Do investors actually value sustainability indices? Replication, development, and new evidence on CSR visibility

Abstract

Research Summary In this study, we replicate and expand Hawn et al.’s study (Strategic Management Journal, 2018, 39, 949–976) that used Dow Jones Sustainability World Index (DJSI) events to measure variations in firms' Corporate Social Responsibility (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. Managerial Summary We replicate and complement a recent study that showed that the events of a firm's addition, continuation, or deletion in a major sustainability index (DJSI) had little impact on stock market reactions (Hawn et al. Strategic Management Journal, 2018, 39, 949–976). We redefine the comparison set that was previously used and compare across observationally equivalent firms in terms of CSR orientation in order to isolate the visibility effect of DJSI events. We find that these events do not significantly impact stock price and trading volumes. However, we expand the analysis and find that sustainability events attract more attention from financial analysts and lead to an increase in the percentage of shares held by long‐term investors indicative of a trend that professional investors pay more attention to CSR‐visible firms over time.

On the relation between corporate social responsibility and financial performance

“…In other words, given the level of disclosure of CSR‐related activities by firms, investors likely know that firms that are covered by, added to, or deleted from the DJSI index are all among the top firms in their given industry and that the re‐composition of the index to include or exclude a particular firm does not materially affect investor opinions of a firm's commitment to CSR. While confirming the muted stock price reactions found by Hawn et al (), Durand et al () uncover another channel through which best‐in‐class status may influence overall company valuations. Specifically, they report that best‐in‐class recognition through inclusion in the DJSI leads to higher levels of analyst coverage and continuation on the DJSI leads to an increase in the proportion of shares held by longer‐term investors.…”

“…Hawn et al (), however, examine investor reactions to additions, deletions, or continuation on the Dow Jones Sustainability Index (DJSI) World index and conclude that DJSI events have an immaterial effect on firm value after including control variables. Durand et al () confirm Hawn et al's (2018) findings regarding stock price reactions to DSJI events, but also find that DSJI sustainability events lead to greater analyst coverage and increases in shareholdings by long‐term investors. Security analysts appear to play an important role in linking corporate social performance to financial performance by reducing the information asymmetry between firms and investors related to investments in CSR (Luo, Wang, Raithel, & Zheng, ).…”

“…These issues may partially explain why studies of additions and/or deletions from indices consisting of best‐in‐class CSR such as Ramchander et al (), Hawn et al (), and Durand et al () find mixed or insignificant market reactions. For example, Hawn et al () and Durand et al () examine the DJSI), which includes firms only if they are among the top 10% CSR leaders in the industry. Given the distributional properties of CSR ratings, at least in the CSR scores that we examine, it is unlikely that the addition to or deletion from an index that tracks best‐in‐class within an industry reflects a material shift in the CSR commitment of the covered firms.…”

“…Studies that examine the value of CSR by focusing on announcement returns associated with additions or deletions to indices comprised of the top CSR firms (Durand, Paugam, & Stolowy, ; Hawn, Chatterji, & Mitchell, ; Ramchander, Schwebach, & Staking, ) also report mixed results and conclusions. If investors are not aware of the significance of the CSR activities or are unable to distinguish the quality of such activities, then external monitors may provide valuable benefits to investors through a certification role.…”

Recurrence based entropies for sustainability indices

“…In the last 20-25 years, a huge number of social responsible or sustainability indices have been created and their number continues to grow [13,14]. Briefly consider the most commonly used.…”