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Firm Characteristics, Industry Context, and Investor Reactions to Environmental CSR: A Stakeholder Theory Approach

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Abstract

We use an event study to capture the investor reaction to the first Newsweek Green Rankings in September 2009, a notable, multi-dimensional recent development in the rating of corporate environmental CSR performance. Drawing on stakeholder theory, we develop hypotheses about (a) market investor reaction to the disclosure of new, relevant corporate environmental performance in both the short and longer (6–12-month) term, (b) whether market investors’ reaction reflects industry context, and (c) whether firm-level contextual variables representing firm size, and market legitimacy significantly impacts the investor reaction. We find that, for the sample of the largest 500 US firms ranked by Newsweek, investors react positively both to the raw and within-industry rankings of green performance in terms of both short-term and longer-term (up to 12 months) returns. Moreover, the investor reaction is significantly influenced by contextual variables such as firm size and firm market legitimacy. Our results are compatible with the inference that rating agencies like Newsweek serve a valuable information dissemination function such that investors in better ranked firms anticipate larger future cash flows due to more positive reactions from key stakeholders such as environmentally-conscious customers, employees, NGOs, regulators, and thus reward these firms with stock price increases. Finally, larger, more visible firms benefit more, while firms which have more market legitimacy (represented by past financial performance) benefit less. We believe these findings will be of considerable interest to scholars of environmental corporate social responsibility.

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Notes

  1. Like others employing event study methods, we assume that markets are informationally efficient, in the sense that investors (stockholders) react immediately to new information.

  2. These authors cite the fact that many institutional investors are signatories to the UN “Principles for Responsible Investment” (UNPRI) and that the CSR data provider Kynder, Lydenberg, and Domini (KLD) states that 31 of the top 50 institutional money managers worldwide use KLD research data in their investment decisions (p. 2).

  3. The capital asset pricing model (CAPM) developed by Sharpe (1964) and Lintner (1965) assumes that the market beta of a stock appropriately measures the systematic risk of the stock that is relevant for well- diversified investors formulating their expected returns. The model specifies a linear relationship between the expected risk premium and market beta of an individual stock and that differences in expected returns across securities can be explained completely by the difference in their market betas.

    Recent research in financial economics does not support this last contention. For example, Banz (1981) finds that low market value (small) stocks earned a higher returns as compared to the return predicted from the market model. Fama and French (1992) observed that stocks with a high book value to market value ratio (book-to-market hereafter) exhibited higher average returns not captured by the market betas. Consequently, Fama and French (1993) proposed a three-factor model to compute expected returns with the factors being the market index, the excess return on a portfolio of small stocks versus large stocks, and the excess return on a portfolio of high book-to-market stocks versus low book-to-market stocks. This three-factor model, they maintain, appropriately captures the return on stock portfolios grouped by size and book-to-market ratio and is superior to the market model in its ability to capture the risk premium on smaller stocks with high book-to-market ratio that are susceptible to financial distress due to their relatively poor performance. Consistent with this, Fama and French (1996) show that the average absolute pricing errors from the market model are very large as compared to the three-factor model Overall, these advances in financial economics support the use of the three-factor (over market) model in estimation of both short-term and long-term market returns.

  4. Sustainable Asset Management (SAM) uses a 33 % weight each for economic, environmental, and social dimensions in their criteria for the DJSI rankings; moreover industry-specific criteria are weighted only 57 % relative to the 43 % weighting for general criteria.

  5. We also tested for significant differences in analysts’ cash flow forecasts but do not find a significant difference for the two-year period preceding and the two-year period succeeding the announcement of the rankings. This result for cash flow forecasts could well be the result of a too-small sampling period post-announcement; however, we are collecting further data to test our findings in a more robust fashion.

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  1. School of Business, State University of New York, Brockport, 115C Hartwell Hall, 350 New Campus Drive, Brockport, NY, 14420, USA

    James J. Cordeiro & Manish Tewari

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  1. James J. Cordeiro
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Correspondence to James J. Cordeiro.

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Cordeiro, J.J., Tewari, M. Firm Characteristics, Industry Context, and Investor Reactions to Environmental CSR: A Stakeholder Theory Approach. J Bus Ethics 130, 833–849 (2015). https://doi.org/10.1007/s10551-014-2115-x

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