Doh, Jonathon P., Shawn D. Howton, Shelly W. Howton, Donald S. Siegel. "Does the Market Respond to an Endorsement of Social Responsibility? The Role of Institutions, Information, and Legitimacy." Journal of Management, forthcoming (April 2009).

Examines the market impact of institutional assessments of CSR through three related analyses. Hypotheses tested include:

  • H1a: There is a positive shareholder wealth effect associated with a firm's addition to a social index.
  • H1b: There is a negative shareholder wealth effect associated with a firm's deletion from a social index.

To test these hypotheses, the authors review all additions to and deletions from the Calvert Social index for the January 2000-December 2005 time period using event study methodology. Share price data was drawn from the CRSP daily database. Abnormal returns were calculated for the day before the announcement, the announcement day, and the two days following the announcement. They find that additions to the index do not appear to impact the market, but deletions "lose over 1.2% of their market value on the announcement day and the day following the announcement."

  • H2: Firms added to a social index will have superior operating performance in the period prior to their inclusion, relative to companies that have been deleted from the index.

Operating performance is measured using a ratio of operating income / assets. This figure is adjusted for industry membership (SIC code) and a Wilcoxon rank test is used to compare the performance of added firms to deleted ones. Consistent with Hypothesis 2, "[operating] performance is significantly better for firms that are added to the index than for deleted firms..."

  • H3a: The magnitude of the positive shareholder wealth effect associated with a firm's addition to a social index is tempered by the firm's prior CSR reputation, i.e., the better the prior reputation, the less positive will be the shareholder wealth effect resulting from inclusion.
  • H3b: The magnitude of the negative shareholder wealth effect associated with a firm's deletion from a social index is tempered by the firm's prior CSR reputation, i.e., the better the prior reputation, the less negative will be the shareholder wealth effect resulting from inclusion.

And ordinary least squares (OLS) regression is used to evaluate these hypothesis, using separate summary statistics of social responsibility and social irresponsibility based on KLD data as the primary independent variables, and a standardized two-day return measure as the dependent variable. Firm size (market cap) and sales growth are used as control variables. This shows that "firms that are deleted experience poorer post-announcement market performance relative to those that are added." However, "firms that have a stronger reputation fro CSR do not experience as much of a decline in their market value when they are deleted from the social index as do companies with a weaker reputation for CSR."

Concludes that "our findings are consistent with the notion that investors are concerned about the social performance of firms in which they invest and that third party endorsement is one mechanism through which information is conveyed to investors who then act on this information in making their investment decisions."