High quality research can inform practice and give a better understanding of ESG risks, opportunities and impacts, thereby increasing the effectiveness of investment practices. However, navigating academic research can be a challenge for investors.

Hand picked books on bookshelves in the library - education

To share the insights of academic research with investors, the PRI Academic Network Advisory Committee – led by the Chair, Fabrizio Ferraro (Professor of Strategic Management, IESE Business School) and Vice-chair, Caroline Flammer (Associate Professor of Strategy & Innovation, Questrom School of Business, Boston University) – has curated a selection of rigorous and high-quality academic studies in the areas of: ESG integration, corporate engagement, the performance impact of specific ESG issues, and reporting and regulation.

Please reach out to us with your feedback or questions, and we would be delighted to meet you at the Academic Network Conference on 9 September 2019, Paris.

ESG integration

The price of sin: The effects of social norms on markets

  • Journal of Financial Economics | 2009 | Hong, H., Kacperczyk, M.

Abstract

We provide evidence for the effects of social norms on markets by studying “sin” stocks—publicly traded companies involved in producing alcohol, tobacco, and gaming. We hypothesize that there is a societal norm against funding operations that promote vice and that some investors, particularly institutions subject to norms, pay a financial cost in abstaining from these stocks. Consistent with this hypothesis, we find that sin stocks are less held by norm-constrained institutions such as pension plans as compared to mutual or hedge funds that are natural arbitrageurs, and they receive less coverage from analysts than do stocks of otherwise comparable characteristics. Sin stocks also have higher expected returns than otherwise comparable stocks, consistent with them being neglected by norm-constrained investors and facing greater litigation risk heightened by social norms. Evidence from corporate financing decisions and the performance of sin stocks outside the US also suggest that norms affect stock prices and returns.

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Doing Well by Doing Good? Green Office Buildings

  • The American Economic Review | 2010 | Eichholtz, P., Kok, N.,Quigley, M J.

Abstract

This paper provides the first credible evidence on the economic value of the certification of "green buildings" -- value derived from impersonal market transactions rather than engineering estimates. For some 10,000 subject and control buildings, we match publicly available information on the addresses of Energy Star and LEED-rated office buildings to the characteristics of these buildings, their rental rates and selling prices. We find that buildings with a "green rating" command rental rates that are roughly three percent higher per square foot than otherwise identical buildings - controlling for the quality and the specific location of office buildings. Ceteris paribus, premiums in effective rents are even higher - above six percent. Selling prices of green buildings are higher by about 16 percent. For the Energy-Star-certified buildings in this sample, we subsequently obtained detailed estimates of site and source energy usage from the U.S. Environmental Protection Agency. Our analysis establishes that variations in the premium for green office buildings are systematically related to their energy-saving characteristics. For example, an increase of ten percent in the site energy utilization efficiency of a green building is associated with a two percent increase in selling price - over and above the 16 percent premium for a labeled building. Further calculations suggest that a one dollar saving in energy costs from increased thermal efficiency yields roughly eighteen dollars in the increased valuation of an Energy-Star certified building.

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The economics of green building

  • The Review of Economics and Statistics | 2013 | Eichholtz, P.,Kok, N., Quigley, M J.

Abstract

We analyze the economics of green building, finding that recent increases in the supply of green buildings and the volatility in property markets have not affected the returns to green buildings. We then analyze a large cross-section of office buildings, demonstrating that economic returns to energy-efficient buildings are substantial. Finally, we relate the economic premiums for green buildings to their relative efficiency in energy use—the attributes rated for thermal efficiency, as well as sustainability, contribute to premiums in rents and asset values. Among green buildings, increased energy efficiency is fully capitalized into rents and asset values.

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Asset Divestment as a Response to Media Attacks in Stigmatized Industries

  • Strategic Management Journal | 2015 | Durand, R.,Vergne, J.

Abstract

In stigmatized industries characterized by social contestation, hostile audiences, and distancing between industry insiders and outsiders, firms facing media attacks follow different strategies from firms in uncontested industries. Because firms avoid publicizing their tainted‐sector membership, when threatened, they can respond by divesting assets from that industry. Our analyses of the arms industry demonstrate that media attacks on the focal firm and its peers both increase the likelihood of divestment for the focal firm. Specifically, attacks on the focal firm are the most consequential, followed by attacks on peers in the same industry subcategory, and by attacks on peers in different subcategories. These findings shed new light on divestment as a response to media attacks in stigmatized industries and lead us to rethink impression management theory.

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Socially Responsible Firms

  • Journal of Financial Economics | 2016 | Ferrell, A., Liang, H., Renneboog, L.

Abstract

In the corporate finance tradition, starting with Berle and Means (1932), corporations should generally be run to maximize shareholder value. The agency view of corporate social responsibility (CSR) considers CSR an agency problem and a waste of corporate resources. Given our identification strategy by means of an instrumental variable approach, we find that well-governed firms that suffer less from agency concerns (less cash abundance, positive pay-for-performance, small control wedge, strong minority protection) engage more in CSR. We also find that a positive relation exists between CSR and value and that CSR attenuates the negative relation between managerial entrenchment and value.

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Does a Long-Term Orientation Create Value? Evidence from a Regression Discontinuity

  • Strategic Management Journal | 2017 | Flammer, C., and Bansal, P.

Abstract

In this paper, we theorize and empirically investigate how a long-term orientation impacts firm value. To study this relationship, we exploit exogenous changes in executives’ long-term incentives. Specifically, we examine shareholder proposals on long-term executive compensation that pass or fail by a small margin of votes. The passage of such “close call” proposals is akin to a random assignment of long-term incentives and hence provides a clean causal estimate. We find that the adoption of such proposals leads to (1) an increase in firm value and operating performance—suggesting that a long-term orientation is beneficial to companies—and (2) an increase in firms’ investments in long-term strategies such as innovation and stakeholder relationships. Overall, our results are consistent with a “time-based” agency conflict between shareholders and managers.

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Why Do Investors Hold Socially Responsible Mutual Funds?

  • Journal of Finance | 2017 | Riedl, A., Smeets, P.

Abstract

To understand why investors hold socially responsible mutual funds, we link administrative data to survey responses and behavior in incentivized experiments. We find that both social preferences and social signaling explain socially responsible investment (SRI) decisions. Financial motives play less of a role. Socially responsible investors in our sample expect to earn lower returns on SRI funds than on conventional funds and pay higher management fees. This suggests that investors are willing to forgo financial performance in order to invest in accordance with their social preferences.

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The Rise of Socially Responsible Investing Funds: The Paradoxical Role of Finance

  • Administrative Science Quarterly | 2018 | Yan, S., Ferraro, F., Almandoz, J.

Abstract

Socially responsible investing (SRI) is gaining traction in the financial sector, but it is unclear whether the dominant financial logic complements or competes with the social logic in the founding of SRI funds. Based on insights we gained from observation at an Asian SRI industry association, interviews with SRI professionals in the U.S. and Europe, and other fieldwork, we questioned explanations for SRI’s conflicted relationship with the financial logic. Our observations prompted us to build a panel database of SRI fund foundings from 1970 to 2014 in 19 countries so that we could examine how a dominant logic interacts with alternative logics to promote or stifle institutional change. We decomposed the financial logic into interdependent dimensions as the provider of means (resources, practices, and knowledge) for novel financial ventures to be founded and the enforcer of profit-maximizing ends that constrain such foundings. Our theory suggests a paradoxical role for the financial logic, which explains an intriguing empirical finding: the founding of SRI funds has a curvilinear, inverted-U-shaped relationship with the prevalence of the financial logic. We propose and find that the relationship between the dominant financial logic and the social logic of SRI shifts from complementary to competing as the financial logic becomes more prevalent in society and its profit-maximizing end becomes taken for granted. We examined how certain alternative logics— those of unions, religion, and green political parties—moderate these effects. Our results shed light on how and to what extent institutional change can occur in fields in which one institutional logic is dominant. They also reveal countrylevel institutional factors that drive SRI.

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Corporate Governance and the Rise of Integrating Corporate Social Responsibility Criteria in Executive Compensation: Effectiveness and Implications for Firm Outcomes

  • Strategic Management Journal | forthcoming | Flammer, C., Hong, B., Minor, D.

Abstract

This study examines the integration of corporate social responsibility (CSR) criteria in executive compensation, a relatively recent practice in corporate governance. We construct a novel database of CSR contracting and document that CSR contracting has become more prevalent over time. We further find that the adoption of CSR contracting leads to (a) an increase in longterm orientation; (b) an increase in firm value; (c) anincrease in social and environmental initiatives; (d) a reduction in emissions; and (e) an increase in green innovations. These findings are consistent with our theoretical arguments predicting that CSR contracting helps direct management's attention to stakeholders that are less salient but financially material to the firm in the long run, thereby enhancing corporate governance.

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Do institutional investors drive corporate social responsibility?

  • International evidence Journal of Financial Economics | forthcoming | Dyck, A., Lins, KV., Roth,L., Wagner, HF.

Abstract

This paper assesses whether shareholders drive the environmental and social (E&S) performance of firms worldwide. Across 41 countries, institutional ownership is positively associated with E&S performance with additional tests suggesting this relation is causal. Institutions are motivated by both financial and social returns. Investors increase firms’ E&S performance following shocks that reveal financial benefits to E&S improvements. In cross section, investors increase firms’ E&S performance when they come from countries with a strong community belief in the importance of E&S issues, but not otherwise. As such, these institutional investors transplant their social norms regarding E&S issues around the world.

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Corporate engagement

Corporate governance proposals and shareholder activism: the role of institutional investors

  • Journal of Financial Economics | 2000 | Gillan, SL., Starks, LT.

Abstract

We study shareholder proposals across a period of substantial activity and find systematic differences both across sponsor identity and across time. To measure the success of shareholder activism, we examine voting outcomes and short-term market reactions conditioned on proposal type and sponsor identity. The voting analysis documents that sponsor identity, issue type, prior performance and time period are important influences on the voting outcome. Proposals sponsored by institutions or coordinated groups appear to act as substitutes gaining substantially more support than proposals sponsored by individuals. The nature of the stock market reaction, while typically small, varies according to the issue and the sponsor identity.

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Returns to Shareholder Activism: Evidence from a Clinical Study of the Hermes U.K. Focus Fund

  • The Review of Financial Studies | 2010 | Becht M., Franks, J., Mayer, C; and Rossi, S.

Abstract

This article reports a unique analysis of private engagements by an activist fund. It is based on data made available to us by Hermes, the fund manager owned by the British Telecom Pension Scheme, on engagements with management in companies targeted by its UK Focus Fund. In contrast with most previous studies of activism, we report that the fund executes shareholder activism predominantly through private interventions that would be unobservable in studies purely relying on public information. The fund substantially outperforms benchmarks and we estimate that abnormal returns are largely associated with engagements rather than stock picking.

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The “Washing Machine”:Investment Strategies and Corporate Behavior with Socially Responsible Investors

  • TSE Working Paper, n. 14-457 | 2014 | Gollier, C., and Pouget, S.

Abstract

This paper studies shareholder engagement in companies' strategic decisions. Differences of objective among shareholders arise in our model due to the presence of socially responsible investors. These investors take externalities into account when valuing their portfolio while conventional investors do not. Shareholders may affect corporate behavior via two mechanisms. They can vote with their feet: responsible investors may shy away from firms producing negative externalities, thereby raising their cost of capital. Investors can also engage in activism. Our main contribution is to show that a large activist investor can generate positive abnormal returns by investing in non-responsible companies and turning them into responsible. We call this strategy the \Washing Machine" and show that its successful implementation relies on a long-term horizon and a credible pro-social orientation.

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Does Corporate Social Responsibility Lead to Superior Financial Performance? A Regression Discontinuity Approach

  • Management Science | 2015 | Flammer, C.

Abstract

This paper studies shareholder engagement in companies' strategic decisions. Differences of objective among shareholders arise in our model due to the presence of socially responsible investors. These investors take externalities into account when valuing their portfolio while conventional investors do not. Shareholders may affect corporate behavior via two mechanisms. They can vote with their feet: responsible investors may shy away from firms producing negative externalities, thereby raising their cost of capital. Investors can also engage in activism. Our main contribution is to show that a large activist investor can generate positive abnormal returns by investing in non-responsible companies and turning them into responsible. We call this strategy the \Washing Machine" and show that its successful implementation relies on a long-term horizon and a credible pro-social orientation.

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Active Ownership

  • Review of Financial studies | 2016 | Dimson, E., Karakas, O., and Li, X.

Abstract

We analyze an extensive proprietary database of corporate social responsibility engagements with U.S. public companies from 1999-2009. Engagements address environmental, social, and governance concerns. Successful (unsuccessful) engagements are followed by positive (zero) abnormal returns. Companies with inferior governance and socially conscious institutional investors are more likely to be engaged. Success in engagements is more probable if the engaged firm has reputational concerns and higher capacity to implement changes. Collaboration among activists is instrumental in increasing the success rate of environmental/social engagements. After successful engagements, particularly on environmental/social issues, companies experience improved accounting performance and governance and increased institutional ownership.

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Through the Mud or in the Boardroom: Examining Activists Types and their Strategies in Targeting Firms for Social Change

  • Strategic Management Journal | 2016 | Eesley, C.,Decelles, K A., Lenox, M.

Abstract

We examine the variety of activist groups and their tactics in demanding firms' social change. While extant work does not usually distinguish among activist types or their variety of tactics, we show that different activists (e.g., social movement organizations vs. religious groups and activist investors) rely on dissimilar tactics (e.g., boycotts and protests versus lawsuits and proxy votes). Further, we show how protests and boycotts drag companies “through the mud” with media attention, whereas lawsuits and proxy votes receive relatively little media attention yet may foster investor risk perceptions. This research presents a multifaceted view of activists and their tactics and suggests that this approach in examining activists and their tactics can extend what we know about how and why firms are targeted.

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Creating Common Ground: A Communicative Action Model of Dialogue in Shareholder Engagement

  • Organization Science | 2018 | Beunza, D., and Ferraro, F.

Abstract

Despite growing empirical evidence on the effectiveness of dialogue between activists and corporations in stakeholder engagement, scholars have not fully accounted for the mechanisms that explain its success. We address this gap by leveraging Habermas’s theory of communicative action. Our study explores the dialogue on climate change between the Interfaith Centre for Corporate Responsibility, a coalition of faith-based investors, Ford, and General Motors. We find that communicative action can emerge from strategic action as a result of three cycles of interaction: establishing dialogue, framing, and deliberation. Our study contributes to the literature on shareholder engagement by integrating communicative and strategic action, thereby offering a new interpretation of how reputational threat and dialogue come together to produce a common ground between activists and companies.

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Do institutional investors drive corporate social responsibility? International evidence

  • Journal of Financial Economics | 2019 | Dyck, IJA., Lins, KV., Roth, L., Wagner, HF.

Abstract

This paper assesses whether shareholders drive the environmental and social (E&S) performance of firms worldwide. Across 41 countries, institutional ownership is positively associated with E&S performance with additional tests suggesting this relation is causal. Institutions are motivated by both financial and social returns. Investors increase firms’ E&S performance following shocks that reveal financial benefits to E&S improvements. In cross section, investors increase firms’ E&S performance when they come from countries with a strong community belief in the importance of E&S issues, but not otherwise. As such, these institutional investors transplant their social norms regarding E&S issues around the world.

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Attributing performance to specific ESG issues

Does the stock market fully value intangibles? Employee satisfaction and equity prices

  • Journal of Financial Economics | 2011 | Edmans, A.

Abstract

This paper analyzes the relationship between employee satisfaction and long-run stock returns. A value-weighted portfolio of the “100 Best Companies to Work For in America” earned an annual four-factor alpha of 3.5% from 1984 to 2009, and 2.1% above industry benchmarks. The results are robust to controls for firm characteristics, different weighting methodologies, and the removal of outliers. The Best Companies also exhibited significantly more positive earnings surprises and announcement returns. These findings have three main implications. First, consistent with human capital-centered theories of the firm, employee satisfaction is positively correlated with shareholder returns and need not represent managerial slack. Second, the stock market does not fully value intangibles, even when independently verified by a highly public survey on large firms. Third, certain socially responsible investing (SRI) screens may improve investment returns.

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Does corporate social responsibility affect the cost of capital?

  • Journal of Banking and Finance | 2011 | El Ghoul,S., Guedhami, O., Kwok, CCY., Mishra, DR.

Abstract

We examine the effect of corporate social responsibility (CSR) on the cost of equity capital for a large sample of US firms. Using several approaches to estimate firms’ ex ante cost of equity, we find that firms with better CSR scores exhibit cheaper equity financing. In particular, our findings suggest that investment in improving responsible employee relations, environmental policies, and product strategies contributes substantially to reducing firms’ cost of equity. Our results also show that participation in two “sin” industries, namely, tobacco and nuclear power, increases firms’ cost of equity. These findings support arguments in the literature that firms with socially responsible practices have higher valuation and lower risk.

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  • Academy of Management Perspectives | 2012 | Edmans, A.

Abstract

How are job satisfaction and firm value linked? I tackle this long-standing management question using a new methodology from finance. I study the effect on firm-level value, rather than employee-level productivity, to take into account the cost of increasing job satisfaction. To address reverse causality, I measure firm value by using future stock returns, controlling for risk, firm characteristics, industry performance, and outliers. Companies listed in the “100 Best Companies to Work For in America” generated 2.3% to 3.8% higher stock returns per year than their peers from 1984 through 2011. These results have three main implications. First, consistent with human resource management theories, job satisfaction is beneficial for firm value. Second, corporate social responsibility can improve stock returns. Third, the stock market does not fully value intangible assets, and so it may be necessary to shield managers from short-term stock prices to encourage long-run growth.

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Corporate social responsibility and shareholder reaction: the environmental awareness of investors

  • Academy of Management Journal | 2013 | Flammer, C

Abstract

This study examines whether shareholders are sensitive to corporations’ environmental footprint. Specifically, I conduct an event study around the announcement of corporate news related to environment for all US publicly traded companies from 1980 to 2009. In keeping with the view that environmental corporate social responsibility (CSR) generates new and competitive resources for firms, I find that companies reported to behave responsibly toward the environment experience a significant stock price increase, whereas firms that behave irresponsibly face a significant decrease. Extending this view of “environment-as-a-resource,” I posit that the value of environmental CSR depends on external and internal moderators. First, I argue that external pressure to behave responsibly towards the environment―which has increased dramatically over recent decades―exacerbates the punishment for eco-harmful behavior and reduces the reward for eco-friendly initiatives. This argument is supported by the data: over time, the negative stock market reaction to eco-harmful behavior has increased, while the positive reaction to eco-friendly initiatives has decreased. Second, I argue that environmental CSR is a resource with decreasing marginal returns and insurance-like features. In keeping with this view, I find that the positive (negative) stock market reaction to eco-friendly (-harmful) events is smaller for companies with higher levels of environmental CSR.

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Environmental Externalities and Cost of Capital

  • Management Science | 2014 | Chava, S.

Abstract

I analyze the impact of a firm's environmental profile on its cost of equity and debt capital. Using implied cost of capital derived from analysts' earnings estimates, I find that investors demand significantly higher expected returns on stocks excluded by environmental screens (such as hazardous chemical, substantial emissions, and climate change concerns) compared to firms without such environmental concerns. Lenders also charge a significantly higher interest rate on the bank loans issued to firms with these environmental concerns. I provide evidence that the environmental profile of a firm is not simply proxying for an omitted component of its default risk. Further, firms with these environmental concerns have lower institutional ownership and fewer banks participate in their loan syndicate than firms without such environmental concerns. These results suggest that exclusionary socially responsible investing and environmentally sensitive lending can have a material impact on the cost of equity and debt capital of affected firms.

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Spinning Gold: The Financial Returns to External Stakeholder Engagement

  • Strategic Management Journal | 2014 | Henisz, W J., Dorobantu, S., Nartey, L J.

Abstract

We provide direct empirical evidence in support of instrumental stakeholder theory's argument that increasing stakeholder support enhances the financial valuation of a firm, holding constant the objective valuation of the physical assets under its control. We undertake this analysis using panel data on 26 gold mines owned by 19 publicly traded firms over the period 1993–2008. We code over 50,000 stakeholder events from media reports to develop an index of the degree of stakeholder conflict/cooperation for these mines. By incorporating this index in a market capitalization analysis, we reduce the discount placed by financial markets on the net present value of the physical assets controlled by these firms from 72 percent to between 37 and 13 percent.

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Corporate social responsibility and access to finance

  • Strategic Management Journal | 2014 | Cheng, B., Ioannou, I., Serafeim, G.

Abstract

In this paper, we investigate whether superior performance on corporate social responsibility (CSR) strategies leads to better access to finance. We hypothesize that better access to finance can be attributed to a) reduced agency costs due to enhanced stakeholder engagement and b) reduced informational asymmetry due to increased transparency. Using a large cross-section of firms, we find that firms with better CSR performance face significantly lower capital constraints. Moreover, we provide evidence that both of the hypothesized mechanisms, better stakeholder engagement and transparency around CSR performance, are important in reducing capital constraints. The results are further confirmed using several alternative measures of capital constraints, a paired analysis based on a ratings shock to CSR performance, an instrumental variables and also a simultaneous equations approach. Finally, we show that the relation is driven by both the social and the environmental dimension of CSR.

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Does Corporate Social Responsibility Lead to Superior Financial Performance? A Regression Discontinuity Approach

  • Management Science | 2015 | Flammer, C.

Abstract

This study examines the effect of shareholder proposals related to corporate social responsibility (CSR) on financial performance. Specifically, I focus on CSR proposals that pass or fail by a small margin of votes. The passage of such “close call” proposals is akin to a random assignment of CSR to companies and hence provides a quasi-experiment to study the effect of CSR on performance. I find that the adoption of close call CSR proposals leads to positive announcement returns and superior accounting performance, implying that these proposals are value enhancing. When I examine the channels through which companies benefit from CSR, I find that labor productivity and sales growth increase after the vote. Finally, I document that close call CSR proposals differ from non-close proposals along several dimensions. Accordingly, although my results imply that adopting close call CSR proposals is beneficial to companies, they do not necessarily imply that CSR proposals are beneficial in general.

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Climate Change and Firm Valuation: Evidence From a Quasi-Natural Experiment

  • Swiss Finance Institute Research Paper No. 15-40 | 2015 | Krueger, P.

Abstract

In this paper, I estimate the effect of mandatory greenhouse gas (GHG) emissions disclosure on corporate value. Using the introduction of mandatory GHG emissions reporting for firms listed on the Main Market of the London Stock Exchange as a source of exogenous variation, I find that firms most heavily affected by the regulation experience significantly positive valuation effects. Increases in value are strongest for large firms and for firms from carbon intensive industries (e.g., oil and gas). Valuation increases are driven by capital market effects such as higher liquidity and lower bid -- ask spreads for the most affected firms.

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The impact of corporate social responsibility on investment recommendations: Analysts’ perceptions and shifting institutional logics

  • Strategic Management Journal | 2015 | Ioannou, I.,Serafeim, G.

Abstract

We explore the impact of corporate social responsibility (CSR) ratings on sell-side analysts’ assessments of firms’ future financial performance. We suggest that when analysts perceive CSR as an agency cost, due to the prevalence of an agency logic, they produce pessimistic recommendations for firms with high CSR ratings. Moreover, we theorize that over time, the emergence of a stakeholder focus, and the gradual weakening of the agency logic, shifts the analysts’ perceptions of CSR ratings and results in increasingly less pessimistic recommendations for firms with high CSR ratings. Using a large sample of publicly traded US firms over 15 years, we confirm that in the early 1990s, analysts issue more pessimistic recommendations for firms with high CSR ratings. However, in more recent years analysts progressively assess these firms less pessimistically, and eventually they assess them optimistically. Furthermore, we find that more experienced analysts and analysts at higher-status brokerage houses are the first to shift the relation between CSR ratings and investment recommendation optimism. We find no significant link between firms’ CSR ratings and analysts’ forecast errors, indicating that learning is unlikely to account for the observed shifts in recommendations.

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Corporate goodness and shareholder wealth

  • Journal of Financial Economics | 2015 | Krueger, P.

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.

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Do investors actually value sustainability? New evidence from investor reactions to the Dow Jones Sustainability Index (DJSI)

  • Strategic Management Journal | 2017 | Chatterji, AK., Mitchell, W.

Abstract

Research exploring investor reactions to sustainability has substantial empirical limitations, which we address with a large‐scale longitudinal financial event study of the first global sustainability index, DJSI World. We examine investor reactions to firms from 27 countries over 17 years that are added, deleted, or continue on the index. We find that once relevant controls and comparisons to observationally equivalent firms beyond the index are included, DJSI events have only limited significance and/or materiality. Nonetheless, investors' valuation of sustainability around the world has evolved over time, involving diminishing reactions to U.S. firms and increasing benefits, particularly of continuation on the index, over time. The study highlights the importance of careful analysis and longitudinal global samples in making inferences about the financial effects of social performance.

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Corporate Green Bonds

  • Working paper | 2018 | Flammer, C.

Abstract

This study examines corporate green bonds, a new practice in corporate finance. I document that the issuance of corporate green bonds has become more prevalent over time, particularly in industries where the natural environment is financially material. I further document that green bonds yield i) positive announcement returns, ii) improvements in long-term value and operating performance, iii) improvements in environmental performance, iv) increases in green innovations, and v) an increase in ownership by long-term and green investors. Overall, these results indicate that green bonds are effective—companies invest the proceeds in projects that improve the company’s environmental footprint and contribute to long-term value creation—and help attract an investor clientele that is sensitive to the environment.

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Do Investors Actually Value Sustainability Indices? Replication, Development, and New Evidence on CSR Visibility

  • Strategic Management Journal | forthcoming | Durand, R., Paugam, L., and Stolowy, H.

Abstract

In this paper, we replicate and expand Hawn, Chatterji, & Mitchell (2018) that used DJSI events to measure variations in firms’ CSR-activism and examined their effect on a firm’s stock price. We use DJSI events to capture variations in firms’ CSR visibility, holding CSR-activism constant by restricting our analyses to CSR-equivalent firms. First, we find similar results on stock price (i.e., no impact) and on trading volumes. Second, because professional market participants pay more attention to CSR-oriented firms and use visible cues such as DJSI- events, we study and find that additions to DJSI lead to more analysts following a firm, and that continuations on the DJSI lead to an increase in equity being held by long-term investors.

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Reporting and regulation

Voluntary nonfinancial disclosure and the cost of equity capital: the initiation of corporate social responsibility reporting

  • Accounting Review | 2011 | Dhaliwal, DS., Zhen Li, O., Tsang, A., Yang, YG.

Abstract

We examine a potential benefit associated with the initiation of voluntary disclosure of corporate social responsibility (CSR) activities: a reduction in firms’ cost of equity capital. We find that firms with a high cost of equity capital in the previous year tend to initiate disclosure of CSR activities in the current year and that initiating firms with superior social responsibility performance enjoy a subsequent reduction in the cost of equity capital. Further, initiating firms with superior social responsibility performance attract dedicated institutional investors and analyst coverage. Moreover, these analysts achieve lower absolute forecast errors and dispersion. Finally, we find that firms exploit the benefit of a lower cost of equity capital associated with the initiation of CSR disclosure. Initiating firms are more likely than non-initiating firms to raise equity capital following the initiations; among firms raising equity capital, initiating firms raise a significantly larger amount than do non-initiating firms.

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When does institutional investor activism increase shareholder value?: the Carbon Disclosure Project

  • Journal of Economic Analysis & Policy | 2011 | Kim, EH., Lyon, T.

Abstract

This paper presents the first empirical test of the financial impacts of institutional investor ac- tivism towards climate change. Specifically, we study the conditions under which share prices are increased for the Financial Times (FT) Global 500 companies due to participation in the Carbon Disclosure Project (CDP), a consortium of institutional investors with $57 trillion in assets. We find no systematic evidence that participation, in and of itself, increased shareholder value. How-ever, by making use of Russia’s ratification of the Kyoto Protocol, which caused the Protocol to go into effect, we find that companies’ CDP participation increased shareholder value when the like-lihood of climate change regulation rose. We estimate the total increase in shareholder value from CDP participation at $8.6 billion, about 86% of the size of the carbon market in 2005. Our findings suggest that institutional investor activism towards climate change can increase shareholder value when the external business environment becomes more climate conscious.

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Do ratings of firms converge? Implications for managers, investors and strategy researchers

  • Strategic Management Journal | 2015 | Chatterji, A K.,Durand, R.,Levine, D I., Touboul, S.

Abstract

Raters of firms play an important role in assessing domains ranging from sustainability to corporate governance to best places to work. Managers, investors, and scholars increasingly rely on these ratings to make strategic decisions, invest trillions of dollars in capital, and study corporate social responsibility (CSR), guided by the implicit assumption that the ratings are valid. We document the surprising lack of agreement across social ratings from six well‐established raters. These differences remain even when we adjust for explicit differences in the definition of CSR held by different raters, implying the ratings have low validity. Our results suggest that users of social ratings should exercise caution in interpreting their connection to actual CSR and that raters should conduct regular evaluations of their ratings.

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The importance of climate risks for institutional investors

  • Working paper | 2018 | Krueger, P., Sautner, Z., Starks, LT.

Abstract

According to our survey regarding climate-risk perceptions, institutional investors believe these risks have financial implications for their portfolio firms and that the risks have already begun to materialize, particularly regulatory risks. Many of the investors, especially the long-term, larger and ESG-oriented ones, consider risk management and engagement, rather than divestment, to be the better approach for addressing climate risks. Although the investors believe that some equity valuations do not fully reflect climate risks, their perceived overvaluations are not large.

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