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Changes in Corporate Social Responsibility and Stock Performance

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Abstract

We study the relationship between corporate social performance and financial performance by comparing the portfolio returns of firms with changes in corporate social responsibility (CSR) intensity. Using an extensive US sample from the MSCI ESG database, we find that improvement in the overall CSR is generally value enhancing. The relationship varies with CSR dimensions. More importantly, the relationship shifts differently for various CSR dimensions during the crisis period when trust in the society is low and financial resource is limited. Improvement in environment, human rights, and product characteristics shows higher financial returns during the financial crisis period, whereas the value enhancement of improvement in employee relations is more pronounced during the non-crisis period.

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Notes

  1. See The UN Global Compact-Accenture CEO Study on Sustainability 2013.

    https://www.unglobalcompact.org/docs/news_events/8.1/UNGC_Accenture_CEO_Study_2013.pdf.

  2. See The KPMG Survey of Corporate Responsibility Reporting 2017.

    https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2017/10/kpmg-survey-of-corporate-responsibility-reporting-2017.pdf.

  3. For example, in 2012, 11.3% of the $33.3 trillion assets under professional management in the U.S. are invested according to the concept of socially responsible investing. From 1995 to 2012, assets engaged in sustainable and responsible investing practice increased by 486%, while the growth rate of total assets under professional management is only 376% during the same period. See the 2012 Report on Sustainable and Responsible Investing Trends in the United States.

    http://www.ussif.org/files/Publications/12_Trends_Exec_Summary.pdf.

  4. Detailed information about the number of firms covered by the database over time is available from the authors upon request.

  5. Other researchers have also specifically studied the CSR aspect of companies involved in the controversial business. See, e.g., Jo and Na (2012), and Oh et al.(2017).

  6. We use the SIC-based industry classifications of Moskowitz and Grinblatt (1999).

  7. The data of market value before 1997 is not available from COMPUSTAT, so the statistics of market value are based on the data for the period of 1998–2012.

  8. In an untabulated analysis, however, we find that such effect is at most temporary. Firms with decreasing commitment to employee relations do not have higher stock returns than those with improvements in employee relations two years after the crisis. The result is available from the authors upon request.

  9. Here we consider year-fixed effects except when year t + 1 is 2008 or 2009, which is defined as the crisis period.

  10. The portfolio is constructed based on changes in social performance in 2003–2012. We compare the returns of the up and down portfolios in the subsequent years, i.e., 2004–2013.

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Acknowledgements

Wu thank the Whitcomb Center for Financial Services at the Rutgers Business School for data and financial support. We are grateful to Lei Gao, Haejung Na, Caddie Putnam Rankin, Hitoshi Takehara, the editor, the anonymous referees and participants of the FMA Annual Meeting, the Midwest Finance Association Annual Meeting, and the Southwestern Finance Association Annual Meeting for insightful comments. We are responsible for any remaining errors.

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  1. Washington College, 300 Washington Avenue, Chestertown, MD, 21620, USA

    Hui-Ju Tsai

  2. Rutgers Business School-Newark and New Brunswick, Rutgers University, 1 Washington Park, Newark, NJ, 07102, USA

    Yangru Wu

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Table 11 Strengths and concerns considered in MSCI ESG data in year 2012
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11.

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Tsai, HJ., Wu, Y. Changes in Corporate Social Responsibility and Stock Performance. J Bus Ethics 178, 735–755 (2022). https://doi.org/10.1007/s10551-021-04772-w

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