A Learning Curve of the Market: Chasing Alpha of Socially Responsible Firms

Authors

Zhichuan LiFollow
Jun Wang, Western University
Dylan Minor, Northwestern University
Chongyu Dang, Ivey School of Business

Document Type

Article

Publication Date

12-2019

Volume

109

Issue

1

Journal

Journal of Economic Dynamics and Control

URL with Digital Object Identifier

https://doi.org/10.1016/j.jedc.2019.103772

Abstract

This paper explores stock market reactions to corporate social performance. We find that a value-weighted portfolio based on the list of “100 Best CSR companies in the world”, published by Reputation Institute, yields statistically significant annual abnormal returns of 1.63% and 1.26%, by controlling for Carhart four factors and Fama-French five factors, respectively (2.39% and 1.84% respectively for an equal-weighted portfolio). Moreover, such abnormal returns decrease as time goes, especially after the inaugural publication of the CSR lists in 2013. The paper also indicates that companies with better social performance are more likely to have positive earnings surprises, and that their returns are more sensitive to earnings surprises. The results of this paper have three implications: firstly, CSR reputation contributes positively to a firm’s short-term superior equity performance; secondly, the CSR lists facilitate market correction of mispricing intangibles such as CSR reputation - abnormal returns decrease as the market gradually learns about the value of firms’ social performance; lastly, the paper contributes to the socially responsible investing (SRI) screens and provides guidance for investors who would like to do well financially by doing good socially.

Creative Commons License

This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Citation of this paper:

Li, Z.F., Minor, D., Wang, J., Yu, C. 2019. A Learning Curve of the Market: Chasing Alpha of Socially Responsible Firms. Journal of Economic Dynamics and Control 109: 103772.