSR reports to incorporate CSR performance information in the stock price revaluation. The positive relationship between abnormal returns and CSR performance is stronger for firms with high R&D, indicating that R&D enhances the business value of CSR. Our results offer important implications for CSR theory and practices.

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