Abstract
Stories about corporate social responsibility have become very frequent over the past decade, and managers can no longer ignore their impact on firm value. In this paper, we investigate the extent and the determinants of the stock market’s reaction following ordinary news related to environmental, social and governance issues—the so-called ESG factors. To that purpose, we use an original database provided by Covalence EthicalQuote. Our empirical analysis is based on about 33,000 ESG news (positive or negative), targeting one hundred listed companies over the period 2002–2010. On average, firms facing negative events experience a drop in their market value of 0.1%, whereas companies gain nothing on average from positive announcements. We find also that market participants are responsive to the media, but they do not react to firms’ press releases or to NGOs’ disclosures. Moreover, our results indicate that sector’s reputation mitigates the loss (the goodwill hypothesis) and that cultural proximity and lexical contents of ESG disclosures play a significant role in the magnitude of the impact.
Similar content being viewed by others
Notes
The Coming Technological Singularity, 1993.
The academic literature on the impact of ESG news is larger, but most of the papers assess the market reaction following a specific event, based on small hand-collected samples without much details. Consequently, they provide little evidence concerning the determinants of the reaction or comparison between different events.
Recently, Elayan et al. (2014) have also used data from Covalence EthicalQuote, but they only consider aggregated information. However, their results suggest that these pieces of information convey useful information to shareholders.
Empirical studies on the relationship between CSP (corporate social performance) and CFP (corporate financial performance) are of three types. A first piece of literature examines whether portfolios composed of firms with a high level of CSP outperform the market (e.g., Barnett and Salomon 2006; Capelle-Blancard and Monjon 2014). A second strand considers the long-term relationship between CSP and accounting-based measures of CFP (e.g., King and Lenox 2001; Konar and Cohen 2001; Guenster et al. 2011). In this paper, we focus on the third type, namely event studies (see “Hypotheses Development” section).
Extensive media coverage might also be explained by the fact that ESG news are “blue-compatible”. Empirical evidence suggests that Democrats (the “blues”), in contrast to Republicans (“the reds”), are more apt to support causes such as environmental and labor protection, and they are more supportive of the stakeholder theory. For instance, Hong and Kostovetsky (2012) find that mutual fund managers who make campaign donations to Democrats hold less of their portfolios in industries that are deemed socially irresponsible (based on KLD ratings). Moreover, news media seems to be biased toward liberal ideas; see Groseclose and Milyo (2005) for empirical evidence from the USA. All together, this is consistent with the heavy weight news media give to ESG issues.
Interestingly, Zyglidopoulos et al. (2012) find that more media attention leads to an increase in CSR strengths, but does not drive any significant change in CSR weaknesses. Yet, this is still consistent with our hypothesis suggesting that it is more expensive for firms to improve their weaknesses, than to enhance their strengths.
For a formal model of greenwashing in presence of “soft” and “hard” (verifiable) information, see Bazillier and Vauday (2009).
Alternative specifications (with or without the sectoral index or with the CAPM) lead to very similar results. The most serious concern is about confounding events. While there is an extensive literature on the event study methodology, the contamination of the estimation period (Aktas et al. 2007) or the event period (Nelson et al. 2008) has attracted little attention. The standard approach consists in using a case-by-case analysis to neutralize all the confounding events, but this approach is impractical for large samples. In our case, we know precisely the dates of the possible confounding events (not all of them, but the ones related to ESG news). Then, we provide a robustness check in order to tackle the problem of confounding events. We consider another estimation window (−130, −11) where confounding events included in the Covalence EthicalQuote database are neutralized. In other words, for each firm, the days surrounding ESG news (−1, 0, +1) are dropped from the estimation window. The results are qualitatively the same (see in “Appendix” section). But the contamination by non-ESG events of the estimation period or the event period remains a possible limitation of this study.
See “Appendix” section for some examples of ESG news collected by Covalence EthicalQuote.
These lists have been manually check. The complete list (with more than 1000 sources) is available on request.
For example, the percentage of bad ESG news published by the media on environmental issues is equal to 7% for the banking industry and to 35% for the chemical industry. Conversely, the percentage of bad ESG news published by the media on corporate governance issues is equal to 24% for the banking industry and to 11% for the chemical industry (see Capelle-Blancard and Petit 2017).
An alternative would be to use the Volatility Index (VIX) computed by the CBOE and based on the implied volatility of the S&P 500 index options. Often referred to as the fear index, it shows a very similar pattern.
We also used the Fortune Magazine’s annual ranking of the “world’s most admired companies.” A problem, however, is that it does not cover all the firms included in our sample. Moreover, according to McGuire et al. (1988), Fortune Magazine’s ranking is linked to prior financial performance.
We also used a 6-month and a 2-year time frame for robustness tests, but it does not change the results.
We only consider news in English.
R&D spendings (divided the total assets) and percentage of floating shares have been used also, but the availability of the data (moreover, only annual) lowers the size of the sample without changing meaningfully the results.
Note that this first set of results holds when we consider alternative specifications: with a restricted sample that excludes events for which abnormal returns are likely to be misspecified (i.e., when parameters of the market model are jointly not significant), with or without sectoral indexes, with a longer estimation window cleaned of contaminating events, or with the Fama-French 4 factors. Those results are available on request.
Table 10 in “Appendix” section only considers cumulative abnormal returns significant at the 1% level. Table 11 uses a larger estimation window \([-130;-11]\) which is “decontaminated” (the days when a firm experiments ESG events were removed from the estimation windows).
Similarly, we also tested whether upcoming weekend (the so-called Friday effect) or holidays distract shareholders from ESG issues (DellaVigna and Pollet 2009), but we did not find any impact as well. We have also controlled for the total amount of news reported in the Dow Jones Factiva database (therefore, including non-ESG news), which can be considered as a proxy of limited attention of shareholders (Hirshleifer et al. 2009); the results were not significant.
In a previous version, we tested whether the impact of ESG news depends on the country where the event took place ; in particular, we distinguished developed and developing countries. On the one hand, the impact should be higher for negative events if they occur in developed countries compared to developing ones, because of environmental liability rules or the stringency of regulation. On the other hand, due to the difference of media coverage, small events are more likely to be reported in developed countries. We did not observe any significant differences.
References
Aktas, N., de Bodt, E., & Cousin, J. G. (2007). Event studies with a contaminated estimation period. Journal of Corporate Finance, 13, 129–145.
Aouadi, A., & Marsat, S. (2016). Do ESG controversies matter for firm value? Evidence from international data. Journal of Business Ethics. doi:10.1007/s10551-016-3213-8.
Barnett, M., & Salomon, M. (2006). The curvilinear relationship between social responsibility and financial performance. Strategic Management Journal, 27(11), 1101–1122.
Baron, D. P. (2001). Private politics. Journal of Economics and Management Strategy, 12(1), 31–66.
Baron, D. P. (2005). Competing for the public through the news media. Journal of Economics and Management Strategy, 14, 339–376.
Baron, D. P. (2009). A positive theory of moral management, social pressure, and corporate social performance. Journal of Economics and Management Strategy, 18, 7–43.
Baron, D. P., & Diermeier, D. (2007). Strategic activism and nonmarket strategy. Journal of Economics and Management Strategy, 16, 599–634.
Bazillier, R., & Vauday, J. (2009). The GreenWashing machine: Is CSR more than communication? Working paper.
Bird, R., Hall, A., Momente, F., & Reggiani, F. (2007). What corporate social responsibility activities are valued by the market? Journal of Business Ethics, 76(2), 189–206.
Borenstein, S., & Zimmerman, M. B. (1988). Market incentives for safe commercial airline operation. The American Economic Review, 78(5), 913–935.
Capelle-Blancard, G., & Couderc, N. (2009). The impact of socially responsible investing: Evidence from stock index redefinitions. The Journal of Investing, 18(2), 76–86.
Capelle-Blancard, G., & Laguna, M.-A. (2010). How does the stock market respond to chemical disasters? Journal of Economics and Management Strategy, 59(2), 192–205.
Capelle-Blancard, G., & Monjon, S. (2014). The performance of socially responsible funds: Does the screening process matter? European Financial Management Journal, 20(3), 494–520.
Capelle-Blancard, G., & Petit, A. (2017). The weighting of CSR dimensions: One size does not fit all. Business and Society, 56(6), 919–943.
Caroll, A. B. (1979). A three-dimensional conceptual model of corporate performance. The Academy of Management Review, 4(4), 497–505.
Carroll, A. B. (1991). The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders. Business Horizons, 34, 39–48.
Chaney, P. K., & Philipich, K. L. (2002). Shredded reputation: The cost of audit failure. Journal of Accounting Research, 40(4), 1221–1245.
Coval, J. D., & Moskowitz, T. J. (2001). The geography of investment: Informed trading and asset prices. Journal of Political Economy, 109(4), 811–841.
Da, Z., Engelberg, J., & Gao, P. (2011). In search of attention. The Journal of Finance, 64(5), 1461–1499.
DellaVigna, S., & Pollet, J. M. (2009). Investor inattention and Friday earnings announcements. The Journal of Finance, 64(2), 709–749.
Demers, E., & Vega, C. (2010). Soft information in earnings announcements: News or noise? Insead working paper, 33/AC.
Doh, J. P., & Guay, T. R. (2006). Corporate social responsibility, public policy, and NGO activism in Europe and the United States: An institutional-stakeholder perspective. Journal of Management Studies, 43(1), 47–73.
Edmans, A. (2012). The link between job satisfaction and firm value, with implications for corporate social responsibility. Academy of Management Perspectives, 26(4), 1–19.
Engelberg, J., & Parsons, C. (2011). The causal impact of media in financial markets. The Journal of Finance, 66(1), 67–97.
Engelberg, J. (2008). Costly information processing: Evidence from earnings announcements. Working paper.
Elayan, F., Li, J., Liu, Z., Meyer, T., & Felton, S. (2014). Changes in the covalence ethical quote, financial performance and financial reporting quality. Journal of Business Ethics, 134, 1–27.
Fama, E., Fisher, L., Jensen, M., & Roll, R. (1969). The adjustment of stock prices to new information. International Economic Review, 10, 1–21.
Farber, H., & Hallock, K. (2009). The changing relationship between job loss announcements and stock prices: 1970–1999. Labour Economics, 16(1), 1–11.
Fisher-Vanden, K., & Thorburn, K. (2011). Voluntary corporate environmental initiatives and shareholder wealth. Journal of Environmental Economics and Management, 62, 430–445.
Flammer, C. (2013). Corporate social responsibility and shareholder reaction: The environmental awareness of investors. Academy of Management Journal, 56, 758–781.
Gibelman, M., & Gelman, S. R. (2004). A loss of credibility: Patterns of wrongdoing among nongovernmental organizations. Voluntas: International Journal of Voluntary and Nonprofit Organizations, 15(4), 355–381.
Grinblatt, M., & Keloharju, M. (2001). How distance, language, and culture influence stockholdings and trades. The Journal of Finance, 56(3), 1053–1073.
Groseclose, T., & Milyo, J. (2005). A measure of media bias. The Quarterly Journal of Economics, 120(4), 1191–1237.
Guenster, N., Derwall, J., Bauer, R., & Koedijk, K. (2011). The economic value of corporate eco-efficiency. European Financial Management, 17(4), 679–704.
Gunthorpe, D. (1997). Business ethics: A quantitative analysis of the impact of unethical behavior by publicly traded corporations. Journal of Business Ethics, 16(5), 537–543.
Dang, H.-A., Knack, S., & Rogers, H. (2009). International aid and financial crises in donor countries. Policy research working paper, 5162. Washington, DC: World Bank.
Hamilton, J. (1995). Pollution as news: Media and stock market reactions to the toxic release inventory data. Journal of Environmental Economics and Management, 28(1), 98–103.
Heath, C., & Tversky, A. (1991). Preference and belief: Ambiguity and competence in choice under uncertainty. Journal of Risk and Uncertainty, 4(1), 5–28.
Hirshleifer, D., Lim, S. S., & Teoh, S. H. (2009). Driven to distraction: Extraneous events and underreaction to earnings news. The Journal of Finance, 64(5), 2289–2325.
Hong, H., & Kostovetsky, L. (2012). Red and blue investing: Values and finance. Journal of Financial Economics, 103(1), 1–19.
Huberman, G. (2001). Familiarity breeds investment. Review of Financial Studies, 14(3), 659–680.
Huberman, G., & Regev, T. (2001). Contagious speculation and a cure for cancer: A nonevent that made stock prices soar. The Journal of Finance, 56(1), 387–396.
Ivkovic, Z., & Weisbenner, S. (2005). Local does as local is: Information content of the geography of individual investors’ common stock investments. The Journal of Finance, 60(1), 267–306.
Jacobs, B. W., Singhal, V. R., & Subramanian, R. (2010). An empirical investigation of environmental performance and the market value of the firm. Journal of Operations Management, 28, 430–441.
Jarrell, G., & Peltzman, S. (1985). The impact of product recalls on the wealth of sellers. Journal of Political Economy, 93(3), 512–536.
Jones, G., Jones, B., & Little, F. (2000). Reputation as reservoir: Buffering against loss in times of economic crisis. Corporate Reputation Review, 3(1), 21–29.
Karpoff, J., & Lott, J. (1993). The reputational penalty firms bear from committing criminal fraud. Journal of Law and Economics, 36, 757–802.
Karpoff, J., Lott, J., & Wehrly, E. (2005). The reputational penalties for environmental violations: Empirical evidence. Journal of Law and Economics, 48, 653–675.
Kawashima, S., & Takeda, F. (2012). The effect of the Fukushima nuclear accident on stock prices of electric power utilities in Japan. Energy Economics, 34(6), 2029–2038.
Kim, Y., Li, H., & Li, S. (2014). Corporate social responsibility and stock price crash risk. Journal of Banking and Finance, 43, 1–13.
King, A., & Lenox, M. (2001). Does it really pay to be green? An empirical study of firm environmental and financial performance. Journal of Industrial Ecology, 5(1), 105–116.
King, B. G., & Soule, S. A. (2007). Social movements as extra-institutional entrepreneurs: The effect of protests on stock price returns. Administrative Science Quarterly, 52, 413–442.
Klassen, R. D., & McLaughlin, C. (1996). The impact of environmental management on firm performance. Management Science, 42(8), 1199–1214.
Kogan, S., Boudoukh, J., Feldman, R., & Richardson, M. (2013). Which news moves stock prices? A textual analysis (No. w18725). National Bureau of Economic Research.
Kollmuss, A., & Agyeman, J. (2002). Mind the gap: Why do people act environmentally and what are the barriers to pro-environmental behavior? Environmental Education Research, 8(3), 239–260.
Konar, S., & Cohen, M. (2001). Does the market value environmental performance? The Review of Economics and Statistics, 83(2), 281–289.
Kothari, S., & Warner, J. (2006). Econometrics of event studies. In Espen Eckbo (Ed.), Handbook of empirical corporate finance. North-Holland: Elsevier.
Krueger, P. (2015). Corporate goodness and shareholder wealth. Journal of Financial Economics, 115(2), 304–329.
Lopatta, K., & Kaspereit, T. (2014). The cross-section of returns, benchmark model parameters, and idiosyncratic volatility of nuclear energy firms after Fukushima Daiichi. Energy Economics, 41, 125–136.
Luo, J., Meier, S., & Oberholzer-Gee, F. (2012). No news is good news: CSR strategy and newspaper coverage of negative firm events. Harvard working paper
Lyon, T., Lu, Y., Shi, X., & Yin, Q. (2013). How do investors respond to Green Company Awards in China? Ecological Economics, 94(C), 1–8.
Lyon, T., & Maxwell, J. (2011). Greenwash: Corporate environmental disclosure under threat of audit. Journal of Economic and Management Strategy, 20(1), 3–41.
MacKinlay, A. C. (1997). Event studies in economics and finance. Journal of Economic Literature, 35(1), 13–39.
MacWilliams, A., & Siegel, D. (2000). Corporate social responsibility: A theory of the firm perspective. The Academy of Management Review, 26(1), 117–127.
Margolis, J., Elfenbein, H., & Walsh, J. (2009). Does it pay to be good... and does it matter? A meta-analysis and redirection of research on corporate social and financial performance. Working paper, Harvard University.
Margolis, J., & Walsh, J. (2003). Misery loves companies: Rethinking social initiatives by business. Administrative Science Quarterly, 48(2), 268–305.
Mattingly, J. E., & Berman, S. L. (2006). Measurement of corporate social action discovering taxonomy in the Kinder Lydenberg Domini ratings data. Business and Society, 45(1), 20–46.
McGuire, J. B., Sundgren, A., & Schneeweis, T. (1988). Corporate social responsibility and firm financial performance. The Academy of Management Journal, 31(4), 854–872.
Mitchell, M. (1989). The impact of external parties on brand-name capital: The 1982 tylenol poisonings and subsequent cases. Economic Inquiry, 27(4), 601–18.
Nelson, K. K., Price, R. A., & Rountree, B. (2008). The market reaction to Arthur Andersen’s role in the Enron scandal: Loss of reputation or confounding events? Journal of Accounting and Economics, 46, 279–293.
Oberndorfer, U., Schmidt, P., Wagner, M., & Ziegler, A. (2013). Does the stock market value the inclusion in a sustainability stock index? An event study analysis for German firms. Journal of Environmental Economics and Management, 66(3), 497–509.
Orlitzky, M. (2013). Corporate social responsibility, noise, and stock market volatility. The Academy of Management Perspectives, 27(3), 238–254.
Orlitzky, M., Schmidt, F. L., & Rynes, S. L. (2003). Corporate social and financial performance: A meta-analysis. Organization Studies, 24, 403–441.
Porter, M., & Kramer, M. (2011). Creating shared value. Harvard Business Review, 89(1/2), 62–77.
Portney, Paul R. (2008). The (not so) new corporate social responsibility: An empirical perspective. Review of Environmental Economics and Policy, 2(2), 261–275.
Renneboog, L., Ter Horst, J., & Zhang, C. (2011). Is ethical money financially smart? Nonfinancial attributes and money flows of socially responsible investment funds. Journal of Financial Intermediation, 20(4), 562–588.
Rennings, K., Schroder, M., & Ziegler, A. (2007). The effect of environmental and social performance on the stock performance of european corporations. Environmental and Resource Economics, 37(4), 661–680.
Schepers, D. H. (2006). The impact of NGO network conflict on the corporate social responsibility strategies of multinational corporations. Business and Society, 45(3), 282–299.
Scholtens, B. (2008). A note on the interaction between corporate social responsibility and financial performance. Ecological Economics, 68, 46–55.
Schumaker, R. P., & Chen, H. (2009). Textual analysis of stock market prediction using breaking financial news: The AZFin text system. ACM Transactions on Information Systems (TOIS), 27(2), 12.
Smith, L. C., Smith, M., & Ashcroft, P. (2011). Analysis of environmental and economic damages from British Petroleum’s Deepwater Horizon oil spill. Albany Law Review, 74(1), 563–585.
Spar, D. L., & La Mure, L. T. (2003). The power of activism: Assessing the impact of NGOs on global business. California Management Review, 45(3), 78.
Takeda, F., & Tomozawa, T. (2008). A change in market responses to the environmental management ranking in Japan. Ecological Economics, 67(3), 465–472.
Tavares, J. (2003). Does foreign aid corrupt? Economics Letters, 79, 99–106.
Tetlock, P. (2007). Giving content to investor sentiment: The role of media in the stock market. The Journal of Finance, 62, 1139–1168.
Wang, Q., Dou, J., & Jia, S. (2016). A meta-analytic review of corporate social responsibility and corporate financial performance: The moderating effect of contextual factors. Business and Society, 55(8), 1083–1121.
Werther, J., & Chandler, D. (2005). Strategic corporate social responsibility as global brand insurance. Business Horizons, 48(4), 317–324.
Yaziji, M., & Doh, J. (2009). NGOs and corporations: Conflict and collaboration. Cambridge: Cambridge University Press.
Yu, F. (2012). Participation of firms in voluntary environmental protection programs: An analysis of corporate social responsibility and capital market performance. Contemporary Economic Policy, 30(1), 13–28.
Yu, K., Du, S., & Bhattacharya, C. B. (2013). Everybody’s talking but is anybody listening? Stock market reactions to corporate social responsibility communications. In Conference paper presented at the sustainability and the corporation: Big ideas (Vol. 24, p. 2015). Cambridge, MA: Harvard Business School. Retrieved July.
Yu, Z. (2005). Environmental protection: A theory of direct and indirect competition for political influence. The Review of Economic Studies, 72(1), 269–286.
Zyglidopoulos, S. C., Georgiadis, A. P., Carroll, C. E., & Siegel, D. S. (2012). Does media attention drive corporate social responsibility? Journal of Business Research, 65(11), 1622–1627.
Acknowledgements
The authors thank Mireille Chiroleu-Assouline, Patricia Crifo, Yannick Le Pen, Bert Sholtens, Charles Cho, Fabrizio Coricelli, Marie-Aude Laguna, Thomas Lyon, participants at the Informing Green Markets conference (Ann Arbor, 2011), the Mines-ParisTech workshop on the Economics of Corporate Social Responsibility (Paris, 2011), the UNPRI Mistra conference (Sigtuna, 2011), and the ESG seminar of the Ecole Polytechnique (Palaiseau, 2011), as well as two anonymous referees for their helpful comments. They also gratefully acknowledge Antoine Mach and Matthias Brunner from Covalence EthicalQuote for providing the data. The usual disclaimer applies.
Author information
Authors and Affiliations
Corresponding author
Ethics declarations
Conflict of Interest
Gunther Capelle-Blancard declares that he has no conflict of interest. Aurélien Petit has worked on short-term contract with Covalence EthicalQuote.
Electronic supplementary material
Below is the link to the electronic supplementary material.
Rights and permissions
About this article
Cite this article
Capelle-Blancard, G., Petit, A. Every Little Helps? ESG News and Stock Market Reaction. J Bus Ethics 157, 543–565 (2019). https://doi.org/10.1007/s10551-017-3667-3
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10551-017-3667-3