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Sustainability efforts, index recognition, and stock performance

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A Correction to this article was published on 01 March 2021

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Abstract

We examine the long-term performance of stocks appearing in the Dow Jones Sustainability Index North America. We find that sustainability stocks exhibit abnormal returns for 12–30 months after the index listing, while those stocks generate no excess returns before the index listing. Moreover, sustainability stocks experience an increase in institutional ownership after the index listing. However, we find no evidence that short sellers increase their position to exploit a possible overpricing for sustainability stocks. Overall, our analysis suggests that sustainability efforts translate into a permanent increase in demand for stocks, leading to the superior performance.

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Notes

  1. Cronqvist and Yu (2017) develop a simple theoretical framework involving a utility-maximizing CEO with social preferences to predict a CEO-daughter effect in the context of corporate decision-making with respect to stakeholders other than a firm's shareholders. While Cronqvist and Yu (2017) implicitly assume that corporate social responsibility efforts are the use of corporate resource not related to shareholders’ interest, our study attempts to argue that sustainability efforts indeed contribute to shareholders’ value.

  2. Bonini and Swartz (2014) cite research by Deutsche Bank evaluating 56 academic studies that show companies with high ratings for environmental, social, and governance (ESG) factors have lower costs of debt and equity. However, Jones et al. (2007) report a generally negative relationship between sustainability disclosures of Australian firms and abnormal returns. Bianchi and Drew (2012) report that a recent performance of sustainable stock indices is worse than other indices over the long term, while De Haan et al. (2012) report a negative relationship between corporate environmental performance and stock returns.

  3. These studies use an event-study approach which maps stock market reactions to news regarding the DJSI membership based on the cumulative abnormal daily return method (CAR).

  4. Many studies address the permanent value effect attributable to index inclusion. See Shleifer (1986).

  5. We attempt to highlight the long-term performance of sustainability stocks based on the calendar-time monthly abnormal return method, while most of the literature on the index recognition effect focuses on the short-term price effect using the cumulative abnormal daily return method (CAR).

  6. NYSE breakpoints data for firm size and book-to-market ratio were obtained from the Fama–French website at: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html#Breakpoints.

  7. We still obtain a similar but weak result when we separate the initial listing of 108 firms from the subsequent listing of 126 firms. The result is available upon request.

  8. A secular trend in institutional ownership can partially explain an increase in the ownership for sustainability stocks. However, this explanation is inconsistent with the analysis for delisting stocks in Panel B of Table 5.

  9. We would like to thank the referee for suggesting this analysis.

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Authors and Affiliations

  1. Brooklyn College of the City University of New York, 2900 Bedford Ave, Brooklyn, NY, 11210, USA

    Moonsoo Kang

  2. Hofstra University, Hempstead, NY, USA

    K. G. Viswanathan, Nancy A. White & Edward J. Zychowicz

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  1. Moonsoo Kang
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  2. K. G. Viswanathan
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  4. Edward J. Zychowicz
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Correspondence to Moonsoo Kang.

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We thank the S&P Dow Jones Indices and SAM for providing us with the Dow Jones Sustainability Index North America constituent data.

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Kang, M., Viswanathan, K.G., White, N.A. et al. Sustainability efforts, index recognition, and stock performance. J Asset Manag 22, 120–132 (2021). https://doi.org/10.1057/s41260-020-00202-0

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